ByTax collection remains one of Pakistan’s most pressing economic challenges. With a GDP-to-tax ratio among the lowest globally, the government faces significant hurdles in generating sufficient revenue. Despite efforts over the decades, systemic flaws persist, leaving a disproportionate burden on certain segments of the population while allowing many to evade their obligations.
Current Measures and Challenges
The government, led by the Federal Board of Revenue (FBR), has introduced measures to compel non-filers to join the tax net. These include restrictions such as barring non-filers from purchasing vehicles above 800cc or opening bank accounts exceeding Rs. 10 lakh. Such steps aim to force compliance and increase tax filings. While these efforts reflect an urgency to improve the tax net, their long-term efficacy and fairness remain subjects of debate.
Dr. Farooq Salim, an economist and commentator, has raised critical points regarding the structural issues underlying Pakistan’s tax system. He emphasizes that addressing these problems requires more than coercive measures—it demands a fundamental overhaul of the tax system.
Systemic Issues in Tax Collection
Low Tax-to-GDP Ratio
Pakistan’s tax-to-GDP ratio is alarmingly low compared to neighboring countries. This reflects not only tax evasion but also a lack of trust between taxpayers and the government. Citizens are often hesitant to contribute due to perceptions of inefficiency and corruption in public spending.
Overreliance on Indirect Taxes
Nearly 60-70% of the government’s revenue comes from indirect taxes. This regressive system disproportionately burdens lower-income groups, as they end up paying a higher share of their income in taxes on essentials like food and utilities.
Untapped Potential in Direct Taxation
Wealthier segments, including large businesses and affluent individuals, often evade taxes or underreport their income. Retail outlets, for instance, remain largely undocumented, depriving the state of significant revenue.
Inefficiency in Public Enterprises
A substantial portion of collected taxes is lost to cover deficits in state-owned enterprises (SOEs) like Pakistan International Airlines, railways, and steel mills. These recurring losses undermine the rationale for increasing taxes, as citizens feel their contributions are not used effectively.
Social and Economic Implications
Dr. Salim also highlights the demographic and socioeconomic realities that limit tax potential:
Women in the Workforce: With less than 17% of women participating in the labor force, a significant portion of the population remains outside the income tax net.
Poverty Levels: Over 60% of the population struggles with poverty or low income, making it unrealistic to expect substantial direct tax contributions from them.
Additionally, indirect taxes on essential goods further exacerbate inequality, pushing vulnerable groups deeper into financial distress.
Historical Context and Missed Opportunities
The narrative of “expanding the tax net” has been a recurring theme since the 1960s. Despite numerous initiatives by successive governments, the tax base remains narrow. Dr. Salim suggests that repeated failures point to deeper structural and policy flaws that require urgent attention.
Steps Towards Meaningful Reform
Shift to Direct Taxation
Pakistan must reduce its reliance on indirect taxes and focus on increasing direct taxes. This involves documenting the economy, addressing tax evasion, and ensuring affluent groups pay their fair share.
Incentivize Compliance
Coercive measures like restricting purchases or account openings may yield short-term results but risk alienating taxpayers. Instead, offering incentives such as lower tax rates for early compliance or simplifying filing processes could encourage voluntary participation.
Enhance Transparency and Accountability
Citizens need assurance that their taxes are used effectively. Transparent governance and reducing losses in SOEs are critical to building trust in the tax system.
Broaden the Tax Net Through Digitalization
Leveraging technology to track income, expenditures, and transactions can help identify potential taxpayers and reduce evasion.
Strengthen Tax Administration
The FBR must improve its capacity to monitor, enforce, and collect taxes while minimizing corruption and inefficiencies within its ranks.
The Way Forward
Reforming Pakistan’s tax system is not merely about increasing revenue but about ensuring fairness and equity. Taxation must align with income levels, reduce the burden on vulnerable groups, and foster economic growth. Without addressing structural flaws and building public trust, the cycle of low compliance and high reliance on indirect taxes will persist.
As Dr. Salim aptly puts it, true reform requires shifting focus from merely collecting taxes to creating a system that promotes transparency, equity, and efficiency. Only then can Pakistan overcome its longstanding tax challenges and move toward sustainable economic development.
