The government has once again announced new measures to raise the tax revenue which is much below the country’s economic potential. Pakistan’s taxation system is riddled with inefficiencies and corruption that hinder fair distribution of resources. When compared to nations with high tax-to-GDP ratios, the gaps in Pakistan’s fiscal policies become glaringly exposed.
Countries with high tax-to-GDP ratios have progressive tax systems that ensure equitable distribution of resources. Many Western countries with tax-to-GDP ratios exceeding 40 percent, utilise social security contributions and tax money to fund comprehensive welfare programmes.
Against an estimated tax revenue potential of around 20-22 per cent of GDP, government revenue totals 12.5pc of GDP, significantly below the average for low- and middle-income countries. Pakistan’s current tax-to-GDP ratio of 9.2 percent, is significantly below the global average of about 30 percent. Almost all Asian countries are far ahead of Pakistan in this regard, including Japan (34.1 percent), Korea (32.0 percent) and Mongolia (24.6 percent). Even India and Bangladesh are ahead of Pakistan in collecting taxes relative to GDP.
The Federal Board of Revenue has historically failed to meet its revenue collection targets, exasperating fiscal deficits. In the fiscal year 2023-24, the FBR collected Rs 9,306 billion, falling short of the original target by Rs 109 billion. The revenue shortfall of Rs 344 billion in the first five months of FY 2024-25 exemplifies the challenges in meeting these targets. As pointed out by experts, Pakistan’s tax regime is unfair, unjust and regressive, putting disproportionately large burdens on the salaried class and small businesses. New amendments were announced recently removing tax benefits for export sectors and increasing levies on salaried individuals. Reform measures aimed at broadening the tax base do not address the underlying issues of tax evasion by wealthy individuals and open-ended concessions for the rich and the powerful.
Pakistan’s reliance on indirect taxes under the garb of direct taxation through numerous withholding provisions, which constitute over 60 percent of total tax revenue, disproportionately affects low-income groups. Direct taxes account for a larger share of revenue in developed economies, promoting equity. For example, personal income taxes represent 23.7 percent of total tax revenue in OECD countries, compared to 15.9 percent in Asia-Pacific and even less in Pakistan. Moving away from indirect to direct taxation is essential to achieve equity.
Whie the poor people bear the burden of heavy taxation, Pakistan’s elites ruthlessly exploit state resources. Successive governments have failed to curb tax evasion, exemptions, and corruption, worsening inequality and poverty levels. In the past efforts have been made to reform the tax system with borrowed funds from the World Bank, Asian Development Bank etc., but to no avail. The elite classes use the Federal Board of Revenue (FBR) as a tool to get tax breaks and exemptions. The Bureau has been rendered powerless to tax the enormous assets owned by the elites. Worse still, high officials enjoy a life of luxury at taxpayers’ expense , with free utilities, perks, perquisites, plots, clubs, golf courses, travel allowances and medical treatments abroad.
Inefficiencies, incompetence and corruption in the FBR hinder effective tax collection. The absence of a comprehensive tax database and reliance on manual processes exacerbate revenue leaks. Advanced economies employ technology-driven solutions, such as electronic invoicing and data analytics, to enhance compliance and minimise evasion. One reason for law tax compliance is that Pakistan’s taxation system fails to translate revenues into tangible benefits for citizens. The lack of investment in health, education, and infrastructure exacerbates socioeconomic disparities. In comparison, countries with high tax-to-GDP ratios effectively utilise tax revenues to enhance public services and improve living standards.
The agricultural sector in Pakistan, which contributes 24 percent to the GDP, remains largely untaxed, perpetuating a fiscal imbalance. Recent initiatives by some provincial governments to impose income tax on agricultural earnings, have failed to yield the desired results. Comprehensive laws, effective implementation and equitable enforcement are essential steps towards reforming the taxation system. In the given situation, Pakistan needs to adopt a multi-pronged approach to reform its taxation system. First, we need to broaden the tax base by integrating the informal economy and eliminating exemptions and concessions to various groups. Second, we must invest in technology and capacity building to ensure efficiency and transparency. There is also a need to promote a culture of voluntary compliance through incentives and public awareness campaigns. At the same time, tax policies must be reoriented to promote exports and attract investments.
The reform measure should be accompanied by equitable tax policies and efficient utilisation of resources. The introduction of digital tax platforms and simplification of procedures can ease compliance burdens and attract more investments. Pakistan’s taxation system should be completely recast to address its anomalies and align it with global best practices. If need be, we should consider hiring well known international tax experts to help us in the matter.