A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers, while the tax base remains too narrow to ensure tax fairness, and fiscal sustainability and meet Pakistan’s large social and development spending needs—IMF Country Report No. 24/310, October 10, 2024
Tax revenue may change through the automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance, and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying tax parameters (bases, rates, etc.) are called discretionary changes.
Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax that is computed by dividing the percentage change in tax yield by the percentage change in national income. The Pakistani experience in this regard has been very disappointing as admitted frequently in government publications, almost in every Economic Survey of the Ministry of Finance in the following identical manner:
“Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan's tax system is still characterised by a narrow and punctured tax base, over-reliance on import-related taxes, high taxes on the one hand, and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses resulted in a low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilisation efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure”.
Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income.
The debate around the narrow and punctured tax base of Pakistan tends to ignore the irrefutable fact that all adults in Pakistan having bio-metrically verified mobile connections were/are paying advance/adjustable income tax, whether they earn taxable income or not!
In the absence or weakness of the elasticity attribute of the tax system, a government will have to revise tax rates and tax base every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency, and are politically inexpedient. This is what has been happening in Pakistan since the dark day of July 5, 1977. It is high time that we go for a paradigm shift in our tax policy to avoid these kinds of negative effects. Therefore, the tax structure should be redesigned to impart a reasonable degree of elasticity to the tax system.
According to Pakistan Telecommunication Authority (PTA), accessed on February 28, 2025 at 11:56 am, the total mobile cellular subscribers as on January 31, 2025 were 195 million (79.30% mobile density), 140 million mobile broadband subscribers (57.08% mobile broadband penetration), 3 million fixed telephone subscribers (1.10% fixed teledensity) and 144 million broadband subscribers (58.60% broadband penetration).
Those who keep on alleging that Pakistanis are “tax thieves” must be reminded that with effect from July 1, 2024, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax—15% as filers, and 75% in case of those mentioned in general order issued under section 114B of the Income Tax Ordinance, 2001, being prepaid or postpaid mobile/broadband/internet users.
The debate around the narrow and punctured tax base of Pakistan tends to ignore the irrefutable fact that all adults in Pakistan having bio-metrically verified mobile connections were/are paying advance/adjustable income tax, whether they earn taxable income or not! If all of them file returns, no less than 100 million will be entitled to refunds. However, it is also disturbing to note that on February 28, 2025, at 12:35 pm (the time of finishing this article), the total number of persons (natural and legal) appearing as active taxpayers on the website of the Federal Board of Revenue (FBR) was 6,417,000 (4,486,952 individuals and 1,930,617 non-individuals)!
FBR has miserably failed to ascertain a rational tax base out of 144 million broadband subscribers, who spend more than Rs. 60,000 per annum on availing of this facility alone. The taxable population of Pakistan is not less than 30 million—see details in this article.
Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends in the tax machinery
The failure of FBR, despite taking foreign loans of millions of dollars for reforms (sic) and asking more from the World Bank for its controversial ‘transformation plan', towards revenue-yielding broadening of the tax base is exposed brilliantly in a research study [Zehra Farooq & Muzammal Rasheed]. It was conducted under the Research for Social Transformation and Advancement (RASTA) of the Pakistan Institute of Development Economics (PIDE), and presented at the 5th PIDE-RASTA Conference [February 26-27, 2025], held in Islamabad.
Our politicians in power and economic managers are the real culprits—they handed over tax policy to FBR (the agency with targets every year, tries to achieve these by fleecing the marginalised and squeezing the existing return filers). Now, once again there is a move on paper to take policy away from Revenuecracy—the so-called wizards (sic) in the apex revenue authority, always busy in infighting and now ruled by a junior officer from Pakistan Administrative Service (PAS)—erstwhile infamous DMG!
For the preparation of Finance Bill 2025, this year too, it appears the work will be assigned to the Revenuecracy, headed now by an outsider, as the Tax Policy Office (TPO) at the Ministry of Finance though notified on February 13, 2025, is still not operation. The Revenuecracy has no concern that taxation is universally accepted as a potent instrument to shape and influence the socioeconomic policies of a country. They are only obsessed with numbers, which they have never met even though actual tax potential at the federal level alone is Rs. 30 trillion.
For achieving the real tax potential, it is imperative to formulate a growth-friendly tax policy keeping in view our own peculiar conditions, and not just following the faulty prescriptions of foreign lenders and donors. It is necessary for us to use the forthcoming budget for the fiscal year 2025-26 as a tool for CHANGE and not as an instrument of the status quo. In taxes, we need to bring some fundamental structural and operational changes. Mindless amendments here and there in various tax codes will serve no useful purpose.
The most crucial problem faced by us in the fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar occupations. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends in the tax machinery. The unholy alliance between tax evaders/their adviser and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system.
In the forthcoming federal budget 2025-26, legislation must be proposed under the name of ‘Compulsory Public Disclosure of Assets Act, 2025’ requiring the following to make their assets and liabilities public along with taxes paid:
- High-ranking civil and military officials
- All Senators, MNAs and MPAs
- Judges of the superior courts
- Any person who has availed loans exceeding Rs. 500 million from any financial institution
- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants, etc
The above powerful/privileged classes of society should act as an example for others. Their declarations would inspire common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes, identified above, if we want to broaden our tax base.