EDITORIAL: Increasing the tax base in Pakistan has remained a huge challenge. Tax rates, both direct and indirect are increasing; however, tax collection as a percentage of the national GDP does not increase correspondingly.
The issue is that as rates rise, the incentive to evade taxes increases, and a level playing field for formal businesses shrinks. The government needs to rethink its strategy, as the formal sector’s ability to pay taxes is diminishing rapidly, and any further increase in tax rates could be counterproductive.
It is important to note that in the tax year 2024, 5.9 million entities (predominantly individuals) filed tax returns, down from 6.8 million in 2023, despite the potential for 15 million filers. This means that one-third of potential taxpayers are not filing tax returns or paying tax on their income, and there has been a marginal decline in the number of those who do file, which may be because of rising rates.
Among those who filed, almost half declared zero taxable income. Only 8,000 individuals declared taxable income exceeding Rs50 million (Rs4.1 million per month), and fewer than 4,000 declared taxable income over Rs100 million.
These numbers simply just don’t add up. One-third of potential taxpayers are filing, half of them report nil income, and only 12 people (out of 250 million) are wealthy enough to earn over Rs10 billion ($35 million) a year. This strongly suggests that a vast majority of individuals and businesses are evading taxes.
Yet, the government’s response has been to further increase tax rates to enhance collection, while efforts to widen the tax base remain largely theoretical.
Corporations are paying a 29 percent income tax, plus a 10 percent super tax. Additionally, there are several other taxes. Shareholders then pay another 15 percent tax on dividends, bringing the effective tax liability to over 60 percent.
The situation is not much different for salaried individuals, where the highest tax slab has an effective rate of 38.5 percent, and for non-salaried individuals, it reaches as high as 48 percent. These tax rates are among the highest in the world. In economies that impose higher tax rates, citizens receive quality social services such as healthcare, education, a better environment, and security.
However, Pakistan ranks among the lowest in providing these basic services. Moreover, countries with higher tax rates tend to have a tax-to-GDP ratio exceeding 30 percent, whereas in Pakistan, it remains below 13 percent, including non-tax revenues.
The numbers tell a clear story: the social contract is broken. Taxpayers receive little in return for their contributions, making evasion an obvious choice. Those who do not pay taxes gain an unfair advantage. With GST at 18 percent — among the highest in the world — businesses that evade taxes enjoy a significant cost advantage over those that comply.
Surely, this discourages formal businesses from growing, while the informal sector remains stagnant because expanding beyond a certain point requires formal registration. This partially explains why businesses in Pakistan fail to scale up.
Additionally, wealth accumulated through tax evasion is often parked in unproductive sectors such as real estate, foreign currency, and bullion. Those who can move money abroad often invest heavily in the UAE real estate. This hinders investment in productive sectors and capital formation.
The consequences are evident — aside from independent power producers (IPPs), the private sector has not launched any mega projects in the past decade. Unsurprisingly, Pakistan’s investment-to-GDP ratio is at a five-decade low.
For those who accumulate wealth in Pakistan, massive currency depreciation erodes their gains, as many wealthy individuals have experienced in recent years. Given today’s exorbitantly high interest rates, no one is willing to invest significantly.
The situation for professionals is not much different either. They pay 40 to 50 percent of their income in taxes, whereas in the Middle East, they pay none. As a result, many mid-level professionals across various industries have moved abroad.
Consequently, both financial and human capital are fleeing Pakistan, rejecting the country’s skewed taxation system.
The finance minister acknowledges the problem of disproportionately high tax rates, saying that he aims to simplify the filing process. However, the finance minister appears helpless when it comes to rationalizing tax rates.
Meanwhile, the Federal Board of Revenue (FBR) is desperate and has introduced a new category of “ineligible persons” who will be barred from conducting certain economic and business transactions or owning assets. It is unclear whether this measure will help increase the tax base and collection.
However, it will certainly grant FBR officials more power to harass honest taxpayers. Already, their performance is judged by the number of notices they issue and the additional demands they generate from existing taxpayers. Many complain of receiving frivolous notices and rightly so.
Salaried individuals have and are receiving notices from FBR to provide Computerised Payment Receipts (CPRs) for the tax deducted by their employers for which they have filed certificates issued by their employers to the tax department. If this is not harassment, then what is it?
The state minister for finance, Ali Malik, has responded by saying that Pakistan is operating within the narrow confines of an IMF programme and faces immense pressure to meet higher tax targets. When the last budget was announced, he claimed that retailers and real estate developers would be taxed appropriately.
However, there has been little success on this front. Now, the government is relying on agricultural taxes, as provinces work on the necessary legislation. However, the outcome is likely to be no different. The burden will continue to fall on the formal sector, which will keep shrinking.
Copyright Business Recorder, 2025
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