OPINION: Tax compliance measures harken back to colonial era collective punishment

Government officials and ministers, especially the FBR Chairman, are attempting to change the narrative of economic strangulation through higher taxes by passing the buck to the private sector to improve compliance. The message between the lines is clear. If you do not improve compliance, then live with high tax rates.

A few private sector representatives, based on speeches and interaction with the government economic team in the recent two-day Dialogue on Economy organized by the Pakistan Business Council (PBC) in Islamabad last week, felt that the government believes they must accept collective punishment due to those who evade taxes.

The FBR chairman, as the last speaker of the event, took control of the room full of private sector tycoons, using McKinsey-style slide deck where he and his team emphasized that tax leakages are concentrated in the top five percent, particularly in the top one percent. It is a smart move by an intelligent person trying to shape a new narrative. It is not possible for any government to defend higher, even punitive rates of taxes, so he shifted the focus to compliance by putting back the money on those who pay. In effect, he came up with an argument that is seemingly impossible to challenge.

But in a way that also concedes that the FBR machinery is failing to expand the tax base, as most of the new filers are nil-filers and still a large pool chooses to remain completely informal. The chairman noted that not many doctors file tax returns, and those who do show an average annual income of Rs 2 million. Similar accounts could be true for lawyers, architects, and other consultants.

Since they do not pay their due share of taxation, salaried people must chip in on their behalf by paying a marginal tax rate of 38.5 percent income tax, including surcharge. Why should salaried people take the burden of doctors and lawyers not paying income taxes?

The FBR chairman also pointed out that there are two rates of sugar in the market, one with GST and the other without. To counter that, the government has imposed Rs 15 per kilogram FED on sugar, which is also paid by those who pay GST. Why are formal biscuits and other businesses penalized due to others who do not comply with the tax laws.

Credit is due to the FBR for initiating some reforms and improvements in compliance. FBR’s method of anonymously grading officers in five categories and giving key positions to those in the top two tiers is commendable. Other government departments should learn from this and apply similar methods in other departments and regulatory authorities.

FBR should be applauded for improving collection in sales tax from the sugar and cement sectors by using AI tools and cameras. This indicates that these companies were likely underreporting sales. Collection has also improved by over Rs 100 billion. The plan is to do the same in the textile value chain where 1.5 million bales of cotton are unaccounted for.

Tobacco is another area where, according to the FBR, the potential of collecting additional taxes is Rs 100–200 billion. Tiles, juices, and many other areas also have potential to improve collection through track and trace.

He also noted that in FY24, there were Rs 3 trillion worth of land and vehicles purchased by tax filers but not declared in the returns. The FBR should focus on these and potentially fetch hundreds of billions from them.

If the FBR is bridging the shortfall from all these measures, then it should lower tax rates immediately by giving much-needed relief to salaried individuals and corporates by lowering income tax rates and subsequently phasing out the super tax as well. Some in the business community are confident that the government may soon announce some relief in taxes.

That would be good news. However, marginal reduction may not bring in investment. The real issue is sustainability. Will these reforms and better KPIs for FBR officials continue once the current chairman leaves, as two of the three-member team he brought to the event may leave with him, if not before.

Not so long ago, he had similar zest to lower power sector transmission and distribution losses when he was secretary power division. Every other day he used to tweet about improved recovery and exhibited similar infographics and statistics, as he is doing now at the tax authority. However, there has been no meaningful reduction in power sector thefts and losses. Honest bill payers suffer high load shedding for others who steal and assume the burden of evaders.

The government must adopt an institutional approach, as individuals can create a feel-good factor, but for sustained performance, overhauling is imperative. The tax rates should be lowered sooner rather than later, as the private sector does not have the patience to wait until 2028. If the current approach persists, capital and entrepreneurs may not.

Copyright Business Recorder, 2025