Removing administrative roadblocks from Pakistan’s tax system-I

Practical reforms can ease the burden on documented taxpayers, improve confidence and support business without reducing tax rates or compromising government revenue.

A taxpayer facilitation and ease-of-doing-business reform agenda.

Pakistan’s tax system continues to face two connected challenges: a large part of the economy remains undocumented, while a relatively small number of documented taxpayers contributes a substantial share of overall tax collections. This places repeated pressure on existing taxpayers, increases the cost of compliance and weakens confidence that the burden of taxation is being shared fairly across the economy.

There can be many proposals for broadening the tax base, reducing tax rates and lowering the overall tax burden. However; such measures may have a direct impact on budgetary revenues and must be considered in the context of Pakistan’s fiscal position, legislative priorities and commitments under the IMF programme. These wider reforms therefore require separate and detailed policy consideration.

This article focuses on a different and more immediate category of reform: mechanical and administrative problems that have little or no adverse revenue impact but create serious difficulties for taxpayers and businesses. Addressing these issues can improve ease of doing business, reduce unnecessary discretion and litigation, promote documentation and strengthen trust in the tax system. The following problems and proposals are presented for consideration by the Federal Board of Revenue (FBR) and other relevant authorities.

Administrative reforms for taxpayer facilitation

1. Automatic adjustment of income tax refunds

Problem

Refunds arising from tax returns or appellate relief cannot generally be adjusted or utilised until the Commissioner determines the refund and issues a formal refund order. This process is lengthy, discretionary, and results in blockage of taxpayers’ funds.

Proposal

The IRIS system should automatically calculate verified refunds. Taxpayers should be allowed to adjust such refunds against future tax liabilities upon online intimation, including refunds arising from appellate orders uploaded onto the system, without requiring a separate refund order.

2. One comprehensive exemption certificate

Problem

Taxpayers often continue to suffer withholding tax, collection of tax and advance tax payments even after discharging their expected annual tax liability because exemption provisions are fragmented and do not always provide complete relief.

Proposal

Section 159 should provide a single comprehensive exemption certificate covering all withholding, collection and advance tax obligations. Applications should be decided within a prescribed period and, where no decision is made, the exemption should be deemed granted.

3. Withdrawal of the Power to reject advance tax estimates

Problem

The Commissioner may reject a taxpayer’s advance tax estimate before the tax year has ended and require evidence regarding expected income and expenses. In some cases, recovery proceedings may commence before accounts are finalised and tax returns are filed.

Proposal

The Commissioner’s power under section 147(6B) to reject advance tax estimates should be withdrawn. Instead, the default surcharge for unreasonable underestimation may be enhanced so that taxpayers remain incentivised to submit accurate estimates.

4. Automatic exemption for tax-exempt persons

Problem

Approved pension funds, retirement funds, mutual funds, non-profit organisations and persons entitled to a 100 percent tax credit remain required to obtain exemption certificates despite already being exempt under the law.

Proposal

The exemption status of such taxpayers should automatically be activated through IRIS and made visible to withholding agents without any separate application requirement.

5. Equal treatment for manufacturers and better monitoring of commercial importers

Problem

Full withholding tax exemption is not available to all manufacturers despite discharge of their annual tax liability. Conversely, exemption of commercial importers from withholding on sales reduces visibility of transactions for compliance purposes.

Proposal

All manufacturers should be entitled to a 100 percent exemption certificate once their annual tax liability is discharged. A nominal withholding tax should be imposed on sales by commercial importers to improve documentation and compliance monitoring.

6. Restricting repeated amendments under Section 122(5A)

Problem

Tax returns may be amended repeatedly, even many years after filing, on issues involving debatable legal interpretations or unresolved factual matters. This results in uncertainty, repeated litigation and significant compliance costs.

Proposal

Section 122(5A) should be restricted to matters conclusively settled in favour of FBR by the High Courts or Supreme Court. Repeated amendments of the same tax year should not be permitted.

7. Revival and expansion of the advance ruling system

Problem

Although the law allows non-residents to obtain advance rulings regarding the tax treatment of proposed transactions, the mechanism has become practically dormant. Resident investors also lack a similar facility.

Proposal

The advance ruling framework should be revived through mandatory timelines for disposal of applications and extended to resident investors undertaking significant proposed transactions.

8. Restoration of treaty access for foreign portfolio investors

Problem

Recent changes have made it difficult for foreign institutional investors to avail treaty benefits despite Pakistan’s treaty obligations.

Proposal

A practical mechanism should be restored enabling eligible foreign institutional investors to obtain treaty benefits while maintaining appropriate reporting and verification requirements.

(To be continued)

Copyright Business Recorder, 2026