TPO: A test of reform

Pakistan’s taxation and trade enforcement systems remain highly inefficient. The Federal Board of Revenue (FBR) has failed to adapt, digitize, or expand the tax base. This has resulted in a historically low tax-to-GDP ratio, declining from 9.22 percent in FY22 to 9 percent in FY24 on an annual basis.

India, in contrast, has a much higher tax-to-GDP ratio at 18 percent.

Inconsistent policies, political unwillingness, and a lack of organisational structure have contributed to this debacle.

The FBR missing its January 2025 revenue target by Rs 84 billion has further exacerbated the bleak situation, collecting Rs 872 billion against the Rs 956 billion target. This brings the cumulative revenue shortfall for the period from July 2024 to January 2025 to Rs 468 billion, further deteriorating Pakistan’s fiscal crisis. In response to FBR’s inefficiencies, the government has recently established a Tax Policy Office (TPO) under the Ministry of Finance, separating tax policy formulation from FBR’s tax collection functions.

As the budget deficit widens, the government needs to raise additional revenue without further burdening lower-income groups. Reform, it seems, is the only way forward.

In this regard, it is important to note that the US, for example, has the Internal Revenue Service (IRS) for tax collection, whilst the Treasury handles all tax policy-related matters. In theory, the creation of the TPO should lead to better revenue forecasting and a more stable tax policy, preventing last-minute tax hikes that disrupt budget planning.

The Ministry of Finance has stated that the TPO will focus on tax policy formulation, with appointments made through the Establishment Division. The efficacy of TPO, however, will depend on whether it staffs specialists in tax policy, economic modeling, and public finance, or is dominated by generalist bureaucrats with limited expertise in tax administration.

Without induction of qualified professionals, the TPO risks becoming just another bureaucratic extension rather than a meaningful step forward.

However, even with this policy shift, deeper structural inefficiencies remain. The Pakistan Customs Service (PCS) and IRS departments, responsible for tax collection, still operate under FBR. Most developed economies have adapted their taxation structures to either fully separate or integrate tax and customs administration.

The UK merged its tax and customs functions under HM Revenue & Customs (HMRC) for efficiency, while the US IRS operates independently from Customs and Border Protection (CBP). Pakistan must determine whether it needs administrative separation or deeper reforms within the existing framework to ensure coordination without bureaucratic overlap.

The TPO’s creation comes at a time when Pakistan’s taxation system faces deep structural problems, combined with an over-reliance on indirect taxes, undermining economic equity and fiscal stability.

Indirect taxes make up the majority of the revenue pool, with 75% of tax revenue coming from sales tax, customs duties, and petroleum levies. This approach burdens lower-income groups disproportionately, while wealthy sectors—agriculture, real estate, and wholesale trade — remain under-taxed.

The agriculture sector, which constitutes 24 percent of GDP, remains one of the most under-taxed sectors. Despite Rs 328.08 billion in sales tax exemptions in FY’ 23, as per the latest FBR report, the agriculture sector’s actual tax contribution was less than Rs 4 billion.

Estimates suggest that bringing livestock and orchards into the tax net could increase agricultural tax collections to Rs 68.48 billion—far exceeding current levels. However, due to political influence, weak enforcement, and questionable land records, the government collects only a fraction of this amount.

Pakistan’s trade enforcement system is equally disappointing. Smuggling and misdeclaration of imported goods pose an annual loss of Rs 8 trillion – 85 percent of the FY24 revenue target, as estimated by the Pakistan Business Council (PBC).

The Afghan Transit Trade Agreement (ATTA), despite recent crackdowns on smugglers by FBR, remains a major loophole for those who wish to flood duty-free goods into Pakistani markets, further draining revenues. Furthermore, our customs clearance process is one of the slowest in South Asia, increasing trade costs and delays.

With India processing 70% of imports electronically within 24 hours, Pakistan is still grappling with manual documentation, opening doors for more corruption and inefficiencies. This outdated system contributes to higher business costs, discourages foreign investment, and undermines Pakistan’s ability to compete internationally.

In February 2025, 45 clearing agents’ licenses were suspended by the FBR, accusing them of system manipulation. This created panic within the trade community, with threats of strikes by traders. Senate’s intervention eased tensions, but the crisis exposed the fragility of Pakistan’s Customs enforcement system.

At the same time, the Pakistan Business Council (PBC) renewed calls for separating tax policy from the FBR, citing inefficiencies and corruption.

Pakistan’s inability to have an actionable tax plan has caused successive governments to pursue bailout programmes brokered by international creditors such as IFC, IMF, and the World Bank.

The dependence on these programmes has forced administrations to implement politically unpopular policies such as higher energy tariffs, subsidy cuts, and new taxes on essential goods.

With the IMF talks scheduled this month, the urgency to reform the taxation system has never been greater.

If the TPO is effectively structured and allowed to operate independently with expert leadership, it could bring much-needed efficiency to tax policy. However, its success would depend on effective coordination with the FBR to ensure smooth policy implementation. This will not be possible if the organizational inefficiencies remain unaddressed.

This moment will test whether Pakistan can implement meaningful reforms — or continue relying on short-term fixes.

Copyright Business Recorder, 2025