EDITORIAL: The country’s fundamentally flawed tax system has long undermined the business environment, slowed economic expansion and hindered key development metrics, creating significant challenges for businesses and individuals striving for sustainable growth.
Pakistan Businessmen and Intellectual Forum President Mian Zahid Hussain recently shed light on this matter, stressing that inefficiencies and disparities of the taxation framework have increasingly burdened documented taxpayers, while key sectors and high-net-worth individuals remain beyond its reach.
As pointed out by Hussain, the core flaw of the taxation system is its highly unequitable nature, which fails to ensure that all sectors of the economy contribute fairly to government coffers. Not only is the tax net excessively narrow, allowing numerous sectors to operate outside its ambit, the tax bureaucracy also persistently enacts measures designed to extract maximum revenue from those already within the system.
The result is a dismally low tax-to-GDP ratio, widespread public distrust in the tax authorities and a reluctance among key economic players to enter the tax net, as compliance proves more punitive than beneficial.
It is important to note that in Pakistan, every economic activity faces a minimum tax on turnover, regardless of profit or loss. A well-structured tax system typically bases taxation on net profits, ensuring businesses are taxed only when they earn an income. If a company incurs losses, it can carry them forward to offset future taxable earnings, creating a fairer tax burden that reflects its true financial position over time.
In contrast, Pakistan’s current tax regime requires all businesses to pay a minimum tax ranging from 0.5 percent to eight percent of their turnover, regardless of profitability. Far from promoting economic growth, this system places an undue burden on struggling businesses, discourages investment and hampers overall economic activity.
Moreover, businesses also have to navigate a convoluted withholding tax regime, where multiple tax rates apply at different stages of business transactions. Instead of taxing incomes and assets, the tax bureaucracy prioritises taxing of transactions.
Consequently, a taxation framework built on minimum taxation and withholding taxes proves particularly harsh on enterprises that rely on several independent businesses at different stages of production.
Each stage of the supply chain, from raw material processing to manufacturing, distribution and retail has to pay the minimum tax applicable on its turnover. As a result, taxes are applied repeatedly at every phase, escalating the overall financial burden and driving up costs for businesses.
The distortions created by this highly dysfunctional tax system stem from the FBR, which, in chasing ambitious collection targets, relies on ease of collection resulting in arbitrary, counterproductive measures. An overdependence on punitive indirect taxes disproportionately burdens those least able to afford them, while efforts to expand the tax base remain woefully inadequate.
The system’s complexity discourages individuals and businesses from formalising their tax status, while those who do comply end up paying more than their fair share, receiving little benefit in return. As a result, the government struggles to generate sufficient revenue, leaving critical sectors like energy, infrastructure, health, education and the environment underfunded.
While the FBR faces ever-increasing revenue collection targets each year, with performance appraisals and promotions tied to meeting these goals, there is an urgent need to apply equally stringent targets for expanding the tax net.
Perhaps then, an overzealous tax bureaucracy might focus some effort towards this critical objective rather than pursuing short-sighted, ineffective measures.
Moreover, the tax authorities must also realise that their current approach to revenue generation is not fit for purpose. In some sectors, excessive taxation has actually led to declining revenues, as businesses struggle to absorb the financial burden. This underscores the urgent need to look beyond indirect taxation and withholding taxes. A sustainable tax system should prioritise long-term compliance and economic growth rather than short-term collection at any cost.
Copyright Business Recorder, 2025
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