Donor agencies have been clamouring for reforms in Pakistan’s unfair, inequitable and anomalous tax structure but to date to no avail. Ideally, the onus of tax revenue must shift away from reliance on indirect taxes (whose incidence on the poor is greater than on the rich which at present account for nearly 80 to 85 percent of all tax collections) to direct taxes (based on the ability to pay principle).
The country’s 78-year history shows no lesson has been learned reflected by an economy that not only requires a periodic steroid injection administered under an increasingly rigid International Monetary Fund (IMF) programme (Pakistan is currently on its 24th IMF programme) but post-2019 there is an escalating reliance on rollovers from friendly countries as a condition for Fund programme approval/staff level agreement.
Today rollovers as per the Governor State Bank of Pakistan amount to 16 billion dollars with 12 billion dollars already secured for another year and the remaining 4 billion dollars expected to be secured for another year as and when they mature. The expected reserves as per the Governor: 14 billion dollars by 30 June this year, or 2 billion dollars less than the rollovers.
The outcome of this long-term prevailing flawed tax policy has been devastating and, disturbingly, has been the outcome of administration after administration, including the incumbent, successfully convincing donors to agree to unrealistic total collections while pledging structural reforms later in the programme, with donors’ agreement perceived as a major design flaw.
In the current year the envisaged rise in tax collections was 40 percent while actual increase for the first ten months has been around 26 percent with a shortfall of 833 billion rupees. Next fiscal year in the first staff review documents, the Fund has projected total tax revenue at 14.307 trillion rupees against the projection for this year at 12.332 trillion rupees or a rise of 17 percent, a more realistic target compared to this year’s target.
Heavy reliance on indirect taxes reflects the persistence of two disturbing elements. First, indirect taxes reflect sustained elite capture. Additionally, there is a vibrant parallel illegal economy consisting of non-filers who have been resistant to filing their returns and have used their considerable clout, exercised through the political system or on the streets, to derail all serious proposals to tax them.
Real estate and traders fall in this category and have so far successfully resisted the implementation of taxes announced in previous budgets, though the government has pledged yet again to the IMF that these two sectors will be taxed from next fiscal year.
Reports also suggest that the status of non-filers will end in next year’s budget; however, it is unclear whether this would then imply that the illegal economy will move towards the legal economy or as in the past lead to more of a cash economy than we have at present.
To add insult to injury, the FBR levies withholding taxes in the sales tax mode, an indirect tax, but continues to dishonestly credit them under direct tax in budget/FBR documents. Ignored is the exhortation by the Auditor General of Pakistan to the FBR to credit these taxes under indirect taxes, with the IMF staff quiet on this account.
Concerns have been raised by those who operate in the legal economy that their tax rates are too high compared to the regional average, yet Pakistani administrations have routinely extended monetary and fiscal incentives to influential output sectors though in the current IMF programme the government has pledged to end all such incentives.
Farm income tax, a provincial tax, under debate for decades, was always rendered toothless due to the rich and politically extremely influential landlords forming a sizeable percentage of the provincial and national parliaments. At present all provinces have legislated a tax on farm income effective 1 July this year to be implemented from 1 January 2025 as an IMF condition yet given the country’s poor implementation record one would have to wait and see how much will be collected from this source – a concern that is strengthened as no mechanism has been legislated that would determine the actual income of a landlord.
Second, raising tax on the salaried in the current year has crippled the quality of life of the lower middle to middle income earners. This accounts for poverty levels remaining at last year’s level of 42.4 percent as per the World Bank.
The massive decline in inflation – from 28.3 percent in January 2024 to 2.4 percent in January 2025 which further declined to 0.7 percent in March 2025 as well as reducing the discount rate from 22 percent in April 2024 to the current 11 percent has done little to energise either the Large Scale Manufacturing sector (which remains in the negative category) or reduce poverty levels. The World Bank contends that with 2 percent population growth, 1.9 million people fell below the poverty line this year.
But what perhaps is the most dishonest component of the tax structure is the placement of revenue from the petroleum levy (reportedly expected to be raised to 90 rupees per litre in the finance bill for next year) under other taxes. The reason: as per the seventh 2010 National Finance Commission award, the last award negotiated between the federation and the provinces, divisible pool taxes that are to be shared between the federal government and the provinces do not include any item under other taxes – but do include taxes on the sales and purchases of goods imported, exported, produced, manufactured or consumed.
Petroleum and products are imported and consumed items in this country. The budget for next year as per IMF projection in the first review documents envisages 1.31 trillion rupees against the projection this year of 1.17 trillion rupees under this head - a rise of 17 percent that would raise transport costs for people and goods.
Levying taxes rests with parliament with suggestions/input from the Federal Board of Revenue (FBR), yet it is fairly evident that their focus has remained on raising the total tax revenue target, through sustained reliance on low-hanging fruit instead of: (i) improving FBR performance (the FBR’s new evaluation system is the subject of considerable ridicule as it requires 43 peer reviewers plus those who have retired, and presupposes 20 percent A grades in each category); (ii) not proactively investigating claims of corruption against its officials and penalizing them given the widening trust deficit between the taxpayers and the officials; (iii) the recent ordinance that envisages the immediate/sudden recovery from the taxpayers’ moveable/immovable assets subsequent to a high court decision irrespective of a pending appeal and deputing officials to monitor production, supply of goods and unsold goods on business premises currently being vigorously opposed by the business community on the grounds of the possibility of harassment and a rise in demand for bribes – charges that are routinely bandied about but rarely investigated.
To conclude, there is a need to focus on reforms rather than total tax revenue collected, to insist on realistic as opposed to ambitious targets with the IMF, and finally to massively slash current expenditure to reduce the onus on the public to fund rising government expenses.
Copyright Business Recorder, 2025
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