Pakistan’s tax challenge: four conversations, one problem—II

Section 7E of the Income Tax Ordinance, 2001, which was introduced in 2022 taxed deemed income from certain immovable property and thus commonly referred to as an asset-based tax, has been declared ultra vires by the Federal Constitutional Court of Pakistan. Separately, there are reports that CVT on foreign assets may be withdrawn in the coming budget. Taken together, these developments may suggest a retreat from certain forms of asset-based taxation. This requires a balanced response.

Around the world, wealth and asset-based taxes remain controversial. Their supporters argue that income tax alone may fail to capture the real economic capacity of very wealthy persons, especially where wealth grows through asset appreciation, real estate, corporate structures or offshore holdings. Their critics point to valuation difficulties, liquidity problems, avoidance, mobility of capital, constitutional issues and administrative complexity.

Pakistan’s own experience shows the risks of blunt design. A tax on deemed income from immovable property initially appeared attractive as a revenue measure, but as it created constitutional litigation and taxpayer uncertainty, the revenue proved less durable than expected.

Similarly, a capital-value tax on foreign assets was also seen as a way to reach high-wealth taxpayers, but it also created anxiety for returning expatriates and persons holding legitimate foreign assets particularly when many of them declared the same under Asset Declaration Schemes introduced in 2018 with a statutory guarantee of not imposing any subsequent taxes.

Doing away with poorly designed asset-based taxes may therefore have positive effects. It may reduce litigation, lower investor anxiety, remove valuation disputes and signal that the tax system will rely less on constitutionally vulnerable or administratively blunt measures.

Also read: Pakistan’s tax challenge: four conversations, one problem

The better approach is not to tax assets crudely merely because they exist. The better approach is to tax real income, realised gains, unexplained wealth, documented transfers and genuine economic capacity through legally durable and administratively credible instruments.

Doing away with poorly designed asset-based taxes may, therefore, be a good policy.

Technology not a substitute for trust

Pakistan is moving towards increasingly digital tax administration. Digital invoicing, real-time reporting, AI-based risk analysis and lifestyle-based data checks may all become part of the future tax system. These tools can detect fake invoices, suppressed sales, under-reporting and mismatches between declared income and visible spending.

But without safeguards, they can also deepen mistrust. Bad data can produce bad notices. Automated suspicion can become another form of harassment. Poor governance, digitally implemented, simply becomes faster poor governance.

This is why digital transformation must be accompanied by transparency, accountability, cybersecurity, data quality and taxpayer rights. The taxpayer should know what data is being used, why it is being used, and how errors can be corrected.

Without safeguards, digitalisation may become surveillance. With safeguards, it can become a foundation for fair documentation.

Government’s fiscal pressure

There is, of course, another side to the story. Pakistan’s fiscal managers face a hard mathematical problem every year. Debt servicing, defence, salaries, pensions, subsidies, development needs and provincial transfers must be financed. External financing pressures leave little room for revenue slippage. Tax collection therefore becomes part of the state’s survival arithmetic.

This pressure travels downwards. Targets are assigned. Field formations are pressed to collect. In an economy where large segments remain undocumented, the system naturally turns towards those already visible.

This may produce advance tax demands, aggressive assessments or disputed collections through coercive measures. The annual number may be achieved, but at the cost of cash-flow pressure, litigation and weakened trust.

A tax system cannot be judged only by how much it collects. It must also be judged by how it collects, from whom it collects, and what institutional cost is paid to collect it.

(To be continued tomorrow)

Copyright Business Recorder, 2026