Fixing a broken tax system

EDITORIAL: The IMF’s (International Monetary Fund’s) call for Pakistan to build on its hard-won economic stability by pursuing a fairer, broader and more predictable tax system strikes at the heart of one of the country’s most persistent economic failings: an inequitable tax regime that places a disproportionate burden on those already within the tax net while allowing influential sectors to contribute far less than their due.

Addressing a recent tax reform workshop, Jihad Azour, Director of the IMF’s Middle East and Central Asia Department, rightly stressed the need to bring under-taxed sectors into the fold, rationalise concessions and ease the burden on those already in the net. Without tackling these structural inequities, Pakistan risks undermining both the gains of stabilisation and the foundations of sustainable, inclusive growth.

The country’s tax system is afflicted by three interlinked weaknesses: a narrow tax base, elite capture, and widespread evasion facilitated by an administration vulnerable to corruption, and bribery. These reinforce one another, leaving compliant taxpayers to shoulder an ever-growing burden while influential sections of the economy escape meaningful scrutiny.

The salaried class and documented corporate sector have been squeezed repeatedly to meet revenue targets, an approach that is neither equitable nor sustainable. The deeper failing here is that the FBR (Federal Board of Revenue) has failed to develop sufficiently effective means of identifying and tracking economic activity beyond the already documented economy.

Tax policy has too often compensated for administrative shortcomings by raising rates on those easiest to tax, rather than identifying those who should be paying but do not. The result is a vicious cycle of higher burdens, weaker incentives for formalization, and greater resistance to compliance.

In a recent Business Recorder article, noted taxation expert and former FBR chairman Shabbar Zaidi argues that the fundamental problem lies in tax administration. His proposed emphasis on empowering Pakistan Revenue Automation Limited (PRAL) deserves serious consideration.

Established in 1994, PRAL provides the FBR with tax automation, data management and IT infrastructure, including the IRIS tax-filing system. Although it already operates as a separate public-sector entity with an autonomous board, its potential remains constrained by its close institutional relationship with the FBR.

Strengthening its operational autonomy and technical capacity could allow technology and data analytics, rather than discretionary bureaucratic intervention, to play a far greater role in identifying economic activity and enforcing tax compliance.

Further, there is a need to recognise that Pakistan already possesses the building blocks for a more intelligent system. Something as basic as the computerised national identity card, combined with properly governed data-sharing arrangements linking NADRA, banks, property registries, utilities, corporate records and provincial revenue authorities can help establish a clearer picture of economic activity.

Data analytics can identify discrepancies between declared income, asset ownership, property transactions and business activity, flagging potential taxpayers for verification. Such systems, however, must incorporate due process, data security and safeguards against arbitrary assessments as technology should make evasion harder without turning compliance into indiscriminate surveillance.

Automation can also reduce opportunities for rent-seeking by limiting unnecessary face-to-face interactions with the tax bureaucracy. While it cannot eliminate corruption on its own, it can narrow the space in which bribery thrives. Nor can it compensate for political reluctance to tax influential constituencies.

Retailers, wholesalers, real estate interests and agricultural incomes must be brought into an effective, enforceable framework rather than accommodated through exemptions, and weakly implemented schemes. Those in power must realise that Pakistan cannot tax its way to prosperity by repeatedly targeting the same compliant minority. There is a need to make economic activity visible, then tax it fairly.

Empowering PRAL to deliver that transformation would be a practical starting point while automation and technology must be deployed to help pinpoint untapped sources of revenue and bring them into the tax net.

Copyright Business Recorder, 2026