Our flawed tax doctrine

LAHORE: For decades, Pakistan’s tax doctrine has rested on a single principle: extract revenue at any cost, even if it cripples the economy. Successive governments have lacked both courage and vision, choosing to appease traders by tolerating informality rather than enforcing genuine documentation.

Policymakers routinely parade cosmetic ‘reforms’, but most are dictated by the IMF. This has created the impression that reforms are foreign impositions rather than national imperatives. By hiding behind the IMF, governments discredit a vital institution while refusing to take ownership of the hard decisions required for sustained growth. The result is an economy held hostage by vested interests.

The consequences are plain. Pakistan continues to borrow recklessly to plug its fiscal gap, even as debt servicing consumes the largest share of the budget. With borrowing space exhausted, the state traps compliant sectors under crushing taxation while letting the informal economy flourish.

It is sobering to recall that as far back as 1986, the National Tax Reforms Commission identified three core ills: tax evasion, smuggling and corruption. Thirty-nine years on, nothing has changed. Politicians evade responsibility, businessmen resist documentation to protect monopolies and bureaucrats exploit informality for personal gain. This unholy alliance has hollowed out the state. Even income tax is often shifted onto consumers, leaving entrepreneurs untaxed while the public shoulders the burden.

The result is a tax system that punishes the honest and rewards the dishonest. With GST above 17 percent, ordinary citizens are squeezed while businesses exploit loopholes through under-invoicing and under-reporting. In an economy where informality rivals formality, such high indirect taxation only fuels further evasion. Those evading tax still charge consumers the full GST, pocketing the difference.

The IMF’s prescriptions, often prudent are distorted by domestic politics. When governments refuse to implement genuine structural reforms — such as documenting traders or broadening the tax base — they leave the IMF with no option but to press for politically ‘easier’ but economically damaging measures: regressive taxation that hits the poor hardest. The outcome is rising inequality and deepening distortions.

At the core of the problem lies a rent-seeking bureaucracy that thrives on the status quo. Informality is not merely tolerated; it is shielded. Tax officials turn a blind eye to unregistered businesses while hounding compliant taxpayers. This selective enforcement breeds cynicism and erodes trust in state institutions.

Pakistan’s tax doctrine must be rewritten. Half-measures, appeasement and IMF scapegoating can no longer suffice. Documenting the economy is not a foreign agenda — it is a survival imperative. The nexus between politicians, traders and bureaucrats must be dismantled through strict enforcement, transparent accountability and a clear message that informality will no longer be rewarded.

Without such a shift, Pakistan will remain trapped: a nation taxing the few, protecting the corrupt, and borrowing endlessly to finance dysfunction. The choice is stark — either rewrite the tax doctrine or accept permanent economic decline.