The Federal Bureau of Revenue (FBR) has quietly earned a name -- or rather, a bad name -- for its performance over the years. The country’s tax-to-GDP ratio was recorded at around 9.6 per cent and 10.8 per cent in the first and second quarters, respectively.
The Federal Bureau of Revenue (FBR) has quietly earned a name -- or rather, a bad name -- for its performance over the years. The country’s tax-to-GDP ratio was recorded at around 9.6 per cent and 10.8 per cent in the first and second quarters, respectively.
This is well below the tipping point of 15 per cent observed in middle-income developing countries and significantly behind countries such as Azerbaijan (18 per cent), Cambodia (13.5 per cent), Sri Lanka (13 per cent), and the 28 per cent and above seen in mature Western economies.
This persistent underperformance has not only exacerbated fiscal imbalances but also constrained the government’s ability to invest in crucial sectors like education, healthcare, and infrastructure.
There are structural flaws within the revenue mobilisation function. It has infamously suffered from weak fiscal architecture, shallow policy orchestration, lethargic post-colonial administration, extractive dispensations and the deepening of elitist pockets. This has led to a shortfall of Rs725 billion (from July to March). Beyond these figures, the recurrent failure to meet revenue targets has eroded investor confidence and increased reliance on external borrowing, further exacerbating Pakistan's debt crisis.
Thankfully, the government recently acknowledged these inefficiencies and attempted to resolve the conflict of interest where policy-making and revenue collection exist within the same institution. Consequently, the federal cabinet has approved the establishment of a Tax Policy Office (TPO) under the Ministry of Finance to support the government’s economic reform agenda.
According to the notification, the TPO will assist in analysing tax policies and proposals through data modelling, revenue and economic forecasting, and managing the country’s international tax treaties and obligations. In short, the responsibility now falls on the TPO to broadly address the fiscal deficit and curate policies that can repair the state's revenue mobilisation function. However, its success will hinge on its autonomy, institutional capacity, and ability to withstand political pressures that have historically plagued tax reforms.
A major challenge before the TPO is the narrow tax base. Pakistan has a tax population of 13.4 million, compared to 66.2 million employed individuals (per the 2023 census), but only around six million are active taxpayers, with 43.3 per cent filing nil returns. The tax gap is staggering: Rs11 trillion, according to Dr Ikram Ul Haq; Rs7.1 trillion, as asserted by the incumbent chairman; and Rs3.8 trillion in tax expenditure.
Another issue is the informal economy, which constitutes more than 64 per cent of the total economy. The FBR struggles to bring this undocumented sector into the tax net due to several factors: the high cost of doing business, heavy-handed regulatory practices, corruption, bureaucratic hurdles, weak institutions, financial exclusion and the inherent tax burden itself -- thanks to a skewed Laffer curve in Pakistan.
The elitist treatment of taxation has long plagued Pakistan, with the wealthy circumventing taxation through various loopholes. The IMF’s 2024 Consultation Report highlights that “the state’s support of businesses through subsidies, favourable taxation arrangements, protection and government price setting has undermined the development of [a] dynamic and outward-oriented economy.” The affluent, due to their political and financial clout, have managed to sideline taxation, evident in the fact that a mere 3,651 filers reported income exceeding Rs100 million. The political economy further fosters tax havens for entire sectors.
The challenges before the TPO are immense, but its potential to redefine Pakistan’s fiscal landscape is equally significant. By addressing systemic issues with innovative strategies, the TPO can foster a more equitable, efficient and sustainable tax system
Agricultural income remains a glaring example of this inequity. Despite contributing around 24 per cent to the national GDP, its share in tax revenue is disproportionately low -- less than one per cent or Rs4 billion. Following the recent legislation on agricultural income tax, enforcement challenges persist. Poorly recorded land ownership and tenancy complicate tax assessment. Most small and medium farmers lack records of produce, sales, income, and expenses, as agriculture remains largely non-commercial. This will hamper accurate income assessment, tax application, and compliance enforcement.
The wholesale and retail sectors also continue to evade taxation despite contributing around 18 per cent to GDP. The Tajir Dost scheme aimed to bring retailers into the tax net, yet as of June 30, 2024, out of approximately three million retailers, only 270,000 filed returns, highlighting the haphazard approach taken by the government and the FBR, as well as the lack of collaboration within the due tax processes.
The real-estate sector follows a similar trajectory. It has become more of a speculative bubble rather than a machinery for sustainable economic growth, strangulating industries, as evident from negative large-scale manufacturing (LSM) trends. Successive governments have introduced real-estate amnesties, such as the 2,100 projects availing the 2021 scheme. The sector lacks a dedicated regulator, resulting in poor-quality developments, overpromising, delayed handovers, and weak property maintenance. With institutional credit below one per cent of sector GDP, infrastructure quality and long-term investment remain limited.
Given the foregoing, the salaried class is a scapegoat for a disproportionate tax burden, as it boasts no astronomical influence in the power corridors. tax collection from the salaried class, which amounted to Rs188 billion in FY22 and increased to Rs368 billion in FY24, indicating a growth of 95.74 per cent.
Another growing concern is the increasing reliance on withholding taxes. Instead of taxing a taxpayer’s actual income, a presumptive approach taxes the transaction itself at its point of occurrence. This effectively shifts the tax burden forward, increasing indirect taxation, which disproportionately impacts lower-income groups.
Unfortunately, withholding taxation has become an easy way for revenue authorities to transfer collection responsibilities to withholding agents. This leads to supply-side inflation -- often called ‘taxflation’ -- encourages the undocumented economy, and fosters what Dr Nadeem Ul Haq describes as “killing transactions” and thereby “killing economic growth”.
Further, weak tax administration remains a persistent issue. Anyone who has had any interaction with the FBR, be it resetting an IRIS password or filing a return, has likely encountered either bureaucratic inefficiency or outright corruption. According to the Tax Reform Commission (TRC), the FBR’s field offices collect merely 5.0 per cent of total tax revenue. In other words, if the FBR were shut down today, the Ministry of Finance and Revenue Affairs would still be able to generate 95 per cent of current tax revenues.
To address these issues, the TPO must propose adherence to OECD’s good tax policy principles, ensuring transparency, neutrality, simplicity, and efficiency. AI and data analytics can play a significant role in overcoming tax evasion, as demonstrated by other countries.
A recent report by IPRI highlights key successes: India’s AI-driven tax compliance monitoring led to an 18 per cent reduction in tax evasion and INR1.6 trillion ($20 billion) in additional revenue. The UK identified GBP3 billion ($4 billion) in underreported income in 2022 through automated audits, reducing manual audits by 40 per cent. And lastly, the US employs AI-driven audits and fraud detection, identifying $10 billion in fraud and underreporting annually, while also accelerating tax processing by 30 per cent and improving taxpayer satisfaction. Ergo, Pakistan must also follow this modus operandi by investing in digital infrastructure and modernising its
tax administration.
The challenges before the TPO are immense, but its potential to redefine Pakistan’s fiscal landscape is equally significant. By addressing these systemic issues with innovative strategies, the TPO can foster a more equitable, efficient, and sustainable tax system. The success of this initiative depends on sustained political will, robust enforcement, and the integration of data-driven methodologies, ultimately leading to a stronger and more resilient economic framework for Pakistan.
The writer is a Peshawar-based researcher who works in the financial sector.
