Tax reforms

Tax laws are almost always alienating for the people. It is an inevitable part of the entire proposition of taxes. No one enjoys giving up a portion of their hard-earned income and so new revenue collection measures often incur the people’s resentment. Pakistan is no exception in this regard, especially considering how people have seen inflation drain away their salaries in recent years. Never have Pakistanis been so reluctant to part with even more of their money, especially since any of the potential returns are far from guaranteed. The government has now introduced a new bill in the National Assembly to strengthen tax compliance – the Tax Law (Amendment) Bill 2024 – giving revenue authorities more power to ensure people follow tax laws. Under the new tax law, people who do not comply with tax rules may not be allowed to open bank accounts. Their financial activities and ability to buy vehicles over 800cc could also be restricted. The authorities have also floated the idea that businesses that are not registered could be sealed. The new legislation has also tweaked the language. The terms filers, non-filers and late filers will be replaced with eligible and ineligible persons. The authorities are also looking at ways to rope in banks to verify the claims that tax filers make to ensure that all information is correct and that they have not underpaid. All of this looks good – on paper. For years now, our financial policymakers have been trying to widen the tax net only to have all their plans become ineffective as tax evaders continue to hide their assets and other details to avoid taxes.

It is understandable why people would feel frustrated with the new amendments. We have big retailers and medium-sized businesses that openly evade taxes while all new revenue collection measures seem to fall disproportionately on the salaried classes. While the tax pressure on traditionally protected sectors like agriculture and retail is slowly being raised, with the National Tax Council reportedly asking the provinces to lay agricultural tax bills by year-end and the FBR sealing restaurants in the capital for issuing fake invoices, it is arguably not yet on par with that felt by ordinary salaried people. The country also still has entrepreneurs who charge hundreds of thousands of rupees for a wedding dress and pay no taxes – some are not even registered.

It is as yet unclear if the new, stricter regulations will actually encourage more people to file taxes, especially those who have been outside the net for decades. But if the past is anything to go by, our record of tax enforcement is unsatisfactory. Restrictions on non-filers have been imposed quite a few times, but have not led to any major success. Authorities must realise that without long-term planning and extensive tax reforms, the aspirations of increasing tax revenues will remain nothing more than wishful thinking. We saw in the case of remittances that the government’s strict crackdown against illegal money exchange centres and the subsequent incentives for compliant centres led to the flow of large volumes of remittances through legal, documented channels. Similarly, boosting tax collection cannot be all sticks and no carrots. There need to be more incentives or benefits for those actually filing taxes. Most importantly, people need to trust the government to spend their money wisely. To say that Pakistan has a deficit of trust in government would be an understatement and changing this will require a more competent and less wasteful state that actually wants to help its people. All too often, governance in Pakistan can feel like someone demanding your loyalty and compliance, threatening punishments for doing otherwise and all while offering you nothing in return.