Our tax dilemma

LAHORE: The Pakistan government’s willingness to accommodate the business community’s demands -- such as tax concessions, reduced rates or curbing the powers of the Federal Board of Revenue (FBR) -- is shaped by a range of political and economic factors.

While the government may offer partial concessions, such as procedural relaxations or targeted sectoral relief, a blanket reduction in tax rates or significant weakening of FBR powers appears unlikely. This is particularly true under the scrutiny of the International Monetary Fund (IMF) and in view of Pakistan’s challenging fiscal conditions.

The country continues to run persistent budget deficits and remains heavily reliant on IMF programmes and foreign loans. Concessions that lower tax revenue or limit FBR authority could jeopardise fiscal targets. The IMF has consistently emphasised the need to broaden the tax base, reduce exemptions and strengthen revenue collection. Any move to lower tax rates or dilute enforcement powers would likely breach IMF programme commitments.

A scenario-based analysis offers insight into two contrasting policy paths: one where the government yields to business pressure, and another where it resists.

If the government concedes: The government may lower income or sales tax rates for traders and SMEs, delay or roll back the FBR’s digitisation and enforcement measures, or introduce new amnesty or tax-whitening schemes. In the short term, this could boost business sentiment, particularly among traders and small manufacturers, and strengthen political support from urban constituencies. However, it would also lead to a loss of tax revenue, worsening the fiscal deficit and risking IMF dissatisfaction or delays in loan disbursements.

Certain sectors, such as retail and construction, may see improved cash flows, but broader consequences could include a weakening tax compliance culture and stalling of formalisation efforts. While friction between the FBR and the business community may ease, perceptions of unfairness among compliant taxpayers would grow. A temporary rise in consumption or stock market performance may occur due to positive sentiment, but exchange rate volatility and bond market pressures could follow if macroeconomic indicators deteriorate.

In the medium term, tax reform credibility would erode, with continued underperformance in revenue collection. External pressure from lenders would intensify, and inflation could rise if the rupee weakens due to fiscal mismanagement. Reversing such concessions could prove politically difficult once precedents are set.

If the government resists: Should the government hold its ground -- by increasing taxes where necessary, expanding FBR enforcement powers, and continuing digital tracking mechanisms (POS systems, CNIC linkage, real-time invoicing) -- it would send a strong signal of commitment to the IMF and broader reform. It may also reject blanket amnesties and prioritise broadening the tax base, targeting retailers, real estate, and undocumented services.

In the short term, this approach could provoke strikes, protests and political backlash from trader groups, but it would support fiscal discipline and contribute to long-term formalisation and tax equity. Nevertheless, the risk of harassment or misuse of FBR authority would remain unless strong checks are in place.

Over the medium to long term, this path promises more sustainable revenue growth, a higher tax-to-GDP ratio, improved investor confidence, deeper financial inclusion and enhanced economic data. The eventual outcome could be a reduced reliance on regressive indirect taxation, such as fuel or utility surcharges.

The most prudent approach may lie in a balanced middle ground. The government could offer targeted, time-bound relief to genuinely struggling sectors rather than blanket tax cuts, while simultaneously reinforcing digital enforcement capabilities -- paired with proper oversight and accessible grievance redressal mechanisms.

Public transparency on how tax revenues are spent -- on education, healthcare and infrastructure -- would help build taxpayer trust. Simplifying procedures and reducing compliance costs can further promote voluntary tax compliance. To prevent abuse of power, independent ombudsmen or tribunals should be established to review FBR actions.