Tax alarm

The federal government has made a bold proclamation: it aims to collect a record Rs14.13 trillion in taxes in the next fiscal year. In its effort to plug tax leaks and meet this ambitious target, the government has decided to arm the FBR with extraordinary powers – including the authority to arrest individuals under Section 37A of the Sales Tax Act. Unsurprisingly, the business community has reacted with alarm and fury. A nationwide strike is now scheduled for July 19, backed by powerful trade bodies in Karachi, Lahore and elsewhere. Although talks between traders and the government are underway, the threat of a strike remains alive. What many in power fail to understand is the deeper problem at play: the government’s repeated resort to coercive tactics in its quest to raise revenue. Pakistan’s tax-to-GDP ratio remains among the lowest in the region, a chronic issue that successive governments have failed to resolve. True, the current government inherited a fragile economy in 2022, teetering on the edge of default. And it has arguably brought some macroeconomic stability. But the old habit of seeking short-term fixes through ad-hoc measures and aggressive enforcement is still around and is now creating new fault lines.

Instead of addressing the structural flaws in Pakistan’s tax system, the state continues to burden those already within the net. Making tax evasion a criminal offence and empowering FBR officials to arrest suspects may seem like a no-nonsense approach, but it is a recipe for harassment and abuse. It also sends a chilling signal to the business community, which is already struggling with inflation, energy costs and regulatory unpredictability. This approach is heavy-handed, shortsighted and should not have been used. The goal should not simply be to extract more taxes by any means necessary, but to expand and formalise the tax base sustainably. Introducing punitive taxes on withdrawals exceeding Rs200,000, for instance, only discourages formal banking and pushes more transactions into the shadow economy. The Asian Development Bank (ADB) has, in a timely report last week, cautioned that expanding the tax base must be done carefully. Simply adding more taxpayers without fixing inefficiencies or closing loopholes will not lead to financial stability. It has also rightly pointed out that the long-term benefits of formalisation and better data must outweigh the compliance burden placed on taxpayers.

Rather than strong-arm tactics, what Pakistan needs is a comprehensive overhaul of the tax system. This includes simplifying the tax code, closing legal loopholes that allow under-reporting of profits, and rewarding compliance through transparency and predictability. It also requires depoliticising the FBR and investing in automation and audit systems that rely on data, not discretion. There is no denying that Pakistan needs to boost its revenue urgently. But using fear as a fiscal tool is likely to backfire. What’s needed is a new social contract, one in which citizens and businesses alike are willing to pay taxes because they see fairness, accountability and value in return. Until then, the government may find itself locked in a cycle of resistance, retreat and repeated failure – all the while people keep wondering what they did wrong to end up in such a taxing dilemma.