Dr. Ikramul Haq
A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers, while the tax base remains too narrow to ensure tax fairness, fiscal sustainability and meet Pakistan’s large social and development spending needs—IMF Country Report No. 24/310, October 10, 2024
Tax revenue may change through automatic response of the tax yield to changes in national income and/or through the imposition of new taxes, revision of the bases and/or the rates of the existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying tax parameters (bases, rates etc.) are called discretionary changes.
Variations in the tax yield flowing from the combined effects of automatic responses as well as discretionary changes constitute the buoyancy of a tax that is computed by dividing percentage change in tax yield by percentage change in national income. The Pakistani experience in this regard has been very disappointing as admitted frequently in the government publications, almost in every Economic Survey of Ministry of Finance in the following identical manner:
“Although successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in the federal budgets, little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan tax system is still characterized by a narrow and punctured tax base, over reliance on import-related taxes, high taxes on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effect of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and tax elasticity and buoyancy on the other. Such a tax system has severely hampered resource mobilization efforts in the past despite a series of discretionary measures taken in almost every federal budget to reduce the widening gap between revenue and expenditure”.
Buoyancy estimates assess the overall success of government measures to increase tax revenues while elasticity coefficients indicate the inherent responsiveness of a tax system to changes in national income.
In the absence or weakness of elasticity attribute of the tax system, a government will have to revise tax rates and tax base every year to keep the share of tax revenue in national income undiminished. Such frequent changes complicate tax laws, reduce administrative efficiency and are politically inexpedient. This is what has been happening in Pakistan since the dark day of July 5, 1977. It is high time that we must go for a paradigm shift in our tax policy to avoid these kinds of negative effects. Therefore, the tax structure should be redesigned to impart a reasonable degree of elasticity to the tax system.
According to Pakistan Telecommunication Authority (PTA), accessed on February 28, 2025 at 11:56 am, the total mobile cellular subscribers as on January 31, 2025 were 195 million (79.30% mobile density), 140 million mobile broadband subscribers (57.08% mobile broadband penetration), 3 million fixed telephone subscribers (1.10% fixed teledensity) and 144 million broadband subscribers (58.60% broadband penetration).
Those who keep on alleging that Pakistanis are “tax thieves” must be reminded that that with effect from July 1, 2024, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax—15% as filers, and 75% in case of those mentioned in general order issued under section 114B of the Income Tax Ordinance, 2001, being prepaid or postpaid mobile/broadband/internet users.
The debate around narrow and punctured tax base of Pakistan tends to ignore the irrefutable fact that all adults in Pakistan having bio-metrically verified mobile connections were/are paying advance/adjustable income tax, whether they earn taxable income or not! In case all of them file returns, not less than 100 million will be entitled to refunds. However, it is also disturbing to note that on February 28, 2025 at 12:35 pm (time of finishing this article), total number of persons (natural and legal) appearing as active taxpayers on the website of Federal Board of Revenue (FBR) were 6,417,000 (4,486,952 individuals and 1,930,617 non-individuals)!
FBR has miserable failed to ascertain a rational tax base out of 144 million broadband subscribers, who spend more than Rs. 60,000 per annum on availing this facility alone. The taxable population of Pakistan is not less than 30 million—see details in this article.
The failure of FBR, despite taking foreign loans of millions of dollars for reforms (sic) and asking more from the World Bank for its controversial ‘transformation plan”, towards revenue-yielding broadening of tax base is exposed brilliantly in a research study [Zehra Farooq & Muzammal Rasheed]. It was conducted under Research for Social Transformation and Advancement (RASTA) of Pakistan Institute of Development Economics (PIDE), presented in the 5th PIDE-RASTA Conference [February 26-27, 2025], held in Islamabad.
Our politicians in power and economic managers are the real culprits—they handed over tax policy to FBR (the agency with targets every year, tries to achieve these by fleecing the marginalized and squeezing the existing return filers). Now, once again there is a move on paper to take policy away from Revenuecracy—the so-called wizards (sic) in the apex revenue authority, always busy in infighting and now ruled by a junior officer from Pakistan Administrative Service (PAS)—erstwhile infamous DMG!
For preparation of Finance Bill 2025, this year too, it appears the work will be assigned to the Revenuecracy, headed now by an outsider, as Tax Policy Office (TPO) at Ministry of Finance though notified on February 13, 2025 is still not operation. The Revenuecracy has no concern that taxation is universally accepted as a potent instrument to shape and influence the socioeconomic polices of a country. They are only obsessed with numbers, which they were never meet despite the fact that actual tax potential at federal level alone is Rs. 30 trillion.
For achieving the real tax potential, it is imperative to formulate a growth-friendly tax policy keeping in view our own peculiar conditions, and by not just following the faulty prescriptions of foreign lenders and donors. It is necessary for us to use the forthcoming budget for fiscal year 2025-26 as a tool for CHANGE and not as instrument of status quo. In taxes, we need to bring some fundamental structural and operational changes. Mindless amendments here and there in various tax codes will serve any useful purpose.
The most crucial problem faced by us in fiscal reform programme is that of devising astute and stringent measures to curb tax evasion so that we can distribute the burden of taxes fairly and justly between different persons in the same or similar occupations. Honest taxpayers have to be safeguarded as day by day they are being disillusioned by the fact that mighty tax evaders are not paying anything with the connivance of their friends in the tax machinery. The unholy alliance between tax evaders/their adviser and corrupt tax officials has to be eliminated as a first and foremost step if we want to initiate any meaningful change in the tax system.
In the forthcoming federal budget 2025-26, legislation must be proposed under the name of ‘Compulsory Public Disclosure of Assets Act, 2025’ requiring the following to make their assets and liabilities public along with taxes paid:
- High ranking civil and military officials
- All Senators, MNAs and MPAs
- Judges of the superior courts
- Any person who has availed loans exceeding Rs. 500 million from any financial institution
- Professionals like lawyers, doctors, chartered accountants, engineers, journalists, consultants etc
The above powerful/privileged classes of society should act as an example for others. Their declarations would inspire common people to pay their taxes honestly. The State needs to wage an all-out war against burgeoning black economy, money power and corrupt politico-administrative structures. This war must start from the mighty classes, identified above if we really want to broaden our tax base.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.