Dr. Ikramul Haq
Pakistan’s tax system does not suffer from lack of law; it suffers from fear of certainty. Safe harbour rules threaten discretionary power structures that thrive on ambiguity. Until Parliament anchors them firmly in the Income Tax Ordinance, 2001, the rhetoric of reform will remain hollow—Prosperity, tax reforms & social justice, Minute Mirror, January 10, 2026
Pakistan’s tax system remains trapped in a paradox: the State demands certainty from taxpayers, yet refuses to grant certainty through law. Few areas expose this contradiction more starkly than the absence of Safe Harbour Rules—a tool that most modern tax administrations deploy to reduce disputes, encourage voluntary compliance, and free scarce administrative capacity for serious enforcement.
Despite repeated lender-doner-led reforms (sic), policy papers, and commitments to international best practices, Pakistan has failed to enact to this day even safe harbour provisions, which testifies to utter incompetence of Federal Board of Revenue (FBR). The result is predictable: litigation replaces compliance, discretion replaces law, and the tax base continues to erode.
Safe harbour rules establish clear, objective thresholds under which taxpayers are deemed compliant without the need for intrusive audits or subjective assessments. They do not grant immunity from tax; they grant predictability.
In transfer pricing, presumptive expenses, services valuation, and financial sector taxation, safe harbours reduce information asymmetry and administrative overload. The Organisation for Economic Co-operation and Development (OECD) recognizes them as compliance-enhancing instruments when designed with transparency and fiscal realism. In Pakistan, however, the debate rarely moves beyond rhetoric.
Pakistan’s failure—structural or oversight
- Revenue myopia and short-termism
Tax policy (sic) in Pakistan is driven by annual collection targets, not by medium-term compliance gains. Safe harbour rules are wrongly perceived as “revenue concessions”, rather than compliance tools. This fiscal myopia is reinforced by IMF-style headline targets that reward immediate yield over institutional credibility. This is the real crisis of Pakistan and FBR.
- Discretion as a governance substitute
The absence of safe harbour rules sustains a discretion-heavy tax regime. Where objective thresholds would limit arbitrary assessments, their absence preserves negotiating space—often at the cost of legality and trust.
- Fragmented constitutional design
Pakistan’s post-18th Amendment [Constitution (Eighteenth Amendment) Act, 2010] fiscal architecture divides taxing powers between federation and provinces, yet coordination mechanisms remain weak, rather non-existent. Safe harbour rules—especially for services—require harmonization. The institutional will and operational capacity through a federalized tax collection machinery to cooperate has been missing.
This is simply shameful in the presence of Council of Common Interests (CCI), National Economic Council (NEC)—constitutional bodies—and a full-fledged ministry in Islamabad, Inter Provincial Coordination (IPC) Division. ‘Inter-provincial matters and co-ordination’ appears as Entry No. 13 in Part II of the Federal Legislative List, Fourth Schedule to the Constitution of Islamic Republic of Pakistan [“the Constitution”] whereas CCI appears at number 14.
- Litigation as policy default
Instead of clarifying law, Pakistan allows disputes to mature through tribunals and courts. The result is a body of case law reacting to uncertainty rather than preventing it—an expensive substitute for rule-making.
Cost of not having Safe Harbours
The absence of safe harbour rules produces four measurable harms:
- Persistent litigation in transfer pricing and services taxation
- Over-auditing of compliant taxpayers
- Under-enforcement against high-risk non-compliance
- Capital flight and discouragement of formalisation
In constitutional terms, this environment strains Articles 4, 18, and 25 of the Constitution by enabling unequal, unpredictable treatment of similarly placed taxpayers—an outcome incompatible with rule of law.
What Pakistan needs now
Safe harbour rules are not a luxury; they are a governance necessity. Pakistan’s tax administration cannot audit its way to compliance. It must legislate certainty and reserve enforcement for real risk. This requires political acceptance of a plain truth: certainty increases revenue more reliably than coercion.
Comparative benchmarks: OECD position
The OECD, in its Transfer Pricing Guidelines, recognizes that:
- Safe harbours reduce compliance costs for low-risk taxpayers
- They allow tax administrations to redirect resources to high-risk cases
- Certainty enhances investment without undermining revenue, provided thresholds are realistic
Crucially, OECD treats safe harbour as a compliance instrument, not a tax incentive—a distinction Pakistan has failed to internalize.
India’s Safe Harbour regime
India introduced statutory safe harbours through sections 92CB and 92CC of the Income-tax Act, 1961, empowering the Central Board of Direct Taxes to notify margins for low-risk transactions.
Key features worth emulating:
- Explicit statutory authority in the parent Act
- Transaction-specific margins (IT services, knowledge process outsourcing (KPOs), financial services)
- Optional regime—taxpayers may opt out
- Built-in sunset and review clauses
India’s experience demonstrates that safe harbours increased compliance certainty without collapsing the tax base, even in a revenue-constrained environment. Pakistan’s reluctance, therefore, cannot be justified on fiscal grounds—it is a governance failure.
Harbour Rules: statutory anchoring
Pakistan’s tax reform debate often collapses at the implementation stage because proposals are floated as rules, guidelines, or SRO-based concessions without being embedded in the charging and machinery provisions of the Income Tax Ordinance, 2001. Safe harbour rules are a classic casualty of this approach. If safe harbours are introduced merely through delegated legislation using the tool of statutory regulatory order (SRO), they will remain vulnerable to administrative dilution and constitutional challenge.
What Pakistan requires is statutory anchoring, not cosmetic rule-making. In the next part, section-by-section alignment of safe harbour rules in the Income Tax Ordinance, 2001 will be proposed so that a public debate can be initiated on this vital issue.
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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.