Finance Bill 2025 Failure In Dismantling Oppressive Tax System  

Dr. Ikramul Haq

“…regressive taxation, one of the great ironies of Pakistan’s tax system, treating exporters more like easy tax targets than growth drivers. The FY2025 budget pushed exporters into the normal tax regime, imposing a 1.25% advance minimum turnover tax adjustable against a 29% income tax, alongside a super tax of up to 10%. With that, exporters also face a 1.25% advance tax on export proceeds and a 0.25% export development surcharge –pushing their total tax burden up to 135%. This is not only punitive but also blatantly discriminatory. Extensive research shows that such regressive taxes encourage evasion while stifling investment and growth. Textile firms, already operating on razor-thin margins, are now squeezed on liquidity, with the turnover-based tax alone drastically hampering cash flow and production capacity—No room for illusions, Business Recorder, June 2, 2025

One of the many maladies in Pakistan’s tax system is cumbersome withholding tax system contained in the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and all provincial laws relating to sales tax on services. This kind of irrational system of withholding of tax at source is operationally inefficient, anti-business, complex, time-consuming and costly. The withholding tax regime must be abolished except for payroll and payment of dividends, interest and payment to non-residents.

Unfortunately, the Finance Bill, 2025 presented along with the federal budget for fiscal year 2025-26 on June 10, 2025, has failed to address the issue raised by the largest export sector of Pakistan (textile) that has become yet another victim of unconstitutional taxation—subjected to both minimum tax and net profit tax. This kind of taxation was disapproved by the Supreme Court of Pakistan in Messers Elahi Cotton Mills & others v Federation of Pakistan & others   [PLD 1997 Supreme Court 582] as under:

“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52.”

The implementation of agenda of simplification of tax codes and rationalisation of tax system can improve tax compliance. Provided this agenda is also accompanied by substantial improvement in public perception regarding the efficiency, technical competence, integrity and ability of the tax authorities to collect taxes fairly and justly, using modern technological tools.

The present weak and fragmented structures of the federal and provincial tax agencies have failed to achieve these objectives. Therefore, the fundamental challenge is providing a simple tax but efficient system that is manned by a competent, proficient and service-oriented administration, which is presently non-existent.

Tax administrations, both at federal and provincial levels are outdated and outmoded, besides suffering from inefficiencies, lack of trained manpower and requisite infrastructure and facilities.  The absence of requisite level of digitization, professionalism and human skills is their major malady. Tax reforms certainly do not mean mere alteration of tax laws or making cosmetic changes here and there as done by the Finance Act, 2025. There is no effort till today to first restructure the entire tax administration on modern lines.

Meaningful tax reforms are not possible without first establishing an efficient and unified, workable and people-friendly structure—one that not only collects due taxes and other levies but also disburses all kinds of social services. This system is in vouge in all states, democratic or otherwise, believing in serving the masses as citizens and not as subjects. We are still not out of colonial hangover. Our parasitic ruling elites are least concerned about the welfare of masses.

The best example of an efficient tax structure is that of Sweden’s tax agency, Skatteverket that maintains data of each and every person, natural or juridical and takes care of social services. Skatteverket is accountable to the government, but operates as an autonomous public authority. We need to establish National Tax Authority (NTA) on the same lines as highlighted in Towards Broad, Flat, Low-rate, and Predictable Taxes [PRIME Institute, November 2024].

The failure to tap real tax potential of Rs. 34 trillion is the real dilemma of both the federal and provincial governments. Poor performance of Federal Board of Revenue (FBR) adversely affects the provinces as they are overwhelmingly dependent on the National Finance Commission (NFC) Award—commonly called Divisible Pool.

Provinces are not ready to collect taxes wherever due e.g. agricultural income tax from rich absentee landowners and rationalized property tax from occupant of palatial houses/bungalows/farm houses etc. and not giving fiscal powers to local governments as envisaged under Article 140A of the Constitution of Islamic Republic of Pakistan [“the Constitution”].

In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the Centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is hardly 0.7 percent of the GDP! In fiscal year 2023-24, it was  7.67 percent of total tax revenues of the state.

The Finance Bill 2025 has not provided the promised legislation to provide “every business — big or small — incentive for offering digital payment options”. In Pakistan, in order to make digitization and documentation a success,  the governments, federal and provincials, need to devise and implement a  well-coordinated plan to discourage cash transactions.

It is also important that before announcing and implementing such a legislative change, the FBR and all provincial tax agencies ensure that digital options like point-of-sale (POS) systems, which involve additional expenditure in the form of POS machines, are made available along with other inexpensive and simple options  like QR codes and many other digital solutions not confined to mobile wallets. Countries like India, Indonesia, and Bangladesh have already achieved landmark successes in this regard.

According to a news item, the Federal Finance Minister, Senator Muhammad Aurangzeb,  noted: “Pakistan’s economy is potentially valued at more than $700 billion — significantly higher than the current estimate of $410 billion — leading to over Rs. 7 trillion in annual tax evasion. “We will ensure this documentation”, the Finance Minister claimed. However, measures announced in Finance Bill 2025 lack any integrated plan to this effect.

The report further claimed: “On the petroleum side, the government introduced a landmark bill in the National Assembly last month to digitally track petroleum products from import and production to retail sales in a bid to curb smuggling and adulteration. The practice causes massive revenue losses estimated at Rs300-500 billion annually, besides affecting the environment and vehicle engines. The dual-pricing mechanism in the upcoming budget is expected to complement that legislative move and provide end-to-end traceability across the fuel supply chain”.

The Finance Minister  needs to acknowledge that After 15 years of the Constitution (Eighteenth Amendment) Act of 2020 [18th Amendment] and 16 years of 7th NFC Award, none of the civilian elected (sic) government made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds could bring fiscal consolidation for the federation.

The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the Constitution. It exposes the political elite—their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower them.

It needs to be accepted that the culprit is not the 18th Amendment but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008 with the dawn of so-called era of civilian rule! In the coming weeks, the government will notify 11th NFC Award after failure of 8th to 10th, but nothing will change unless oppressive, exploitative and elitist structures are dismantled!

The federal government after imposing all kinds of oppressive taxes, which are further proposed to be accentuated through the Finance Bill 2025, has miserably failed to reduce the burgeoning fiscal deficit. The reason being that FBR has been persistently failing to achieve the assigned targets, what to speak of tapping the actual tax potential that at federal level is not less than Rs. 34 trillion at federal level and Rs. 4 billion at provincial levels.

The Centre is unwilling to grant provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet overall needs of the federation and federating units. Sales tax on goods at time of independence was a provincial subject. The subject of sales tax was on the Provincial Legislative List at Serial No.48 in the Government of India Act, 1935 and was described as “Taxes on sales of goods and on advertising”.

In the Constitution, 1956, “tax on sales and purchases” was mentioned at Serial No.26 of the Federal Legislative List, and therefore, for the first time it became a federal subject. The position was maintained in 1962 Constitution, which mentioned “tax on sales and purchases” on the Federal Legislative List as clause (j) at Serial No.43 in the Third Schedule.

In 1973 Constitution as originally adopted ‘tax on sales and purchases’ was kept on Federal Legislative List at Serial No.49 of Part I of the Federal Legislative List given in the Fourth Schedule to the Constitution. The item was, however, completely substituted by Constitution Fifth Amendment Act, 1976 with effect from September 13, 1976, to read “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”.

The second half of the amended entry appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960. Through that amendment the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption” [see details in WAPDA v. Collector of Central Excise and Sales Tax (2002 PTD 2077 and also in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)].

The size of the cake is so small that it cannot help the country to come out of debt trap and spend adequately for the welfare of the masses, no matter which part of the country they belong to. Under the given scenario, Pakistan will remain in debt prison, and more and more people will be pushed below the poverty line, especially due to oppressive indirect taxes. If we want to overcome it, the Parliament will have to reconsider the prevailing social contract between federation and the provinces.

The following measures/steps are necessary to fix the crumbling tax system and create a reliable national socio-economic registry as maintained by Skatteverket and many other tax agencies:

• All individuals, whatever the level of income may be, should be facilitated to file simple and easy tax returns made available both in English and Urdu—incentive for filing return should be Rs. 5,000 cash paybacks in the bank account of the filer. It would enable the process of creating National Registry about households and their earning levels at national level. Individuals earning below Rs. 600,000 should be paid income support (negative tax) till the time the State provides them employment and not keep them beggars for life.
• For individuals, income tax rate exceeding income of Rs. 1.2 million should be 10% with alternate minimum tax 1% of net wealth exceeding Rs. 50 million. Corporate income tax rate should be reduced to 20%.
• All citizens should be given a chance to pay any past unpaid liability due to non-reporting or under-reporting by just paying 10% tax latest by June 30, 2026. After the deadline, stringent action including confiscation and imprisonment should be provided.
• For the next three years, under a self-assessment scheme if any taxpayer pays more than 25% tax over the last year’s liability, no audit should be conducted. If definite information for underreporting or non-reporting of any income is received, the retrieval be made with penalty of 100%.
• Simplified and harmonized sales tax on goods and services at a low rate of 10% by making recourse to Article 144 of the Constitution. The collection will be through single national agency but provinces will get shares according to the provisions of the Constitution.
• Simplify Customs tariff with ‘One-Chapter One-rate’.
• Radiographic scanning of all inbound and outbound containers to plug revenue leakages.
• Effective mechanism to counter unfair practices on the part of tax administrators—subjected to punitive actions and pecuniary damages after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
• Taxpayers’ rights must be safeguarded and strengthened by giving adequate rights under Taxpayers’ Bill of Rights ensuring quality of treatment, guaranteeing privacy and confidentiality of their declarations, providing right to assistance by the State in tax matters, ensuring unfettered right of appeal through an independent tax appellate system and providing facilities for independent review of disputes with tax authorities.
• In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz.

1. Advance tax was paid by the taxpayer on the basis of last declared/assessed/estimated income for that assessment year;
2. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
3. 6% mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.

The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001 which will help in ascertaining collection for the current tax year without accumulation of refunds after abolishing all regressive withholding provisions.

• Recovery of tax demand should be made only after decision of National Tax Court as suggested in a column.
• An efficient tax judiciary to help in removing impediments in the way of collection of genuine tax demands by the State and settling tax dispute within 12 months. For this we need to make the Tax Appellate Tribunals a truly independent forum. After merging Appellate Tribunal Inland Revenue and Customs Tribunal, the new entity should be renamed as National Tax Court (NTC) and placed directly under the Supreme Court as is the case with Service Tribunal. After one intra-court appeal right with the NTC, only the substantial questions of law to go to the Supreme Court by way of leave to appeal as provided in Article 185(3) of the Constitution. Members for NTC should be recruited in the same manner as judges of High Court. The pay, perquisites and salary structure of NTC members and staff should be at par with that of High Courts.

The way forward to sustain fiscal consolidation is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilization in Pakistan.

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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.