Dr. Ikramul Haq & Abdul Rauf Shakoori
The IMF staff level agreement of April 30, 2026 highlights a fundamental issue for developing economies that durable revenue mobilization is not achieved through isolated tax design changes but through sustained improvements in institutional capacity, compliance frameworks, and enforcement credibility, where enhanced revenue collection is paired with governance reforms and disciplined public financial management.
The Pakistani perspective demands that any discussion on tax reform begins with this reality, because the challenge is not merely about designing ‘smarter taxes’ or about building a system capable of implementing them. The persistent administrative weaknesses within Pakistan’s revenue authority have repeatedly demonstrated that even well-designed policies fail when enforcement mechanisms remain fragile and inconsistent.
The slogans of “taxing smarter, not harder” or “Reforming Pakistan tax policy” may offer rhetorical appeal, but in Pakistan’s case it risks masking structural deficiencies. The country’s tax system is not obliged by a lack of ideas but by the inability to operate those ideas in a manner that ensures compliance, minimizes evasion, and builds trust in the system. The application of such slogans without contextual grounding leads to policy prescriptions that are disconnected from on ground realities.
The most critical omission in current fiscal discourse is the failure to address the distortionary impact of exemptions and zero rating within the sales tax regime. The presence of these provisions has created significant avenues for lobbying, rent seeking, and revenue leakage. The persistence of these distortions reflects a political economy challenge that cannot be bypassed through technical adjustments elsewhere in the system.
The proposal to expand the Third Schedule and shift tax collection upstream to manufacturers and importers appears structurally efficient in theory. The logic of targeting a smaller number of entities rather than millions of informal retailers is administratively attractive. The practical implications, however, are far more complex.
The Pakistani market for essential goods is considered by low price elasticity, meaning that producers will pass the tax burden directly to consumers. The result is an immediate inflationary impact that disproportionately affects lower income households, whose consumption is converged in these goods.
The assumption that upstream collection enhances formalization reflects a misunderstanding of the nature of informality in Pakistan. The relocation of the tax collection point does not address the absence of documentation across the value chain.
The underlying issue is not where tax is collected but whether transactions are recorded, verified, and integrated into a broader compliance framework. Therefore, without addressing these gaps, informality remains the same.
The claim that retail price-based taxation reduces leakage must be evaluated against Pakistan’s existing compliance challenges. The manufacturing and import stages are already vulnerable to transfer pricing abuse, fake invoicing, and under declaration of production capacities. The concentration of tax liability at these stages may, in fact, intensify these vulnerabilities by increasing the incentives for manipulation.
The integrity of the tax credit mechanism further complicates the situation. The system, which is predominant to the functioning of the sales tax model, has been undermined by widespread misuse, including flying invoices and fictitious refund claims. The expansion of this mechanism without strengthening verification and audit processes risks amplifying existing fraud rather than curbing it.
The experience of sectors already covered under similar frameworks highlights these limitations. The continued prevalence of smuggling, misuse of Afghan transit trade routes, and counterfeit products in categories such as beverages and personal care items demonstrates that policy design alone cannot overcome enforcement deficiencies. The persistence of these issues indicates that structural weaknesses remain unaddressed.
The weakness of competition regulation introduces an additional distortion. The ability of manufacturers to set inflated retail prices creates a scenario where tax is calculated on artificially high bases, which are then passed on to consumers. The absence of effective oversight allows such practices to persist, undermining both consumer welfare and the credibility of the tax system.
The exclusion of significant non-compliant sectors further limits the effectiveness of the proposed approach. The agricultural sector and its associated value chains, including loose dairy, unpackaged processed foods, and informal distribution networks, operate largely outside the formal economy. The inability to capture these segments renders retail price-based taxation incomplete and regressive, as it disproportionately targets formalized segments by leaving informal activities untaxed.
The absence of a comprehensive revenue impact assessment represents a critical gap in policy formulation. A credible reform proposal must quantify expected gains, assess behavioral responses, and evaluate potential unintended consequences such as demand suppression and shifts toward informal channels. The lack of such analysis raises questions about the feasibility and sustainability of the proposed measures. The broader issue is that tax reform in Pakistan cannot be reduced to adjustments in collection mechanisms by ignoring the underlying institutional framework.
The effectiveness of any fiscal policy depends on the strength of the institutions responsible for its implementation. The expansion of a system with known compliance gaps, without addressing those gaps, risks replicating existing problems on a larger scale.
The way forward requires a shift in focus toward structural reforms that strengthen enforcement capacity, enhance transparency, and improve data integration across the tax system. The elimination of distortive exemptions, the digitization of transactions, and the development of robust audit mechanisms are essential components of a credible reform strategy.
The sustainable revenue mobilization in Pakistan will not be achieved through isolated policy innovations or so-called “smarter taxation” but through comprehensive institutional reform. The credibility of the tax system depends on its ability to enforce compliance consistently and fairly. Therefore, without addressing these foundational issues, any attempt to redesign taxation mechanisms will remain limited in its impact and unlikely to deliver the desired outcomes.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.
He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).
He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.
His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Abdul Rauf Shakoori
The recent publication, coauthored by these writes with Huzaima Bukhari is:
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46