Dr. Ikramul Haq
The people have to understand that the tax money stolen by the corrupt rich of the country represent the good schools, colleges, hospitals, roads and many other projects of welfare stolen from us poor—Tax Reforms in Pakistan: Historic & Critical View
In a tyrannical government, the ruler becomes corrupt and uses his power to further his own interests instead of working for the common good—Aristotle, The Athenian Constitution
Ruin comes when the trader, whose heart is lifted up by wealth, becomes ruler—Plato, The Republic
All public power is a sacred trust, which is to be exercised fairly, justly, honestly and in accordance with law—Supreme Court of Pakistan in Workers’ Party Pakistan & Others v Federation of Pakistan & Others [PLD 2012 Supreme Court 681]
Undoubtedly, Pakistan since its inception has perpetually been facing the multidimensional politico-economic crises. From ruthless military regimes to incompetent civilians’ (sic) rules, the people of Pakistan have suffered immensely from 1958 to date and struggled for their rights and restoration of democracy—they are still searching for independence in the true sense of the word. The rule of people, as understood in a constitutional democracy, remains a distant dream in Pakistan.
With every passing day, the grip of undemocratic forces, controlling the main resources of the country, is becoming more and more brutal and naked. The latest example is passage of Prevention of Electronic Crimes (Amendment) Act, 2025 (Act No. II of 2025) aimed at muzzling the dissident voices in the name of “countering fake news”! It reaffirms complete captivity, rather subjugation, of the elected (sic) Parliament. What started in utter haste with the passage of Constitution (Twenty-sixth Amendment) Act, 2024 [26th Amendment], by the sovereign (sic) Parliament on October 21, 2024, is now culminating into a fascist state in a civilian outfit under hybrid model.
While the domestic political culture is becoming further intolerant, uglier and pitiless, fiscal management, courtesy incompetence, is deteriorating at a fast pace. From a serious dollar crunch to monstrous debt burden, from widening fiscal deficit to unsustainable debt servicing, from vulnerabilities on external payment front to unjust import restrictions, from rising unemployment to poverty to growth retardation—all worrisome indicators demand the urgent need for prudent fiscal management and export-led growth. It is essential to get rid of deadly tentacles of International Monetary Fund (IMF) and other external lenders imposing their policies and dictates.
For years, Pakistan has become a target of severe criticism at home and abroad, by donors and lenders, for not collecting due taxes, especially from the rich and mighty. It is an incontrovertible reality that both the centre and provinces are not collecting taxes diligently from powerful sections of society. The contribution of provinces in overall tax collection is pathetically low.
During the first seven months of the current fiscal year (2024-25), the Federal Board of Revenue (FBR) has suffered a huge shortfall of Rs. 418 billion, which according to the Chairman’s own confession may reach Rs. 447 billion by the end of February 2025. This shortfall is after blocking bona fide refunds of billions and taking undue advances from banks and other large companies, including corporations owned by the federal and provincial governments!
FBR, since assumption of leadership by Rashid Mahmood Langrial on August 8, 2024, is under immense pressure from IMF to levy more oppressive, indirect taxes to meet the agreed targets (sic), as under his command shortfall is increasing. The agreed tax-to-GDP-ratio (sic), with IMF under the ongoing US$7 billion 37-month Extended Fund Facility (EFF) programme, is based on overblown numbers of GDP due to massive devaluation of rupee and wrong projection of higher inflation! Resultantly, in the wake of IMF-imposed higher taxes, astronomical prices of energy—sure recipes for disaster—the country is facing growth stagnation, especially in industrial and agricultural sectors.
Sole stress on collecting high-rate oppressive taxes, even under the garb of income taxation, is pushing growth retardation and millions more below the poverty line. Even many middle-class families now find it too hard to meet both ends [read Falling inflation, rising misery]. What makes the situation more painful is the fact that the country’s prime minister has expressed “helplessness” (sic), saying he “would have reduced the tax rate by 15% had his hands were not tied by IMF”. This is a lame excuse. IMF wants primary budget surplus that can be met by reducing expenditure and not through illogical higher taxes that are bound to destroy our economy and induce people to even tax revolt!
What is preventing the federal government to disband/eliminate permanently nearly two dozen ministries and numerous allied departments and divisions not required after devolution (sic) under the Eighteenth Constitutional (Amendment) Act, 2010 [18th Amendment]? The reduction in federal cabinet, comprising ministers, state minsters and advisers, should be the first step towards reducing monstrous wasteful state expenditure, pleaded convincingly many a times in his brilliant columns by my dear friend, late Dr. Pervez Tahir.
Right-sizing the monstrous inefficient and corrupt government machinery and revamping of taxes (Shahid Hafeez Kardar 2023) at federal and provincial levels, and assigning their overwhelming functions to elected local government representatives is essential structural reform. Any debate about overhauling of tax system should take place after such structural changes and many others discussed repeatedly in these columns.
As regards Pakistan’s tax potential, the latest study suggests that with low-rate taxes on broadest possible base, at federal level is Rs. 30 trillion and at national level Rs. 34 trillion (17% of GDP including informal economy). FBR has failed to collect tax even from 10 million individuals (http://data.worldbank.org/country/pakistan) having annual taxable income of Rs. 2 million as retailers. Total income tax collection from them alone at the prevalent income tax rates comes to around Rs. 3000 billion. Income tax collection from all sources can be Rs. 15 trillion provided all exemptions are withdrawn and the entire undocumented economy is brought into tax net.
Harmonized sales tax (HST) at 10% has potential of Rs. 12 trillion provided all kinds of taxes on goods and services, presently levied through federal and provincial assemblies, are merged and collected through a single efficient national tax agency or National Tax Council.
Customs and federal excise have potential of Rs. 3 trillion.
Provinces can collect Rs. 4 trillion, if agricultural income tax, after amendments in their respective laws, is properly collected.
The existing tax system encourages parallel economy. Thus, reforming it is nothing but a fallacy. Patchwork would be an exercise in futility—no matter how many tax reform commissions or committees are formed; the result would be curing the incurable. The remedy lies in a paradigm shift in tax policy and dismantling the existing tax apparatus, and its replacement with a lean and automated national tax agency operated by professionals and supervised by an independent board of governors, answerable to Senate.
The following measures at federal and provincial levels can increase the tax-to-GDP ratio from the present 9.5 percent to 18 percent:
- Bridging of tax gap through effective enforcement & voluntary compliance
- Withdrawal of all concessionary Statutory Regulatory Orders (SROs)
- Substantial property tax on the rich
- Capital gains tax at normal rate on transfer of all moveable and immovable assets
- Imposition of sales tax on all kinds of goods and services under a unified code
Prudent and effective fiscal management and accountability alone can help Pakistan to effectively overcome fiscal deficit. Once good governance creates fiscal space, the federal and provincial government can focus on providing basic amenities like clean and safe drinking water, health and education, transport and housing to the people.
Resource mobilization should be given top priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. At the same time, large corporations, with equity stakes for the poor, through public-private partnerships, resolve the issues of inclusive development. This would set the stage for a structural change that could help achieve economic growth for the people and by the people, which is presently confined to the elites only.
Amending tax codes each year through Finance Acts and in between, by way of Supplementary Acts and statutory regulatory orders (SROs) is not serving any useful purpose—these are not solutions for improving tax administration. In fact, taxation through executive orders is unconstitutional in view of Article 77 read with Article 162 of the Constitution of Pakistan. Through these SROs, the government bypasses the Parliament and commits open violation of the dictum of Supreme Court in the case of Engineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others (2013) 108 TAX 1 (S.C. Pak) that says:
“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18, Para 20]
Effective fiscal management lies in converting FBR into an autonomous body run by an independent Board of Directors comprising professionals not answerable to the headquarters of the ruling party but to Senate as representatives of all provinces.
FBR must remain free from all forms of political influence. The government’s foremost priority should be impartial enforcement of tax laws, as this is essential for addressing the current economic challenges. Additionally, it is crucial to allocate tax revenues for the benefit of the general populace and to refrain from squandering resources on inefficient public sector enterprises plagued by corruption.
Such actions would demonstrate that the elected government is responsible and genuinely concerned for its citizens. This approach would foster a culture of tax compliance and help restore public trust in the tax system. Enhancing voluntary tax compliance can only be achieved through a robust deterrent framework, where compliant taxpayers are acknowledged and rewarded, while tax evaders face exposure and legal consequences.
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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.