Dr. Ikramul Haq
Pakistan’s tax debate is crowded with familiar slogans—documentation, digitization, enforcement, broadening the base. Yet one reform tool, universally recognized in mature tax systems as a compliance stabilizer, remains conspicuously absent: Safe Harbour Rules. Their continued non-existence is not an oversight. It is a structural choice—one that reveals how deeply Pakistan’s tax system depends on uncertainty as a governing technique.
Safe harbour rules are not tax exemptions. They are rules of certainty: clearly defined thresholds under which a taxpayer is deemed compliant, insulating routine, low-risk transactions from discretionary reinterpretation. Their purpose is simple—reduce disputes, lower compliance costs, and allow tax authorities to focus on genuine risk. That Pakistan has failed to enact them, despite decades of reform rhetoric, speaks volumes about the political economy of taxation in the country.
A tax system addicted to disputes
Pakistan today runs two parallel fiscal systems: one that collects tax, and another—far larger—that manufactures tax demands which never translate into revenue. The scale of litigation is no longer anecdotal; it is systemic. Trillions of rupees remain stuck in appeals at various stages, converting assessments into paper claims rather than usable fiscal resources. This “revenue illusion” flatters annual targets while hollowing out actual state capacity.
In such an environment, the absence of safe harbour rules is not neutral. It feeds the litigation pipeline. Routine issues—transfer pricing mark-ups, services attribution, expense ratios—are repeatedly litigated despite settled economic logic and, in many cases, settled appellate jurisprudence. What should be resolved ex ante through rules is instead pushed ex post into tribunals.
Safe harbour rules would cut off a significant portion of this inflow by deeming compliance in low-risk cases. Their absence ensures that ambiguity survives—and ambiguity is the oxygen of discretionary power.
Litigation volume and the “revenue stuck” trap
Pakistan is running a tax system where assessment becomes a revenue claim, not revenue realised. The numbers now show how costly this model has become.
Appellate Tribunal plus Commissioner (Appeals): one widely reported official snapshot of 2024 put Rs. 46 trillion stuck in 65,255 cases at the Appellate Tribunal and Rs. 1.427 trillion stuck in 20,618 cases at Commissioner (Appeals).
Even allowing for overlaps and inflated demands, the scale signals systemic failure: disputed “revenue” has become a parallel budget.
High Courts and Supreme Court: another official briefing (reported in 2025) indicated 108,366 revenue cases pending in High Courts involving Rs. 4.457 trillion, and around 6,000 revenue cases pending before the Supreme Court, a huge number now shifted to Federal Constitutional Court of Pakistan in the wake of Constitution (Twenty-seventh Amendment) Act, 2025.
For context, FBR’s gross collection in fiscal year 2024-2025 was about Rs. 11.74 trillion.
So even the conservative “High Court disputed stock” figure of Rs. 4.457 trillion equals roughly 38% of a full year’s FBR collection—money that is claimed but not usable for debt servicing, development, or National Finance Commission (NFC) transfers.
Safe harbour rules do not “forgive tax”; they reduce dispute inflow in low-risk, high-volume categories (routine services allocations, low-value group services, standard mark-ups). If even 10–15% of new disputes are prevented in these categories, tribunals and appellate commissionerates regain capacity for genuinely contentious matters—and recoveries become timelier.
Audit without yield, enforcement without focus
Pakistan audits extensively, but not efficiently. Risk-based audit selection exists in name, yet the outcomes betray misallocation. A significant proportion of audits yield either no adjustment or marginal recoveries, while imposing heavy documentation and professional costs on compliant businesses. This is not aggressive enforcement; it is administrative overreach with diminishing returns.
Safe harbour rules directly address this failure. By excluding low-risk, standardized transactions from audit selection, they free up institutional bandwidth. Audit resources can then be redeployed to complex structures, aggressive avoidance, and sectors with real evasion risk. International experience shows that audit quality matters more than audit quantity—a lesson Pakistan has yet to absorb.
Without safe harbours, audit powers remain blunt instruments, applied uniformly rather than intelligently. The result is predictable: taxpayer fatigue, erosion of trust, and strategic non-compliance.
The hidden tax: compliance cost as economic distortion
Perhaps the most under-discussed cost of Pakistan’s discretionary tax regime is time. Businesses in Pakistan spend significantly more hours per year on tax compliance than their global peers. This is not because Pakistan has a more sophisticated tax system; it is because uncertainty forces defensive behaviour—over-documentation, repeated explanations, and endless correspondence.
Safe harbour rules are, in effect, an anti-corruption and pro-formality device because they reduce the time businesses spend proving obvious facts to the State.
Pakistan’s compliance burden is repeatedly benchmarked at:
- 283 hours per year for a standard firm’s tax compliance activity versus a global average around 108 hours—a differential of 175 hours.
If we price compliance time conservatively:
- At Rs. 2,500/hour, the “excess” 175 hours ≈ Rs. 437,500 per firm per year
- At Rs. 5,000/hour, it ≈ Rs. 875,000 per firm per year
This is not academic. It is the quiet tax on documented business—especially SMEs—pushing them toward informality or under-reporting. There is also policy evidence that Pakistan’s design choices inflate costs: one Pakistan-focused fiscal analysis estimates that rationalising withholding tax complexity could save around Rs. 11.14 billion in compliance costs (and reduce administrative collection costs as well).
This time cost is not abstract. It translates into professional fees, managerial diversion, and delayed investment decisions. For small and medium enterprises, it often becomes the decisive factor pushing them out of formality altogether. In effect, Pakistan imposes a tax on compliance while claiming to fight informality.
Safe harbour rules function as compliance cost reducers. By clarifying what is “acceptable,” they remove the need to prove the obvious repeatedly. In doing so, they reward documentation instead of punishing it—a reversal Pakistan urgently needs.
Constitutional implications: equality, legality, and economic freedom
The failure to enact safe harbour rules also raises constitutional concerns. When similarly placed taxpayers are treated differently based on the discretion of individual officers, the promise of equality before law becomes illusory. When lawful commercial arrangements are retrospectively questioned without objective benchmarks, due process suffers. When compliance becomes prohibitively costly, freedom of trade and business is indirectly curtailed.
Safe harbour rules discipline the State. They limit executive overreach by binding tax administration to pre-declared standards. In constitutional political economy terms, they reduce the scope for rent extraction and arbitrary power—precisely why they face institutional resistance.
Learning from others—without copying blindly
Internationally, safe harbour regimes are embedded in parent tax statutes, not introduced through ad-hoc notifications. The OECD treats them as compliance tools, not revenue concessions. India’s experience is particularly instructive: safe harbour margins were legislated, made optional, and periodically reviewed. Far from collapsing revenue, they stabilised expectations and reduced litigation in routine categories.
Pakistan’s refusal to learn from such models cannot be explained by fiscal constraints. It reflects a deeper discomfort with certainty—because certainty redistributes power away from administrators and back to law.
What a Pakistani safe harbour regime must look like
A credible safe harbour framework in Pakistan must be:
- Statutorily anchored in the Income Tax Ordinance, not left to delegated legislation
- Optional, preserving taxpayer choice
- Transaction-specific, focusing on low-risk, high-volume areas
- Paired with audit protection, otherwise meaningless
- Periodically reviewed, ensuring fiscal realism
Most importantly, it must be framed as a governance reform, not a taxpayer favour.
Conclusion
Pakistan’s tax problem is not merely low compliance; it is low credibility. A system that thrives on ambiguity cannot build trust, and without trust, enforcement becomes self-defeating. Safe harbour rules offer a modest but powerful corrective. They do not weaken the State; they strengthen it by aligning power with law. Until Pakistan accepts certainty as a legitimate instrument of governance, tax reform will remain trapped in cycles of coercion, contestation, and collapse.
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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.