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Tax gap & bad policy measures

Huzaima Bukhari & Dr. Ikramul Haq


There is hardly any doubt about huge tax gap in Pakistan. It is not only because of weaknesses in enforcement of Federal Board of Revenue (FBR) and provincial tax agencies, but also attributed to the bad tax policy. According to Pakistan Telecommunication Authority (PTA), the total number of cellular subscribers as on August 31, 2021 was 186 million (84.67% teledensity), out of these, 103 million are 3G/4G subscribers (47.09% penetration), 2 million basic telephony users (1.13 teledensity) and 106 million broadband subscribers (46.4% penetration). Not less than 100 million unique mobile users (many have more than one SIMs) are paying advance/adjustable income tax of 10% reduced from 12.5% from July 1, 2021).

At present, the entire taxable population and even those having no income or income below taxable limit are paying advance and adjustable income tax at source as mobile users. If all file income tax returns, there will be refund payable to at least 80 million having no income or income below taxable limit though cost to claim will be much higher than what is withheld. FBR must collect taxes where due and not in advance or from those not chargeable to tax. Sadly 75 paisa tax on cell call exceeding 5-minute is inconsiderate towards the poor, impractical to implement for operators, and inconsequential to the efforts of FBR.  The government must lower the rate of taxes and allow capital formation to accelerate high and sustainable growth of by investing in productive sectors and heavily tax unproductive investment in open plots etc. It is possible only through simple The relief given to small and medium enterprises (SMEs) as manufacturers up to turnover of Rs. 250 million in the Finance Act, 2021, should have been for retailers and others taxpayers as well, without any discrimination. Low-rate tax on broad base with simple compliance procedure is needed to collect Rs. 8 trillion. 

The coalition government of Pakistan Tehreek-i-Insaf (PTI) must stop taxing the less-privileged and downtrodden. Why the poor have been subjected to oppressive taxes like 75 paisa for cell call exceeding 5-minute and 10% advance income on mobile and/or internet use from July 1, 2021? The rich and mighty are still enjoying free perks and benefits. The heavy taxation on electricity bills and a number of food items and items of daily use by the citizens is totally unjustified when tax expenditure was above Rs. 1.5 billion in financial year 2020-21. The tax credits for senior citizens and special people that was available before the enhancement of tax rates by Finance Act, 2019 should be restored after the higher tax rates restored soon after coming into power by the PTI Government.

While, the exporters of services from tax year 2022 is to be taxed at 1%, laudable amendment to bring it at par with exports of goods, it is nor provided that how much credit would be taken in books. The definition of “imputable income” is available in the Income Tax Ordinance, 2001 and must be applied in the case of exporters of services provided that if they claim higher credit than the same, the actual working must be provided. In case of wrong claim, the punitive measures should be provided,

Many self-acclaimed professionals, selected as committees announced by the government to remove anomalies and technical issues (sector-wise etc.), have failed to even remove these obvious lacunas, what to speak of  suggesting a pro-growth and investment-friendly tax policy helping in creating jobs from agriculture to high tech knowledge-bases initiatives, rather than emphasising on bricks and mortars. They must be reminded of couplet of great poet and thinker, Dr. Allama Muhammad Iqbal:

Jahan-e-Taza Ki Afkar-e-Taza Se Hai Namood
Ke Sang-o-Khisht Se Hote Nahin Jahan Paida

New worlds derive their pomp from thoughts quite fresh and new
From stones and bricks a world was neither built nor grew.

The federal and provincial governments in Pakistan have shown a lukewarm attitude in restructuring the ineffective, outmoded, colonial era institutions, including the country’s tax system to achieve efficiency, equity and to promote economic growth. Complex tax codes, complicated procedures, reliance on easily-collectable indirect taxes, weak enforcement, inefficiencies, incompetence and corruption are the main factors for low tax collection. Instead of broadening the tax base and simplifying laws, federal and provincial governments offer amnesties, immunities, tax-free perks and perquisites to powerful segments of society. As a result of this policy mindset, ordinary businesses and citizens suffer. In these columns we have been repeatedly discussed and pleaded for radical revamping and restructuring of the entire tax system, through low-rate, broad-based and predictable taxes, single national tax agency and national tax court.

Tax policy reforms undertaken to date, have mainly been patchwork, and proven to be an exercise in futility. Tax reform commissions and consultative committees, constituted for reforming the system, have proven to be unsuccessful as they have been suggesting remedies for curing the incurable or otherwise curing symptoms rather than addressing the causes.

The reforms, including World Bank-funded six-year-long Tax Administration Reforms Project (TARP), have failed to encourage people towards voluntary tax compliance. In 2020, the Federal Government obtained loan of US$400 million for Pakistan Raises Revenue (PRR) Project. It may be mentioned that the total cost of Pakistan Raises Revenue (PRR) Project is estimated at US $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing is US$400 million. Following in the footsteps of the Federal Government, the Punjab Government also decided to borrow US$304 million from the World Bank for tax reforms and it was approved by Planning Commission on September 16, 2020. Like earlier programmes, these are also bound to fail.

The only viable option for meaningful change is to replace the existing tax system with lower, flat and a predictable tax system that is simple, pragmatic, growth-oriented, and broad-based. This is the time that government and all political parties should consider it seriously if we have to make Pakistan a prosperous country and egalitarian state—an economic power with 220 million people to have its say in global matters for a safer, just and peaceful place for the humanity at large, especially in the wake of US and its allies complete retreat from Afghanistan after humiliating defeat and leaving the region in turmoil. It must forge alliance with Golden Ring countries to protect its national interest and progress rapidly in all areas.


The writers, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE)

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