Tax Policy & Development Strategy—I

Dr. Ikramul Haq

Fiscal consolidation should be as growth-friendly as possible. In general, tax base-broadening reforms are identified as growth-oriented reforms. To the extent that they reduce distortions to economic decisions on work, saving, investment and consumption, they should increase output and improve social welfare—Choosing a Broad Base–Low Rate Approach to Taxation, OECD Tax Policy Studies No. 19 

It is a matter of great tragedy that economic managers of successive governments in Pakistan since independence—civil and military alike—never thought of using tax policy as a tool of economic development, and their sole stress on revenue targets at the time of making annual budgets has resulted into economic chaos and income/wealth disparities.

The Federal Government, with the approval of Federal Cabinet, notified on February 13, 2025, on the dictates of International Monetary Fund (IMF), the establishment of Tax Policy Office (TPO) in Ministry of Finance to purportedly “build on the Government’s economic reform agenda”.

With the responsibility of directly reporting to the Minister of Finance & Revenue, the TRO is assigned the task “to lend support to the analysis of tax policies and proposals through data modeling, revenue and economic forecasting as well as the country’s international tax treaties and obligations”. A blog says, An IMF technical mission is scheduled to assist the office in becoming fully operational. The mission will provide guidance on defining functions, developing standardised evaluation methods, and improving coordination between the TPO and FBR

The TPO remained dormant for little over seven months, till the appointment of its first Director General on October 24, 2025 by the Prime Minister under the Special Professional Pay Scale (SPPS-1) for a two-years term. The delay confirms reluctance and resistance on the part of Revenuecracy and its protectors to separate tax policy from revenue administration!

The appointments of directors made so far in TPO, except two from outside Revenuecracy, hints that only reporting office is changed from Secretary Revenue Division to Minister of Revenue! Yet, it is claimed, “The TPO will also collaborate closely with the FBR’s International Centre of Tax Excellence (ICTE) to ensure coordinated policymaking and implementation”. Neither ICTE nor TPO has any website so that public can know about their structures and work done! The expansion of Revenuecracy is what has been achieved successfully at the expense of taxpayers’ money—a highly lamentable act.

The establishment of TPO under an executive order is in also in violation of section 6 of the Federal Board of Revenue Act, 2007 [FBR Act 2007], as amended in 2011, aimed at making the revenue administration autonomous and policy independent. It reads as under:

     “6. Establishment of Policy Board.– (1) The Federal Government may establish a Policy board to provide guidance in matters relating to the vision, mission and values of the Board, and to provide policy guidelines in framing fiscal policy and in achieving goals and targets.

            (2) The Policy Board shall consist of the following Members, namely:–

     (3) The Chairman of the Federal Board of Revenue shall act as Secretary for the Policy Board.

     (4) The Policy board shall hold a meeting at least once in each quarter of a financial year.

     (5) The nominated members other than ex-officio members shall be subject to ratification by the Standing Committees on Finance and Revenue of the Senate and National Assembly”.

The establishment of TPO ignoring above quoted section 6 of the FBR Act 2007 once again testifies to the persistent failure of our legislators (sic) to directly control/supervise tax policy and reforms, fiscal planning, and budget making. Leaving these with Revenuecracy and so-called economic experts has resulted in burgeoning fiscal deficit and fiscal imbalances. This has created a situation of inescapable dependence on foreign and domestic loans, coupled with twenty-five programmes under IMF—an unprecedented subjugation of any country.

Our economic survival from a long-term perspective lies in inducing local and foreign investment, accelerated, inclusive and export-oriented growth, creating much needed jobs and collection of taxes wherever due by abandoning the policy of appeasement towards the powerful and the rich. An unshakable determination, consistency and political will is required to curb the 78-year-old habit of defying tax laws along with complete reconstruction of tax machinery and paradigm shift in tax policy.

The role of taxation and fiscal policy in development strategy has to be viewed against the background of the functions, which it performs. The main functions of a tax system in relation to economic development are:

The primary function of a tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. Therefore, the first goal in development strategy as regards taxation policy is to ensure that this function is discharged effectively. The performance of the Pakistani tax managers is highly disappointing as fiscal deficit remained high during the last many decades and the revenue targets fixed annually were revised downwards many a times yet rarely achieved.

To reduce inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some means adopted for achieving these ends. In Pakistan there has been a gradual shift from equitable taxes to highly inequitable taxes. The shift from removing inequalities through taxes to presumptive, minimum, and easily collectable taxes has destroyed the entire philosophy of taxes. This deviation has transferred the burden of taxes from the rich to the poor.

The equity principle in taxation implies that taxes should be imposed in accordance with the ability to pay. This has two dimensions: (i) Horizontal equity, i.e. similar treatment of persons in similar circumstances; and (ii) Vertical equity, i.e. different treatment of persons with different taxable capacity.

The equity principle can be held to be satisfied when the overall classification of individuals into categories is reasonable and broad enough to contain many individuals within each category and there is equal treatment within each category.

For social purposes such as discouraging certain activities, which are considered undesirable, for example, excise duties on tobacco and gambling and special excises on luxury and semi-luxury goods. Such measures act as deterrents in avoiding a spill over of these items and creating disturbance in the society as a consequence.

To achieve economic goals through the ability of the taxation system to influence the allocation of resources. This includes: transferring resources from the private sector to the government to finance public investment programme; directing private investment into desired channels through such measures as regulation of tax rates and the grant of tax incentives. This includes investment activities to attract foreign direct investment in to the country; and influencing relative factor prices for enhanced use of labour and economizing the use of capital and foreign exchange.

To increase the level of savings and capital formation in the private sector partly for borrowing by the government and partly for enhancing investment resources within the private sector for economic development.

In Pakistan, we find a reversal of this principle. Recent years have experienced flight of capital, closure of huge industries and recession in the trade market. Lack of consistency in the tax policies and excessive tax rates have forced the business community to move towards safer havens depriving the country of invaluable capital. Similarly, foreign investors feel shy to make use of the tremendous Pakistani talent that goes to waste for lack of proper funding.

To protect local industries from foreign competition through the use of import duties, turnover taxes/VAT and excises. This has the effect of transferring a certain amount of demand from imported goods for domestically produced goods. Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. However, unfortunately, and thanks to our economic wizards, our dependence on imported products has been hit with an upward surge in the recent years.

Due to the introduction of harsh tax measures and misadministration, turnover and supertax and non-issuance of refunds another; both our agricultural and industrial sectors have suffered so badly that instead of being able to export our goods we are forced to import in order to cater for the demands of the nation.

To stabilize national income by using taxation as an instrument of demand management. Taxation levels could be used to eliminate an inflationary gap or deflationary gap in the economy. Taxation reduces the effect of the multiplier and so can be used to dampen upswings in a trade cycle.

Taxes affect growth in two ways. First, by influencing the aggregate supply of the main factors of production by raising or lowering their net (after tax) returns; and second, by influencing the efficiency of resource utilization (total factor productivity). Some of the main factors in this process will be discussed in the next part of this four-part series.

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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.