Author: Dr. Muhammad Amir Malik (Sitara-i-Imtiaz), CEO of PRAL
Pakistan navigates through a nuanced array of tax challenges, characterized by a fragmented tax base, widespread rent-seeking, and malpractices. In this intricate landscape, despite possessing substantial offshore assets, the nation faces a persistent budget deficit. Recognizing the need for a holistic approach, the International Monetary Fund (IMF) and World Bank advocate not just for a tax overhaul but a broader, visionary leadership and comprehensive reforms1. This financial puzzle requires a strategic solution that goes beyond traditional measures, calling for innovation and commitment from both policymakers and citizens alike. A World Bank study found that a 10% import duty in Pakistan would increase profits from domestic sales by 40% on average compared to exports. This has implications for Pakistan’s weak export problem, which is the basis of its balance of payments. This inequality has been exacerbated by the taxation of agricultural income, urban housing, and retail trade. By collecting property taxes, Pakistan’s tax system encourages businesses and households to invest in urban real estate rather than in projects likely to produce exports or services. Pakistan’s low collection from direct taxes is primarily due to weak tax compliance and large number of exemptions. The agriculture sector contributes almost 20 percent to GDP, but its share in taxes is less than 1 percent. After the 18th amendment, Provinces were authorized to collect taxes from the agriculture sector. Nevertheless, Provinces have not produced the anticipated results with very low collections.
Tax evasion, a shadowy practice, not only inflicts financial wounds but also affects Pakistan’s international standing. Beyond the fiscal impact, it becomes a concern for the nation’s reputation. Offshore assets, though potentially beneficial for budget deficits, pose challenges in terms of repatriation. The current administration has embarked on policy measures, recognizing the gravity of the situation. However, the true wind of transformative leadership remains crucial for sustained progress2. As the nation contends with the dynamics between fiscal responsibility and international perception, the call for visionary leadership echoes louder, demanding innovative solutions and resolute actions.
Rent-seeking and malpractices within political and bureaucratic spheres present substantial roadblocks to expanding the tax base. These negative influences not only hinder but actively sabotage efforts to incentivize tax filing. In the complex tapestry of fiscal responsibility, balanced policies become the key choreography, essential for countering the undue influence of powerful stakeholders. Navigating through these challenges requires more than policy adjustments; it demands a cultural shift towards compliance, achievable through comprehensive public education on the delicate balance between revenue and expenditure3. As the nation confronts these challenges, the call for a harmonious collaboration between policymakers and the public becomes increasingly resonant, emphasizing the need for a shared understanding of the collective responsibility towards a balanced financial ecosystem.
At independence, Pakistan contended with a legacy of limited national development, marking its classification as an underdeveloped nation. The absence of educational prioritization became a silent contributor to a low tax-to-GDP ratio, leaving a significant part of the economy in the untaxed shadows. The prevalent cash-based economy deepened the distrust of legal or financial intervention. This cultural sentiment extends to public institutions, including the government, fostering a trust deficit that hampers voluntary tax compliance4. This historical narrative not only underscores fiscal challenges but calls for a societal shift, emphasizing the critical link between education, trust, and transparent governance in building a resilient financial future. Furthermore, the imperative to implement efficient tax collection extends beyond mere financial discipline; it is the linchpin for sustaining critical economic functions. From fueling public expenditure and infrastructure development to supporting welfare programs and deficit reduction, a robust tax collection mechanism forms the bedrock of a nation’s fiscal health 5. Shifting towards a more balanced direct tax system becomes a pressing need, considering the often-overlooked contributions made through indirect taxes. However, this shift is not merely a structural adjustment; it’s a call for a broader societal transformation. Addressing issues such as tax literacy, educational reforms, and a reevaluation of social values becomes crucial for fostering a truly tax-compliant society. As Pakistan steers through this transformative journey, it’s not just about revenue numbers; it’s about building a financial ethos that resonates with every citizen, creating a sense of shared responsibility for the nation’s economic well-being.
The persistently low tax-to-GDP ratio in Pakistan emerges as a multifaceted challenge, shaped by the prevalence of a cash economy, an underground economy, and the undue influence exerted by interest groups, including lobbyists, feudal lords, politicians, and corporate entities6. Addressing this complex issue demands more than conventional approaches; it requires a comprehensive strategy that delves into the roots of these problems. Initiatives such as crackdowns on black markets become imperative, aiming to bring the informal economy into the light. Simultaneously, limiting the sway of interest groups becomes a delicate but necessary task, ensuring a more level playing field in the fiscal landscape. A particularly innovative step involves the digitization of the cash economy, offering not just efficiency but also transparency in financial transactions. Amidst these challenges, Revenue Authorities and Boards faces its own hurdles, including issues with the self-assessment scheme and prolonged audits that demand urgent attention. As Pakistan grapples with reshaping its fiscal identity, this strategic overhaul becomes not just a financial necessity but a transformative journey toward a more accountable and dynamic economic landscape.
To achieve fiscal parity and foster a more equitable society, the government must contemplate measures targeting the affluent class, ensuring a fair distribution of the tax burden with a focus on redistributing the proceeds to benefit the less privileged. An alternative approach to consider is the introduction of a Goods and Services Tax (GST), which can offer a nuanced solution contributing to comprehensive and efficient consumption-based taxation.7. This shift necessitates that Revenue Authorities and Boards to adopt a segmented approach, aligning revenue collection efforts with specific economic sectors. Such a tailored strategy acknowledges the diverse economic landscape and optimizes the impact of tax policies. In parallel, enhancing the capabilities of tax officers through proper training and equipping them with third-party data interfaces becomes crucial for effective implementation. Strengthening the anti-malpractices mechanism is equally essential, requiring collaborative efforts from academic institutions and the media to promote awareness regarding the purpose of tax collection and the repercussions of non-compliance. As Pakistan envisions a more inclusive and transparent fiscal future, these strategic interventions become not just policy initiatives but catalysts for societal change, redefining the relationship between citizens and their financial responsibilities. Advocating for a well-rounded fiscal approach there is a call for a balanced blend of direct and indirect taxes, gradually transitioning towards a predominantly direct taxation model. This strategic shift is not merely a numerical adjustment but a recalibration of the tax structure to align with evolving economic landscapes and ensure fairness in contribution. A prudent strategy to fortify this transition involves allocating 2% of tax revenue to upgrade the tax machinery, emphasizing the need for continuous innovation and efficiency in revenue collection8. Beyond the financial mechanics, encouraging tax compliance emerges as a societal imperative, demanding a paradigm shift in how citizens perceive their fiscal responsibilities. Instilling a sense of pride in tax compliance becomes paramount, not merely as a financial obligation but as a collective commitment to the nation’s welfare.
To unravel the complex reasons behind the diminishing number of taxpayers, researchers must embark on a comprehensive exploration of factors extending beyond numerical metrics. Delving into changes in tax rates provides a numerical foundation, but equally crucial is the examination of taxable income dynamics, shedding light on how economic shifts influence individual contributions. Trust in the government emerges as a psychological variable, influencing tax compliance; therefore, a nuanced investigation into the dynamics of public trust becomes indispensable. Beyond these, a deeper dive into tax audit cases is essential. This involves not only understanding the tax demand created by Revenue Authorities and Boards but also assessing the nuanced impact of appeals on reducing this demand and the actual amount of tax successfully collected.
Moreover, there are certain strategic reforms that hold promise for improving tax compliance in Pakistan. Firstly, there is a need to boost tax morale by improving public services and raising income levels, ensuring taxes remain manageable. Secondly, addressing the decline in tax literacy through educational reforms and media involvement is crucial for cultivating a tax-compliant society. Efforts should be directed towards cracking down on cash and underground economies, limiting the influence of interest groups, and digitizing transactions for transparency. Additionally, reforming Revenue Authorities and Boards self-assessment and audit system is essential to address the declining number of taxfilers9. Introducing progressive taxation, targeting the higher class, and redistributing funds for socioeconomic balance is pivotal. A Goods and Services Tax (GST) system should be implemented for comprehensive and efficient consumption-based taxation. The economy should be segmented for focused revenue collection, aligning tax strategies with specific sectors. To enhance efficiency, tax officers need better training and modern tools. These reforms, coupled with a commitment to a mix of direct and indirect taxes, aim to foster pride in tax compliance among citizens and contribute to a transparent and efficient tax system in Pakistan10.
It is important for Pakistan to finish corporate tax exemptions, reduce tax expenditures in the energy sector and for COVID-19 response, and end exemptions for basic household items. Furthermore, tax the service, real estate, and retail sectors with strong enforcement. The net effect is the high tax rates and tax evasion, undermining the potential indirect tax revenues. Addressing Pakistan’s tax challenges necessitates a comprehensive and integrated approach. Visionary leadership, balanced policies, and public awareness initiatives are essential to foster a culture of compliance. Reforms in public and private institutions, coupled with targeted measures to counter rent-seeking and malpractices, will pave the way for a transparent and efficient tax system. As Pakistan navigates this complex terrain, the onus lies on both the government and citizens to collaborate in building a resilient fiscal foundation for sustained economic growth.
References:
- Ali, A. R. “Taxation Challenges in Pakistan: A Call for Strategic Reform.” Journal of Economic Policy and Taxation, (2023).
- Khan, S. M. “Offshore Assets and International Pressure: Navigating Fiscal Waters in Pakistan.” International Journal of Finance and Economics,(2022).
- Ahmed, N., & Malik, F. “Rent-Seeking and malpractices : Impeding Tax Base Expansion in Pakistan.” Journal of Governance and Public Policy, (2023).
- Qureshi, M. A. “Inherited Challenges and Lack of Trust: Shaping Pakistan’s Tax Landscape.” Development Policy Review, (2022).
- Hussain, R., & Ali, M. “Determinants of Tax Evasion: Insights from a Focus Group Discussion in Pakistan.” Journal of Accounting and Public Policy, (2023).
- Malik, A., & Mahmood, K. “Cracking the Code: Strategies for Overcoming Tax Challenges in Pakistan.” Taxation and Public Finance Journal,(2022).
- Ahmed, F. “Reforms and Suggestions for Improving Tax Compliance in Pakistan.” Journal of Economic Development and Policy, (2023).
- Saleem, S., & Haider, M. “Understanding Taxpayer Behavior: Insights from Tax Audit Cases in Pakistan.” International Journal of Accounting and Finance, (2022).
- Abbas, M., & Rahman, H. “Progressive Taxation and Socioeconomic Balance: A Case for Pakistan.” Journal of Economic Inequality, (2022).
- Farooq, U., & Akhtar, M. “Efficient Tax Collection: A Cornerstone for Economic Sustainability in Pakistan.” International Journal of Business and Economics Research, (2023).
