ON Dec 18, the cash-strapped government of Prime Minister Shehbaz Sharif tabled the Tax Laws (Amendment) Bill, 2024 before the National Assembly, proposing sweeping changes in existing income and sales tax laws aimed at tightening the noose around tax dodgers — individuals and businesses both — by making it difficult for them to spend their illicit money.

This is the most significant action that the government is implementing ostensibly to punish tax dodgers, improve compliance and enforcement to ensure that everyone pays tax according to their income and consumption level, as well as to complete the value chain of businesses to raise the nation’s abysmally low tax-to-GDP ratio of below 10 per cent to 13pc in the next three years to meet one of the core goals of the ongoing IMF $7 billion bailout loan. Its immediate purpose is to pull off the tax target of nearly Rs13 trillion for the present fiscal year, which the FBR is struggling to keep pace with due to a collection shortfall of around Rs350bn in the first five months to November.

The bill proposes to empower the tax authorities to seal business premises, and seize property and bank accounts of tax non-compliant individuals and businesses besides suggesting several punitive restrictions on spending by persons who either aren’t active taxpayers or do not file tax returns at all on purchase of immovable property and automobiles beyond a certain threshold to be determined by the FBR. Further, it puts similar curbs on investment in stocks, etc by tax evaders in addition to barring them from maintaining or opening bank accounts.

Other salient features of the bill include permission to taxmen to retrieve financial data of tax dodgers from banks where their tax data and other financial information available with the FBR is at variance with their transactions through banking channels or accounts. Active taxpayers defined as “eligible persons” in the bill will be exempt from these restrictions as long as their spending and investments match their income or financial resources declared in their wealth statement. Their immediate family members who don’t file their tax returns will also be considered eligible persons and would not be subjected to the proposed restrictions.

Dr Ikramul Haq, a leading tax law expert and author, argues that the bill is self-contradictory since it does not abolish the withholding and advance income tax regime introduced to punish non-filers with higher-than-normal tax rate and compel them to become tax filers. “The FBR wants to keep these punitive indirect taxes on incomes because of the significantly large revenues these yield and ease of collection.” That is not all.

He finds the measures proposed in the bill in clear breach of the fundamental right to purchase and dispose of an asset and freedom of doing trade and business as enshrined in the Constitution. “It is worth mentioning here that a similar condition made in the Finance Act, 2018 barring the ‘non-filers’ — residents as well as non-residents — to buy immovable property exceeding Rs5 million was later withdrawn because it was anti-business and violative of the Constitution,” he contends. “Placing restrictions on economic transactions will hurt the business environment and discourage new investments.”

Successive governments have miserably failed to fix the country’s iniquitous, inefficient, and corrupt tax system that leaves out of the net entire sectors of the economy like urban property, retail, agriculture, and so on due to their political or agitational power at the cost of worsening public service delivery and diminishing resources for development projects critical for future economic growth. Only a fraction of the population files their tax returns as the ineffective system neither has the capacity nor is willing to go after delinquents.

Consequently, the state is disproportionately taxing the salaried classes, compliant organised businesses, consumption, and imports to harvest easy money. The deficiencies of the system and the lack of political will to broaden the tax base became too obvious in the current year’s budget when the authorities exponentially raised taxes on incomes of salaried individuals and the corporate sector while letting powerful lobbies off the hook. Still, it has been unable to meet the revenue targets. For example, a media report suggests that additional taxation measures worth Rs1.4tr introduced in the budget haven’t yielded the targeted revenues. The FBR has so far collected just Rs143bn against the targeted Rs491bn from the new tax policy measures during the first five months of FY25.

Many insist that the sweeping changes in the country’s tax policy suggested by the FBR through the tax amendment bill are unlikely to deliver the desired results without deep reforms to increase the use of technology, and make the system equitable, fair, and transparent by taxing all irrespective of their source of income or their political clout and agitational power. At best, the experts insist, it will give more discretionary powers to corrupt FBR officials to harass and coerce individuals and businesses without any discernible impact on tax-to-GDP ratio. At worst, we may see Pakistan’s structural economic imbalances worsen going forward, feeding into challenges like low exports and investment, and informality of the economy due to coercion in the name of compliance and enforcement, higher tax burden on compliant persons and policy uncertainty.