PAKISTAN’S tax system is extortionist, unpredictable and unsupportive of investment and economic growth. It disproportionately taxes documented businesses and individuals, and spares those who choose not to become part of the documented economy. If they can help it, a host of businesses and individuals prefer to operate outside the ambit of the formal economy citing steep consumption and personal tax rates and large-scale extortion by a corrupt tax machinery. Little wonder that the FBR’s real tax per capita has grown by only 0.3pc from 2018 to 2024, and that Pakistan’s 10pc tax-to-GDP ratio is one of the lowest in the world and the region.

A business lobby group has recently called for a revamp of Pakistan’s taxation system to rev up business activities and create jobs in the country. It also urged the government to execute structural reforms for boosting tax revenues. At the same time, however, the tax proposals that the Pakistan Business Forum has put forward for inclusion in the next fiscal year show a bias for the largely tax-exempted real estate and trading sectors, including retailers and commercial importers. Besides a reduction in the consumption tax rates and elimination of the super tax, the group has suggested the imposition of a paltry fixed tax of Rs20,000 on large and Rs10,000 on smaller traders to expand the tax base by making it convenient for them to pay their tax liability. However, it has not explained how this proposal fits into the larger scheme of structural reforms to increase the extremely narrow base, least of all a reduction in the higher tax rates. Currently, the FBR estimates that the tax gap — the amount that remains uncollected due to non-compliance of tax laws — has soared to Rs7.1tr. Add to this the huge tax expenditure of nearly Rs4tr and the stage is set for an increased burden on documented businesses and individuals through innovative levies like super tax, a charge initially imposed to finance the rehabilitation of communities displaced during the military operation against militants in KP a decade ago. It has since been made a permanent source of revenue by expanding its scope to include all businesses and individuals earning over Rs150m. While the tax rates must be slashed to ease the burden on compliant persons, this does not justify demands for special treatment being given to certain sectors.

Published in Dawn, March 23rd, 2025