Tax evasion and resistance to efforts to broaden the tax base have long been a thorn in the side of Pakistan’s economic stability. As the government grapples with increasing budget deficits, the reluctance to pay taxes remains a significant barrier to national progress.
Tax evasion and resistance to efforts to broaden the tax base have long been a thorn in the side of Pakistan’s economic stability. As the government grapples with increasing budget deficits, the reluctance to pay taxes remains a significant barrier to national progress.
Recently, the Pakistan Petroleum Dealers Association (PPDA) called for a nationwide strike against the imposition of a mere 0.5 per cent advance turnover tax on petrol stations on the sale of their products. They rejected it saying that they already pay tax per litre and will not accept a double tax.
The chairman of the association said that this was an additional cost to be incurred by the dealers who were already supplying fuel to petrol stations at low-profit margins. Eventually, this new tax would burden every dealer at the rate of up to Rs100,000 per month. The number of total dealers adds up to 13,000 – making this a cost of about nearly Rs1.3 billion monthly. However, the strike was called off, citing a better plan to convince the government to withdraw this rate.
Per reports by the State Bank of Pakistan as well as news analyses, Pakistan’s retail market cap in 2023 stood at $300 billion. Dr Ikram ul Haq from the Pakistan Institute of Development Economics (PIDE) posited that applying a one per cent income tax on gross turnover, alongside a 4.0 per cent sales tax could raise $15 billion in annual tax revenues, far exceeding the total annual tax collection of the country in FY23, which stood at Rs7,164 billion.
What happens when eligible taxpayers try to beat the system and pocket the extra savings? It translates into additional indirect taxes through any available means. One easy solution tends to be electricity bills, already burgeoning under government-mandated hikes. If the price of electricity goes up 10 per cent, the impact of taxes takes the effective increase to almost 30 per cent, which puts more of the approximately 40 million electricity customers at risk of defaulting on their bills, contributing to circular debt and denting the company’s economy yet again. Unlike flippant retailers who erupt in protest at the hint of a tax increase, distribution companies operate in highly regulated environments with little agency and become used as extended collection agencies.
The other victim regrettably becomes Pakistan’s salaried class. With a population of 240 million, there are only 5.3 million active taxpayers which is sadly only 2.21 per cent in percentage terms while the tax-to-GDP ratio hovers around 9.0 per cent. This starves governments of funds for crucial services like education and infrastructure. The limited resources hinder economic growth, trap these nations in a cycle of dependence on foreign aid, and exacerbate existing inequalities.
The Federal Board of Revenue (FBR) recently introduced the Tajir Dost Scheme (TDS), meant to bring small traders and shopkeepers into the formal tax system. The initiative faced challenges during its voluntary registration phase, with only about 100 traders and wholesalers enrolling by the April 30 deadline, despite efforts to incentivize registration. Following this, tax officials engaged in direct outreach efforts, resulting in an increase to 16,175 registrations across six major cities by May 22, the most registering from Karachi.
Targeted measures to increase the tax revenue at provincial and federal levels are required to create breathing room which is desperately required by the average citizen. Pakistan has ambitious plans to boost its tax revenue and shrink its budget deficit. Aiming for a near 40 per cent increase, it has set a target of Rs13 trillion for the current fiscal year. This ambitious goal coincides with efforts to lower the fiscal deficit from 7.4 per cent to 5.9 per cent of GDP. The first step towards achieving this is to tap into the sectors contributing the most towards the GDP, establishing workable baselines and then building on them incrementally.
Effective tax collection would enable the government to generate the revenue necessary to fund critical public services such as education, healthcare, and infrastructure. On provincial levels, such measures could help the government of Sindh generate enough funds for municipal development, instead of levying taxes that result in trash being thrown on utility company vehicles. On a federal level, concrete steps can enable the government to subsidize a larger set of electricity users and finance the burgeoning circular debt.
In an economy where tax evasion is rampant and the informal sector thrives, strengthening tax compliance and expanding the tax net is imperative in ensuring equitable distribution of the tax burden and creating a more transparent and accountable financial system. By doing so, Pakistan can achieve a more resilient economy, capable of withstanding economic shocks and fostering long-term prosperity.
To improve tax compliance and broaden the tax base, Pakistan needs to implement several measures to bring about a behavioural change and instill a sense of responsibility. At the same time, there has to be a parallel culture of incentivizing honest citizens.
Strengthening tax compliance through modernizing the FBR with advanced technology, expanding the tax base by incorporating the informal sector into the formal economy, and offering incentives for voluntary compliance such as tax credits and rebates are essential steps. Public awareness campaigns can educate citizens on the importance of tax payments, while a more progressive taxation system can ensure that higher-income earners pay a proportionally larger share.
Reducing tax evasion through stronger penalties and legal consequences would come in handy and although blocking SIMs came in handy, it appeared more of a short-term solution -- perhaps the same system can help devise a long-term strategy.
Meanwhile, ensuring transparency in the utilization of tax revenue, and enhancing tax collection mechanisms at both federal and provincial levels are crucial. Developing sector-specific tax strategies targeting high-revenue sectors and fostering dialogue between the government and key stakeholders can also contribute to better tax policies. These solutions will enable increasing tax revenue, reduce budget deficits, and promote sustainable economic growth in Pakistan.
The writer is an energy economist with a focus on optimizing global energy systems. He currently works as a research officer at the Institute of Policy Studies, Islamabad.
