Revenue reform or illusion?

Multilateral Development Agencies (MLDAs) are often criticised for offering superficial, template-like reforms that target symptoms instead of addressing root causes. For instance, as per critics, past engagements with the IMF have mostly focused on fiscal austerity measures -- reducing development expenditure and increasing revenue through regressive taxes -- without addressing systemic blips.

These short-sighted approaches lead to unsustainable short-run improvements, long-term liabilities, and exacerbate challenges in the long run in countries like Pakistan, where, as Atif Mian aptly describes the "nervous system" of governance is broken.

Pakistan’s dependence on foreign aid is no secret. The modus operandi of MLDAs in Pakistan reveals a troubling pattern. Typically, the MLDA disburses funds -- mostly loans, backed by sovereign guarantee. Foreign consultants are hired, often profiting heavily through fees and largely, imitating the works of indigenous minds. Government officials also benefit, either through direct cuts in infrastructure projects or through perks such as luxurious training sessions and high-end gadgets. This cycle leaves the burden of repayment squarely on the public, who bear the brunt through skewed, elitist, and extractive taxation systems.

Pakistan’s revenue collection is in the doldrums. The fiscal deficit, as envisaged by Budget 25, exceeds Rs8 trillion. Fueling the fire, a further deficit (in an already deficit-laden budget) of Rs321 billion is expected by December, despite a 23 per cent YoY growth increase in July-November tax collection. This dire situation has already triggered talks of a mini budget with further regressive taxation measures. Ergo, the irony of MLDA’s aid deepens when these loans are aimed at ‘revenue mobilisation’ in itself.

An analysis by PRIME, authored by economist Shahid Mehmood, highlights a persistent issue with MLDAs’ reparation of our revenue mobilisation function. Over the years, these agencies (ADB and WB, to be precise) have disbursed more than $3.8 billion through loans, technical assistance, and grants for fiscal reform projects.

Despite these significant investments, tangible outcomes remain elusive. Loans disbursed decades ago under similar objectives have failed to establish a self-sustaining revenue mobilisation framework. Dependency on external financing persists, while the repayment burden continues to grow, reflecting a broader failure rooted in misaligned priorities and governance inefficiencies.

For instance, the World Bank’s $400 million ‘Pakistan Raises Revenue’ (PRR) project, approved in 2019, highlights the challenges of reforming Pakistan's tax system. The project set ambitious goals, including broadening the tax base, simplifying compliance, and upgrading the Federal Board of Revenue’s (FBR) IT systems. Despite the World Bank's claims of “satisfactory” progress, a comprehensive overhaul seems far from realisation. Progress has been sluggish, with significant shortcomings undermining the project’s objectives.

As the report states, the WB claims a rosy implementation and improvement in tax administration; whereas the reality is far from what is claimed. Despite 80 per cent of the disbursement already being utilised, the project has failed miserably in improving the tax-to-GDP ratio. Despite a strong GDP growth of 6.0 per cent in FY2022, the tax-to-GDP ratio stagnated, with import duties accounting for 34 per cent of total collections in FY2024. Refunds are still counted as collections, distorting actual revenue figures.

Second, the number of compliant taxpayers dropped by 35 per cent, and while income tax collections increased, this was due to higher taxes on existing taxpayers, not an expanded base. Initiatives like the Tajir Dost Scheme failed to bring retailers into the tax net, with only 270,000 retailers filing taxes out of a target of three million, paying just Rs34 billion for FY24. Compliance costs surged to Rs250,000 annually per business, with many opting for double bookkeeping to reduce tax burdens.

The time for superficial fixes is over. Policymakers, civil society,and thought leaders must unite to reform Pakistan's tax system, focusing on sustainable growth and equitable development. Accountability from MLDAs and local governance is essential

Third, customs clearance saw some improvements, but procedural inefficiencies remain. Updates to the Customs Act and the e-TIR system have yet to deliver meaningful results, and the pre-arrival/pre-clearance system introduced in FY2021 hasn’t improved productivity much.

Further, automated data sharing has had little impact on widening the tax base. Tracking arrears remains opaque, with trillions of rupees pending in courts. Risk management in customs inspections has shown minimal effectiveness, while e-services for taxpayers are hampered by issues like non-responsive banking systems and disputed tax returns.

Additionally, refund claims remain unresolved, despite government claims to the contrary. The Authorized Economic Operator (AEO) programme has shown minimal progress, and the ICT equipment purchased for FBR has been underutilised. The withholding tax regime has not seen significant improvements, and Budget 2024-25 focused on introducing new lines of withholding (further empowering withholding-isation) rather than addressing core issues.

And transparency within the FBR is lacking, with decision-making processes still opaque, and coordination with provincial tax authorities remains weak. Legal challenges and inconsistencies in tax rates on property sales by civil servants and military personnel persist.

Lastly, the Track-and-Trace system, meant to monitor key sectors, has been delayed since 2021, with corruption allegations surrounding the Rs25 billion contract and faulty implementation. Similarly, the identification of new taxpayers through ICT and automated data sharing has made little headway, with no effective follow-through.

Despite the foregoing, placing sole blame on foreign assistance’s lack of accountability is neither accurate nor fair; rather, it is a sham. Systemic inefficiencies, corruption, and a focus on short-term political gains compound the problem. Examples include the lack of coordination between federal and provincial governments (as evidenced by the recent agriculture income taxation legislation), unresolved legal disputes, and the persistence of rent-seeking behaviours. The governance superstructure has repeatedly opted for superficial fixes, leaving the underlying causes unaddressed.

What do we need now? We must prioritise indigenous thinking by fostering the local intellectual capacity to develop tailored solutions instead of outsourcing critical reforms to foreign consultants. Revenue mobilisation strategies should align with OECD principles, ensuring equity, simplicity, and transparency in taxation. The over-reliance on withholding taxes must be eliminated, as it distorts the tax system and disproportionately burdens specific sectors.

Expanding the tax base is equally crucial by taxing previously untapped sectors such as agriculture, retailers, and real estate, which have remained exempt from fair contribution. Incorporating the latest technology (data analytics and AI), effectively with superlative intent, can strengthen the tax base, combat the undocumented economy and improve taxation. Lastly, governance must be strengthened by reducing rent-seeking and political interference while promoting institutional independence and accountability.

The time for superficial fixes is over. Policymakers, civil society, and thought leaders must unite to reform Pakistan's tax system, focusing on sustainable growth and equitable development. Accountability from MLDAs and local governance is essential. Bold, coordinated efforts are needed to achieve fiscal independence and long-term prosperity.

The writer is a Peshawar-based researcher who works in the financial sector.