Our tax doctrine

LAHORE: Pakistan’s tax doctrine prioritises revenue collection, often at the expense of economic stability and fairness. The state lacks the resolve to document the economy, instead appeasing traders with the option to pay slightly higher taxes in undocumented modes to satisfy the International Monetary Fund (IMF).

Reforms in Pakistan are perceived as IMF-driven, creating an impression that they are undesirable but necessary to maintain engagement with the lender. This apologetic stance tarnishes the reputation of the IMF and highlights the government’s reluctance to pursue sustainable economic growth. Without a fair and transparent tax regime, the informal economy will continue to expand, further widening the gap between government income and expenditures.

Pakistan’s growing fiscal deficit leaves little room for borrowing, as debt servicing now constitutes the largest expenditure in the national budget. Addressing this imbalance requires immediate reforms that successive governments have failed to implement.

The National Tax Reforms Commission’s interim report of 1986 identified tax evasion, smuggling and corruption as the three fundamental challenges facing Pakistan’s economy. These issues remain unresolved 38 years later. Although the IMF has repeatedly urged Pakistan to document its economy, the government has evaded meaningful action for four decades, perpetuating a broken system.

The reluctance of politicians to embrace reforms and the business community’s preference for maintaining the status quo stifle progress. Under the current system, businesses pass income tax burdens onto consumers, while informal sectors flourish, undermining efforts to expand the tax net.

The excessive general sales tax (GST) of over 17 per cent exacerbates these challenges. High tax rates incentivise tax evasion through practices like under-invoicing by importers and underreporting by local manufacturers. The coexistence of a robust informal sector further pressures formal businesses to adopt informal practices to stay competitive.

The IMF generally recommends prudent measures to enhance revenue for public expenditures. However, when governments hesitate due to political concerns, the IMF resorts to pushing for politically less-damaging but regressive taxation policies. These measures disproportionately burden the poor and exacerbate income inequality.

Special interest groups, particularly rent-seeking bureaucrats, benefit from the current system, enabling informality to thrive. This nexus between informal entrepreneurs and corrupt officials obstructs meaningful reform. Breaking this cycle requires strict enforcement and accountability.

Tax administration credibility is another critical issue. While tax officials often turn a blind eye to informal activities, they impose excessive scrutiny on registered taxpayers. This inconsistent approach undermines trust and encourages further tax evasion.

Effective tax reforms demand political will, robust governance and transparent policies that promote economic equity. Addressing the systemic flaws in Pakistan’s tax doctrine is essential to fostering a sustainable and inclusive economic future.