he financial viability of any country is dependent on its revenue generation capacity. Governments collect revenue through various sources, like taxes on incomes and/ or assets; consumption; and transfer receipts from natural and artificial persons. However, significant importance is attached to the collection of direct taxes as these are linked to the ‘ability to pay’ principle.

Unfortunately, successive governments in Pakistan have been meeting tax revenue targets through the imposition of regressive indirect taxes, even in the garb of income taxation. Consequently, Pakistan has witnessed an unabated increase in the cost of doing business, inflation and wealth/ income inequalities.

The governments’ inability to introduce an efficient and just tax system that can cater for the country’s needs often leads to a vicious debt trap where the gap between revenue and expenditures is bridged through borrowing. This compromises the ability of the state to spend on the welfare of its citizens. It also hampers the provision of basic facilities like health, education and infrastructure.

As a developing economy, Pakistan faces a formidable challenge of establishing an efficient tax policy framework. A huge portion of the economy is still operating informally, making it difficult for the governments to realise the potential of tax at the federal and provincial levels.

Pakistan Economic Survey for 2021-22 released by the Ministry of Finance and The Annual Report 2021 (State of the Pakistan’s Economy) issued recently by the State Bank of Pakistan paint a bleak picture of the economy for 2023. This should be a cause for concern for all.

There is a consensus now that the growth potential of the country is fast depleting. Tax revenues which stood at 13.4 percent of the GDP during 1990s came down to 10.3 percent during 2000s. After falling into single digits in the fiscal year 2007-08 and onwards, these rose around 10.8 percent of the GDP in FY 2017-18. However, post-2018, the fraction again dropped to an average of 9.5 percent.

The Revenue Statistics in Asia and the Pacific 2022 by the OECD reveals that the average tax-to-GDP ratio in the 28 Asian and Pacific economies in 2020 was 19.1 percent — significantly lower from the OECD’s average of 33.5 percent. It is worthwhile to mention that our tax-to-GDP ratio was 10.4 percent in 2020 - 8.8 percentage points lower than that of Asia and Pacific and 23.2 of OECD’s average.

Also, it is well-established that the Federal Board of Revenue and the provincial tax authorities collected overwhelming amounts of taxes through indirect modes — taxing goods and services at exorbitant rates rather than taxing incomes and assets. Indirect taxes take away a larger share of the earnings of the poor than that of the rich.

During FY 2021-22, sales tax was the highest revenue spinner for the FBR, contributing about 41 percent of the total tax collection. If we include minimum taxes imposed on imports, contracts, etc, under the Income Tax Ordinance, 2001, the ratio is as high as 70 percent. In FY 2021-22, the direct taxes collected by the FBR came to Rs 2,284.9 billion, constituting 37.2 percent of total tax collection — this included withholding taxes of Rs 1,534 billion, i.e., 67 percent of total direct tax collection.

FBR Year Book 2021-22 contains an interesting analysis. During the early 1950s, the main revenue collection source was customs duty, contributing 66 percent of the total revenue, while share of direct tax and sales tax was only 12 percent and 14 percent, respectively.

Our tax-to-GDP ratio in recent years has gone down due to multiple reasons. Major factors remain slow growth and ever-increasing size of the informal economy. Given their inability to broaden the tax base, tax policy design for the FBR has been relying mainly to transactional changes like revision of tax rates or further extortion from the existing taxpayers and increasing rates of withholding taxes. Another impeding factor is a nexus between legislature and powerful elite of the country that has stunted the executive’s ability to grow financially. Taxing the rich and facilitating lower/ fixed income earners or green-field industries is always resisted by the powerful elites and unscrupulous traders as this will eventually increase their tax burdens.

The continuous appeasement is reflected in multiple/ frequent amnesties/ immunities introduced by successive governments. Such schemes testify to flaws in the existing system confirming the governments’ inability to trace and track potential tax evaders and taxpayers who remain off the record.

Instead of penalising criminals, the state facilitates and incentivises them causing the compliant ones to feel cheated and lose faith in the system. Those having access to the corridors of power maneuver the legislature for protection of mutual vested interests. Also, the tax amnesties in recent past were extended to the sectors lacking the potential for export-led growth, e.g., the real estate sector, etc.

On the other hand, key contributors to formal economy have been excessively burdened with heavy taxes, obstructing their ability to generate capital and employment, ensuring economic growth and expansion. The classic example of this is the imposition of enhanced super tax of 10 percent on airlines, automobiles, beverages, cement, chemicals, cigarettes and tobacco, fertilisers, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles on income exceeding Rs 300 million in addition to 29 percent corporate tax. The better course would have been windfall gain tax or excess profit tax after public debate.

In the same manner, insertion of Section 7E in the Ordinance through Finance Act 2022 retrospectively for tax year 2022, in fact reintroduction of wealth tax on immovable property at the rate of one percent of fair market value, camouflaging it as deemed rent, reaffirms the continuation of imprudent tax policy, besides being a patently unconstitutional measure.

Such shortsighted and anti-business measures have unfortunately been the hallmark of our tax policy for decades. Over the last few years, aggressive steps taken by the government have created survival issues for the common man.

The policy of meeting fiscal needs by imposing additional and/ or oppressive taxes is a flop idea. Additionally, the import ban has added to the problems of the manufacturing industry and small traders. The orthodox approach has failed to harness the benefits of real tax potential. The policymakers apparently do not realise that traditional revenue generation measures are not enough to meet the demands of the fifth largest population in the world.

In the era of fourth industrial revolution, we have to incentivise the technology sector and need to invest and educate the new generation so that in coming years we can compete with the global world as highlighted in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute, Islamabad, published in December 2020).

2023 is high time for all stakeholders to work together to restore the trust/ confidence of existing/ potential investors/ taxpayers in the system. The governments — federal and provincial — should reconsider their approach of extracting the maximum from a limited pool of people.

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA