A system that breeds fraud

Business Recorder

5 days ago

EDITORIAL: In his briefing to the National Assembly's Public Accounts Committee recently, FBR (Federal Board of Revenue) Chairman Rashid Langrial not only acknowledged that the potential volume of tax fraud in Pakistan could be as high as Rs700 billion, with sales tax fraud posing a particularly knotty challenge, he also conceded that its complete elimination remains unlikely. This is, in effect, an admission that there is something inherently wrong with the country's tax administration and overall taxation structure.
While the FBR chairman readily owned up to the challenge posed by tax fraud and evasion, there remains within the tax bureaucracy a stubborn refusal to honestly reckon with the root causes of the country's dismal tax compliance. Firstly, there is a need to recognise that such huge levels of tax evasion cannot exist without the incompetence, and in too many cases, outright connivance of those manning the tax bureaucracy. But even more fundamentally, there is the structurally problematic over reliance on excessively high tax rates — rates that are not only steep but subject to frequent and accelerating increases — eroding public trust in and compliance with the system.
For large segments of the economy, paying taxes at prevailing high rates has become substantially costlier than bearing the cost for evading them, yet the tax bureaucracy remains unwilling to confront the glaringly obvious truth: the higher the tax rate, the greater the temptation for evasion. The costs of evasion, such as bribing tax officials, are often significantly lower than the burden of full tax compliance in an environment of high rates. The chairman highlights sales tax fraud, yet in a country where the standard sales tax rate is 18 percent, and even higher in some cases, such high rates practically invite evasion. Anyone with even a basic grasp on tax policy can see then that the most effective way to broaden the tax net would be through lowering tax rates, but that understanding remains inexecutable in the absence of political will to tax all incomes irrespective of origin.
Then there is the problem posed by a tax structure dependent on minimum tax on turnover, which is inherently punitive towards compliant taxpayers. Under this regime, even if an entity has incurred a loss and so certified by audit, it must still pay the legally mandated minimum tax on its revenue. How such a policy encourages businesses to join the tax net remains a mystery, as loss-making enterprises can easily be driven out of operation under this punishing framework, especially since Pakistani companies have to pay a minimum tax ranging from 0.5 to eight percent on turnover, irrespective of profitability. Essentially, this system penalises businesses for entering the tax net and for fully adhering to tax laws, while also undermining investment and suppressing broader economic activity.
Added to this are the complications caused by high withholding tax rates. Not only do these remain exorbitant, but claiming and actually receiving refunds has become an increasingly onerous process. In many cases, businesses and individuals are unable to recover their dues without resorting to paying 'speed money' to relevant officials, creating yet another reason to simply stay out of the tax ambit than to expend effort and resources on documenting receipts, invoices and financial records for countless transactions only to be denied the full refund that is ultimately owed.
We thus find ourselves trapped in a vicious, never-ending cycle. Multiple studies have highlighted the enormous cost of complying with Pakistan's complex and punitive tax system. A recent ADB study, for instance, clearly demonstrates the link between high rates, high compliance costs and increased tax evasion. Yet, judging by the prevailing attitude within the tax bureaucracy, there seems little hope that these legitimate concerns will be meaningfully addressed.
Copyright Business Recorder, 2025