Widening the tax base
Pakistan's tax structure to this day relies heavily on indirect taxes, whose incidence on the poor is greater than on the rich, which effectively implies that the burden on the poor continues. Direct taxes, based on the ability to pay principle, accounted for nearly 49 percent of total collections; however, this does not take account of the fact that 75 to 80 percent of these collections are withholding taxes levied in the sales tax mode, which is an indirect tax — an exercise that the Auditor General of Pakistan noted and recommended to the FBR to abandon though with no success.
The Federal Finance Minister is on record as having stated that the extraordinary law enforcement powers of the FBR, approved in the Finance Bill 2025, envisage effective implementation of sales tax regimen rather than on income, and Chairman of the FBR, Rashid Mahmood Langrial, is on record as having stated that the increase in collections from sugar industry are attributable to improved enforcement.
In this context, it is relevant to note that successive governments, including the incumbent, focused on increasing the number of filers through access to NADRA data; however, this led to a rise in the number of filers with little increase in revenue.
At the same time the FBR continues with its long-term practice of: (i) sustaining the reliance on indirect instead of direct taxes to ensure that the relatively poorer sections of society are not paying the bulk of revenue collections. In this context, it is relevant to note that the steady rise in reliance on petroleum levy (even though it is not collected by the FBR) is budgeted to generate 1.468 trillion rupees this year, which is an indirect tax and impacts on the transport costs of the poor and vulnerable; (ii) making the tax structure non-anomalous by taxing all units operating within a sector equally irrespective of ownership; (iii) failure to rationalise digital infrastructure taxes with the intent to make them more competitive against a basket of countries and fixing the tax rates for at least 10 years and fixing future spectrum flood prices while delinking the price from the dollar as suggested by a recent Asian Development Bank report; (iv) resistance to taxing certain sectors to enable their manipulation, example being the low tax prevalent on the stock market.
It is relevant to note that India on average collects more than 100 billion rupees from this source against Pakistan's less than 5 billion rupees per annum; and (v) farm income tax, tax on traders, and retailers and builders, sectors which under the ongoing IMF programme will be taxed from this year onwards; however, time will tell how successful they have been.
The government would no doubt argue that the attempt to raise FBR collections through raising existing taxes or bringing more items under the sales tax net or better enforcement is to ensure that the budget deficit is sustainable yet a better option would have been to reduce its own current expenditure for the time that is required to implement these structural tax reforms.
Sadly, the budget for the current year envisages a rise in all items (10 percent raise in civil administration) except subsidies (for the poor though they remain untargeted) and mark-up which is expected to decline not because government borrowing is budgeted to decline but because the cost of borrowing, dependent on the discount rate, is projected to decline which the IMF, as per its reports on its website, does not appear to regard as a done deal.
To conclude, structural reforms to amend the existing tax structure are the way forward rather than the measures currently in focus to increase revenue.
Copyright Business Recorder, 2025
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