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Express Tribune
an hour ago
- Business
- Express Tribune
A tax system built on evasion
Listen to article Those drafting the upcoming budget face a formidable set of challenges: the mammoth and still growing debt burden, the skyrocketing cost of living for the poor, and the seemingly intractable trade deficit, to name just a few. But by far the biggest challenge is the mismatch between income and expenses. This has led the government to run a perennial budget deficit. Of course, this is a situation that cannot continue forever. If the government were a corporation, it would have been declared bankrupt years ago. There are only two ways to address this problem: increase tax revenues or decrease expenses. On the latter, there's much the government can do to curb needless extravagance — think of the number of cabinet ministers it supports and their ancillary costs, or the number of MNAs and MPAs in our assemblies, whose presence or absence has zero impact on the country. But ultimately, cutting expenses is a game of diminishing returns. You can trim the fat only so far before you get to the meat. So, the solution to the budget deficit must rely on boosting revenues. And here lies the real problem. Pakistan is perhaps the only country in the world that gives its citizens the option to pay taxes — or not. We have a whole category of people called non-filers who can legally refuse to be part of the tax net. Only a slim — and some might say foolish — minority has opted to become filers, actually submitting tax returns. In an effort to improve tax compliance without broadening enforcement capacity, this filer versus non-filer distinction was introduced through the Finance Act 2013 under the Pakistan Muslim League-Nawaz (PML-N) government. It allowed the Federal Board of Revenue (FBR) to impose differential withholding tax rates on certain transactions — like vehicle registration, banking, and real estatebased on taxpayer status. This had several goals: encouraging non-filers to register and become filers, using third-party withholding as a substitute for weak enforcement, and generating quick revenue from high-volume transactions. Despite some early gains in revenue collection, the system created a host of negative consequences. It spawned a parallel economy which, rather than pushing non-filers into the formal system, effectively legalised non-compliance by allowing them to continue operatingalbeit at a higher cost. Instead of enforcing mandatory return filing, the government began collecting advance taxes from non-filers on transactions such as vehicle registration, bank withdrawals, and real estate deals. This turned non-compliance into a revenue stream. Many prefer to remain non-filers and simply absorb the higher withholding tax — it's often cheaper and less risky than formal registration. Cash-based and undocumented businesses continue to function outside the tax net, limiting the impact of broader economic reforms. A particularly troubling outcome is that filers often feel punished for their honesty, while non-filers continue with impunity. Filers face politically motivated audits, complex filing requirements, and penalties for minor errors. Non-filers avoid scrutiny altogether. This disillusionment fosters cynicism and erodes trust in tax authorities. Instead of encouraging compliance, the system paradoxically discourages it — especially when filers see no benefits in return for their transparency. Tax systems thrive on fairness and reciprocity. Yet this two-tier structure undermines both. Filers rarely witness improvements in public services or infrastructure proportional to their contributions, further dampening their motivation to comply. Knowing that non-compliance attracts no real penalty — beyond a slightly higher withholding rate — many make the rational decision to avoid filing. Certain sectors, like real estate and wholesale/retail trade, thrive despite being dominated by non-filers, making voluntary compliance appear naïve and burdensome. This split also introduces market distortions. Individuals and businesses structure transactions to dodge higher non-filer taxesusing intermediaries, splitting invoices, or underreporting. Genuine investors are deterred by sectors with high compliance burdens, creating a tilt toward low-visibility, low-regulation activities. Non-filers still invest in property— albeit at higher ratesfuelling speculation rather than productivity. While withholding taxes have boosted collection, actual compliance and accountability remain weak. The government may celebrate rising revenues, but much of it comes from advance taxes on non-filers who remain beyond the system's reach. There's been no expansion of the taxpayer base. Withholding doesn't equate to documentation or broader participation. Worse, the administrative burden has increased. Focusing on transaction-based tax grabs distracts from building institutional audit and enforcement capacity. This system undermines progressive taxation. A core tenet of modern tax policy is that those who earn more should pay morea principle weakened by our current regime. Withholding taxes are levied regardless of an individual's ability to pay, hitting poor and low-income non-filers hardest. Since non-filers are taxed per transaction, not income, the regime becomes regressive. Equity is eroded. The wealthiest often remain outside the net entirely by structuring their finances to avoid detection. Finance Minister Muhammad Aurangzeb has called the upcoming budget a "structural budget" — implying fundamental reforms are on the table. If he truly intends to walk the talk, he must begin by scrapping the non-filer category. It's iniquitous and untenable. But this alone won't suffice. The FBR's enforcement capacity must be enhanced to manage a larger filer base. Digitisation must also accelerate. Cashless, online transactions should be made mandatory. AI can automate many functions — like audit selection — that currently rely on human input. These reforms will take time, but eliminating the non-filer status can happen immediately. It's the necessary first step, and it alone could significantly boost revenues and help reduce the chronic budget deficit that continues to haunt the country. THE WRITER IS CHAIRMAN OF MUSTAQBIL PAKISTAN AND HOLDS AN MBA FROM HARVARD BUSINESS SCHOOL
Business Recorder
2 hours ago
- Automotive
- Business Recorder
FBR may impose 18pc ST on locally-manufactured cars
ISLAMABAD: The government is likely to impose standard rate of 18 percent sales tax on locally manufactured or assembled motorcars having engine capacity 850cc in budget (25-26). In this connection, the Federal Board of Revenue (FBR) is reviewing the budget proposal to amend the Eighth Schedule of the Sales Tax Act 1990. Presently, 12.5 percent sales tax is applicable on locally manufactured or assembled motorcars of cylinder capacity up to 850cc. In case FBR's proposal is approved, the FBR will delete entry number 72 of the Eighth Schedule of the Sales Tax Act 1990. FBR may allow import of 5-year-old used vehicles It is a revenue generation measure for 2025-26 as the FBR is reviewing all sales tax exemptions and lower rates to bring them at part with the standard rate of sales tax from 2025-26, officials added. The goods specified in the Eighth schedule shall be charged to tax at such rates and subject to such conditions and limitations as specified therein, Sales Tax Act 1990 added. Copyright Business Recorder, 2025
Business Recorder
2 hours ago
- Business
- Business Recorder
Sindh farmers ask FBR to reduce duty on tractors
ISLAMABAD: Small farmers from Sindh have approached Federal Board of Revenue (FBR) to reduce custom duty on imported tractors from 15 percent to 5 percent under massive tariff rationalisation plan to be implemented in budget (2025-26) to support agriculture sector. Farmers have also proposed FBR Chairman Rashid Mahmood to reduce the existing sales tax rate on locally manufactured and imported tractors from 14 percent to 5 percent, enabling the farmers to purchase tractors. This is not an exemption, but only a reduced rate already applicable of many items including vehicles under Sales Tax Act. The budget proposals of the Sindh Chamber of Agriculture (SCA) Hyderabad to FBR Chairman included rationalisation of tax structure and abolishment of levy of sales tax on tractors to support agriculture sector. Sales tax on tractors, pesticides likely When contacted, sources in the FBR revealed that the proposals are under consideration of the FBR during ongoing budget preparation exercise to facilitate poor farmers of the country. The chamber stated that the approved tariff plan to be implemented in budget (2025-26) covers elimination of Additional Customs Duty (ACD); phasing out of Regulatory Duty (RD); gradual elimination of the Fifth Schedule of the Customs Act and restructuring of the customs tariff. This must cover most essential item i.e. tractor which is not a luxury item like vehicle. Nabi Bux Sathio, Senior Vice President, Sindh Chamber of Agriculture Hyderabad stated: 'We, as representatives of the farming and agricultural community in Sindh, feel compelled to shed light on the significant challenges and hardships faced by our fellow farmers and agriculturists in recent times'. The chamber stated that the agricultural sector plays a pivotal role in Pakistan's economy, contributing 24% to the GDP and employing 37.4% of the workforce. However, the sector is currently grappling with a myriad of complex issues. These include the lack of investment and support, the adverse effects of climate change, and the dwindling availability of water, exacerbating the challenges faced by farmers and agriculturists. Moreover, farmers have been severely impacted by the inability to secure fair prices for their produce. The government's announcement of support prices for wheat and cotton has not translated into actual purchases at the stipulated rates, leaving farmers with no choice but to sell their crops at significantly lower prices. The situation is further compounded by the low prices offered for rice and the potential delay in the sugar cane crushing season, which has added to the woes of the farming community. He urged the FBR to reduce the existing sales tax rate on locally manufactured and imported tractors from 14% to 5% enabling the farmers to purchase tractors, and also reduce the custom duty on imported tractors from 15% to 5% and also for re-conditional tractors. Copyright Business Recorder, 2025
Business Recorder
a day ago
- Business
- Business Recorder
May: FBR's provisional collection over Rs935bn
ISLAMABAD: The Federal Board of Revenue (FBR) has provisionally collected over and above Rs 935 billion in May 2025 against the assigned target of Rs1110 billion, reducing shortfall to Rs175 billion. Till now, the FBR has collected Rs10,244 billion during July-May (2024-25) period against the target of Rs 11,240 billion, further reducing the shortfall to Rs 1016 billion, according to updated revenue collection figures of the FBR late Saturday night. Copyright Business Recorder, 2025
Business Recorder
a day ago
- Business
- Business Recorder
ST, Federal Excise Return: FBR extends date of submission upto June 5
ISLAMABAD: The Federal Board of Revenue (FBR) has extended date of submission of Sales Tax and Federal Excise Return for the tax period of April, 2025 upto June 5, 2025. This is subject to the condition that due sales tax liability has been deposited within due date. FBR to levy 18% sales tax in erstwhile tribal areas In this regard, the FBR has issued instructions to all Chief Commissioners Inland Revenue of Large Taxpayers Offices (LTOs), Medium Taxpayers Office (MTO), Corporate Tax Offices (CTOs) and Regional Tax Offices (RTOs) on extension in date of Submission of Sales Tax & Federal Excise Return for the Tax Period of April, 2025. In exercise of the powers conferred under section 74 of the Sales Tax Act, 1990 and section 43 of the Federal Excise Act, 2005, the FBR has directed that the date of submission of Sales Tax and Federal Excise Return for the tax period of April, 2025 which was due on May 18, 2025 is extended till June 5, 2025 subject to the condition that due sales tax liability has been deposited within due date, FBR added. Copyright Business Recorder, 2025
