Zafar Iqbal
Pakistan’s tax system has long been a major barrier to economic growth, sustainability, and development. For years, the country’s flawed tax structure has created significant challenges for both businesses and individuals. These inefficiencies have slowed down economic expansion, undermined the business environment, and hindered crucial development metrics, making it harder for Pakistan to achieve its full potential.
Mian Zahid Hussain, the President of the Pakistan Businessmen and Intellectual Forum, recently highlighted these issues, pointing out that the current tax system disproportionately burdens the documented taxpayers while allowing powerful sectors and high-net-worth individuals to avoid paying their fair share. Hussain emphasized the need for a major overhaul of the taxation framework, as its inherent inequalities are damaging the economy.
The primary flaw in Pakistan’s tax system lies in its inequitable nature. The system is not designed to ensure that all sectors of the economy contribute fairly to the national revenue. Instead, it has allowed certain sectors to operate outside the tax net, leaving them unchecked while placing an increasing burden on those who are already paying taxes. This results in a low tax-to-GDP ratio, which is significantly below the global average, and leads to widespread public mistrust of tax authorities. There is a general reluctance to participate in the formal tax system, as businesses and individuals are discouraged by the high tax burden and the punitive nature of the system.
One of the main contributing factors to this issue is the imposition of a minimum tax on turnover for all businesses, regardless of whether they are making a profit. In contrast, a well-structured tax system typically taxes businesses based on their net profits, which ensures that businesses are only taxed when they are actually earning an income. If a company is incurring losses, the tax system should allow those losses to be carried forward, providing relief and fairness in the long term. However, Pakistan’s tax regime forces businesses to pay a minimum tax ranging from 0.5% to 8% of their turnover, regardless of their profitability. This policy, rather than promoting growth, acts as a major financial burden, especially for struggling businesses, discouraging investment and stifling overall economic activity.
In addition to the minimum tax on turnover, Pakistan’s tax system also includes a convoluted withholding tax regime. Under this system, multiple tax rates are applied at various stages of business transactions. Instead of focusing on taxing incomes and assets, the tax authorities prioritize taxing transactions. This creates an environment where businesses, particularly those involved in multiple stages of production, face escalating financial burdens as taxes are applied repeatedly at each stage of the supply chain. From raw material processing to manufacturing, distribution, and retail, each phase of the supply chain is subjected to the minimum tax on its turnover. This leads to an increase in overall costs, discourages business activity, and drives up prices for consumers.
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The effects of this dysfunctional tax system are most apparent in sectors that rely on a wide network of independent businesses at different stages of production. For example, small manufacturers and retailers, who depend on multiple suppliers, are hit hardest by this tax system. The imposition of taxes at every stage of the supply chain significantly increases their costs, making it more difficult for them to compete both locally and internationally. The result is a higher cost of doing business and, in many cases, a decline in revenue generation, as businesses struggle to absorb the financial burden.
The Federal Board of Revenue (FBR) is often accused of focusing too heavily on meeting revenue collection targets, which has led to the implementation of punitive and counterproductive measures. In its quest to meet ambitious collection goals, the FBR relies on measures that are easier to collect, such as indirect taxes and withholding taxes. However, this approach is deeply flawed. The overdependence on indirect taxes, which disproportionately burden those least able to afford them, exacerbates income inequality and discourages long-term economic growth.
Additionally, the tax authorities’ focus on meeting collection targets rather than expanding the tax net results in a vicious cycle of ineffective taxation. Instead of working towards broadening the base of taxpayers and fostering an environment of compliance, the FBR resorts to short-term, punitive measures that ultimately fail to generate sustainable revenue. In fact, in some sectors, excessive taxation has led to a decline in revenue, as businesses struggle to absorb the financial pressure. This highlights the need for a shift in strategy—from an over-reliance on indirect taxes to a more balanced and sustainable approach to taxation.
One of the key issues with Pakistan’s tax system is the lack of political will and the weak enforcement of policies. In many cases, tax evasion is rampant among influential sectors, which enjoy political protection and the ability to operate outside the formal tax net. As a result, the government’s efforts to increase tax revenue are stymied by corruption and a lack of accountability. This makes it all the more important for the government to take a firm stance against tax evasion and focus on creating an environment where businesses are encouraged to formalize their tax status.
The complexity of the current tax system is another major deterrent for businesses and individuals who might otherwise be willing to pay taxes. With excessive paperwork, convoluted tax rules, and a lack of clear guidance, many businesses simply choose to remain outside the formal tax system. This leads to a situation where only a small portion of the economy contributes to national revenue, while the rest operates in the informal sector, avoiding taxes altogether. To address this issue, Pakistan needs to simplify its tax code and make compliance easier for businesses.
Pakistan’s tax system needs urgent reform if the country is to overcome its current economic challenges. The government must move away from its focus on short-term revenue collection and adopt a more long-term strategy that encourages compliance, promotes investment, and supports sustainable economic growth. This includes broadening the tax base, simplifying tax regulations, and creating incentives for businesses to formalize their tax status. Additionally, the government must work to address governance issues, reduce corruption, and ensure that all sectors of the economy contribute fairly to the national revenue.
In conclusion, Pakistan’s current tax system is deeply flawed, inefficient, and inequitable. It is failing to generate the revenue needed to support key sectors such as education, healthcare, and infrastructure. To address these challenges, Pakistan must adopt a more sustainable and equitable tax system that fosters long-term economic growth, reduces the burden on struggling businesses, and ensures that all sectors of the economy contribute their fair share.
