Zafar Iqbal
The proposed Tax Laws (Amendment) Bill, 2024, which introduces a new category of “ineligible person,” has sparked significant debate and concern across Pakistan’s economic landscape. The bill includes restrictions on individuals and businesses, prohibiting them from engaging in certain economic activities such as buying real estate, purchasing cars, opening bank accounts, and participating in various business transactions. While the Federal Board of Revenue (FBR) and finance division officials support the proposal, the National Assembly panel is critically evaluating its potential impact. The bill has divided the business community, with some supporting the initiative and others voicing concerns about its broader economic consequences.
At its core, the bill introduces a new classification for “ineligible persons,” imposing restrictions on their ability to engage in key economic transactions. This includes prohibitions on buying property, acquiring vehicles, and opening bank accounts. The bill aims to target non-filers—individuals and entities that have not complied with tax filing obligations. However, the underlying concept behind creating separate categories for non-filers is not a new one. This approach has been part of Pakistan’s tax policy since the 1990s, primarily introduced under the Pakistan Muslim League-Nawaz (PML-N) government. Over the years, non-filers have faced higher withholding tax (WHT) rates on various transactions, as a means of incentivizing tax compliance.
In theory, this system should encourage individuals and businesses to file taxes to avoid the higher WHT rates. However, it also operates as an implicit amnesty system, allowing non-compliant taxpayers to pay a penalty (usually in the form of excess taxes) to avoid full-scale audits or legal consequences. The concern, however, is that such a system enables individuals to evade proper tax obligations while still contributing to the tax system in a limited, nominal way.
The new amendment bill seeks to extend this framework, maintaining higher tax rates for non-filers but also introducing the concept of “ineligible persons.” The restrictions imposed on these individuals would affect their ability to engage in critical economic activities, adding a layer of deterrence to non-compliance. However, this approach has raised questions about its clarity and effectiveness in achieving the desired outcomes.
One of the most critical issues with the proposed bill is its lack of clarity. The government has not sufficiently explained the intended objectives of the new restrictions, nor how these restrictions would translate into tangible improvements in tax collection or overall economic health. As it stands, the bill appears to be an attempt to address Pakistan’s low tax-to-GDP ratio by imposing more stringent measures on non-compliant taxpayers. However, this could inadvertently alienate a large segment of the population and business community without necessarily resulting in a significant increase in revenue.
The FBR’s reluctance to abandon the substantial revenue generated from non-filers is another important factor that complicates the situation. The imposition of higher tax rates on non-filers has historically been a source of income for the government. Yet, in attempting to tighten these restrictions, the FBR risks alienating the very individuals and businesses from whom it seeks to collect taxes. This approach could create a significant paradox: the government may lose access to a portion of the tax base it has relied upon, without necessarily attracting new tax filers into the system.
Furthermore, the bill risks exacerbating the very issues it seeks to address, particularly corruption within the FBR. Officials in the FBR already face immense pressure to meet unrealistic revenue targets. This often leads to the creation of arbitrary or inflated tax demands, which may be difficult to challenge legally. The FBR’s culture of over-taxing individuals and businesses, combined with the high expectations for collection, fosters an environment where abuses of power and corruption thrive. The introduction of a new category of “ineligible persons” may give more authority to FBR officials, further fueling corruption and extortion, especially if they are pressured to meet their targets through aggressive enforcement.
The broader economic implications of the proposed bill have also been questioned. While it is true that Pakistan’s tax system has long suffered from widespread non-compliance, the bill’s restrictive nature could push more people and businesses out of the formal economy. This has already been evident in recent years, as the country has seen an increasing trend of businesses and individuals opting for informal, cash-based transactions to avoid the burdens of the formal tax system.
The bill’s emphasis on penalizing non-filers could discourage business growth, particularly among small and medium enterprises (SMEs), which often struggle to meet tax compliance requirements due to lack of resources or expertise. By introducing further restrictions, such as limiting access to banking and property ownership, the government risks stifling entrepreneurship and reducing overall economic activity. In the worst case, this could exacerbate Pakistan’s ongoing economic struggles, as more people may choose to either exit the formal economy or move capital abroad.
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The real estate sector, for instance, has already been adversely impacted by rising taxes and property valuations. As a result, the sector has experienced a significant slowdown in transactions, leading to a drop in tax revenues. Although the FBR has made some attempts to revise valuation tables downward in areas showing signs of recovery, the overall impact of these efforts has been minimal. If the new bill imposes stricter restrictions on non-filers, it could further dampen activity in the real estate market, which remains a critical avenue for parking untaxed wealth. This could also contribute to capital flight, a phenomenon that has already caused significant currency instability in recent years.
While the proposal to create a category of “ineligible persons” may have been well-intentioned, its execution could be disastrous for Pakistan’s economic future. Before implementing such drastic measures, the government must prioritize comprehensive tax reforms that address the root causes of non-compliance and corruption within the FBR. These reforms should include enhancing the FBR’s capacity to collect taxes more effectively, ensuring transparency in tax administration, and implementing measures to reduce corruption at all levels.
Furthermore, the government should focus on creating an environment where individuals and businesses are incentivized to enter the formal tax system rather than being punished for their non-compliance. This could involve simplifying tax laws, providing incentives for voluntary tax filers, and improving the efficiency of the tax collection process.
Without addressing these foundational issues, the introduction of the proposed Tax Laws (Amendment) Bill, 2024, could have far-reaching negative consequences. The bill may end up doing more harm than good, undermining Pakistan’s economic stability and creating further divisions between the government and the business community. The focus should be on reforms that build trust in the tax system and encourage compliance, rather than relying on punitive measures that may backfire.
In conclusion, while the intention behind the Tax Laws (Amendment) Bill, 2024 may be to increase tax collection, its current form risks exacerbating existing problems in Pakistan’s tax system. For the proposal to be effective, it must be part of a broader, more comprehensive effort to reform Pakistan’s tax administration, reduce corruption, and incentivize compliance. Otherwise, the bill may end up as a well-meaning but ultimately counterproductive measure that harms both the economy and the public trust.
