Zafar Iqbal
A newly proposed bill, which seeks to grant sweeping powers to tax authorities in Pakistan to enforce compliance, has been tabled in the parliament and is expected to pass without much resistance. While the bill may present an aggressive stance on increasing tax collection, it raises several critical concerns regarding its implementation, the potential for loopholes, and the overall impact on both the economy and the public. This law could exacerbate the country’s ongoing struggle with tax collection, which has historically been hindered by a complex and ineffective tax structure.
One of the most glaring issues with the law is the exemptions it grants to certain individuals. According to the bill, the law will not apply to parents, spouses, children below the age of 25, unmarried daughters (including divorced or widowed individuals), and children with disabilities. While these exemptions are likely meant to safeguard vulnerable segments of the population, they open the door to potential misuse. The bill does not clearly define what constitutes a disability, which is problematic given the wide range of disabilities—such as learning disabilities like dyslexia, which affects millions of Pakistani children. Additionally, it raises a question regarding the tax obligations of sons over the age of 25, who may not be employed but still rely on family support, as well as the situation with unmarried daughters.
Another issue lies in the law’s provision barring non-filers from opening bank accounts. While this measure is designed to curb non-compliance, it has a history of causing unintended consequences. Previous attempts to restrict financial access for non-filers have led to a significant increase in the informal economy, where transactions are conducted outside the purview of the formal financial system. This parallel economy, which is already estimated to constitute around 40 percent of the total economy, may only expand further, undermining the law’s effectiveness. Furthermore, the mandate for banks to report high-risk individuals with financial activities exceeding their declared assets and turnover presents an additional challenge. Banks currently lack the resources and data to assess these individuals accurately, especially when they may be operating both within the formal and informal sectors.
Additionally, the bill proposes restricting the registration of vehicles with engine capacities exceeding 800cc, with exceptions for rickshaws, motorcycle rickshaws, tractors, and small vehicles. While the intention behind this provision may be to curb luxury purchases, its impact is questionable. Tractors, which are typically bought by wealthy landowners, are excluded from this restriction, creating an inconsistency in the policy that raises concerns about the fairness and effectiveness of the law. The lack of clarity on which assets are subject to these restrictions could further exacerbate the inequality between different social classes.
The law also introduces measures to regulate the sale of products without proper tax stamps, stickers, or barcodes. While this appears to target tax evasion in the retail sector, the practical implementation of this policy is questionable. Products with the necessary tax stamps and barcodes are largely confined to urban areas and major retail outlets, leaving rural and smaller markets largely unaffected. Consequently, this provision may fail to address the root of tax evasion, which is rampant in the informal sector.
Perhaps the most concerning aspect of the law is its potential to generate widespread opposition, not only from opposition parties but also from members of the ruling coalition. The bill’s punitive measures, which include the sealing of businesses, asset seizures, and suspension of bank accounts, are likely to be contested in court. In a country where even the finance minister acknowledges that the public is willing to pay more taxes but is unwilling to engage with the tax authorities, the law’s proposed punitive approach may only alienate taxpayers further. The Federal Board of Revenue (FBR), which is tasked with enforcing tax collection, has long been criticized for its inefficiency and lack of credibility. As the finance minister correctly pointed out, citizens cannot be expected to comply with a tax system they view as corrupt and unjust. Restoring the FBR’s credibility and ensuring that tax collection is handled fairly and transparently should be the primary focus before implementing such stringent measures.
This highlights a fundamental flaw in Pakistan’s tax structure: the focus on punitive enforcement rather than addressing the root causes of low tax compliance. Tax collection in Pakistan is not merely an administrative issue; it stems from an outdated and inefficient tax system that disproportionately burdens the poor while letting the wealthy off the hook. Indirect taxes, which constitute around 75 to 80 percent of total tax revenue, are particularly regressive, as they place a heavier burden on the lower-income population. In contrast, direct taxes, which are typically easier to collect from wealthier individuals, remain largely underutilized.
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Instead of relying on harsh punitive measures, the government should focus on overhauling the tax system. This overhaul should include reforms to broaden the tax base, reduce the reliance on indirect taxes, and implement policies that encourage voluntary compliance. For example, the government could introduce targeted tax incentives for businesses that operate within the formal economy and invest in technology to improve the efficiency of tax collection. Additionally, strengthening the enforcement of laws related to asset disclosure and tax evasion, particularly in the informal economy, could help improve compliance without resorting to draconian measures.
One potential avenue for reform is to tackle the government’s own expenditure, which has been a major source of the country’s fiscal deficits. Cutting back on unnecessary spending and reducing corruption within the public sector would free up resources that could be reinvested into essential services and infrastructure. However, this would require political will and a commitment to reducing the bloated public sector, which may prove difficult to achieve.
Finally, while the government’s intention to curb tax evasion and increase revenue is commendable, the current approach outlined in the bill is not the right solution. The punitive measures outlined in the bill, such as asset seizures, sealing of businesses, and suspending bank accounts, may create significant resistance from the public and lead to more widespread non-compliance. The focus should be on building a more equitable and efficient tax system, strengthening the FBR, and implementing reforms that address the root causes of low tax compliance. Without such reforms, the country’s tax-to-GDP ratio is unlikely to improve in the long term, and Pakistan will continue to struggle with a low tax base and an inefficient public sector.
In conclusion, the proposed tax law is a step in the wrong direction. It may temporarily increase revenue, but it is unlikely to address the underlying issues with Pakistan’s tax system. The government must focus on long-term structural reforms that promote tax compliance, restore confidence in the tax authority, and create a fairer and more sustainable tax system. Only then can Pakistan hope to achieve the necessary revenue growth to support its development and address its fiscal challenges.
