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Tax Reforms Challenges in Pakistan

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Pakistan’s inability to significantly broaden its tax base has been a major factor contributing to the country’s crippling debt burden and its precarious financial situation over the past several decades. The issue has largely remained under the radar until recently because successive governments have managed to postpone addressing it, effectively kicking the can down the road.

The recent establishment of a committee tasked with developing a new plan to expand the tax base is not surprising given the dire situation. However, achieving the ambitious goal of increasing the number of tax filers from 4.9 million last year to 6.9 million by the end of the current fiscal year appears daunting. The committee, headed by the NADRA chief and three senior FBR members, also faces the challenges of improving data integration, reducing reliance on foreign aid, and boosting overall revenue beyond simply expanding the tax base.

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Striking a balance between adding two million tax filers within a year without resorting to harsh measures proves a delicate task. Converting these new filers into actual taxpayers poses an even greater challenge, as the system remains vulnerable to manipulation and the FBR’s own shortcomings, such as its failure to rigorously enforce proper documentation of companies’ revenue and payroll data, have created exploitable loopholes. Meanwhile, the FBR continues to rely on its favored approach of squeezing existing taxpayers even tighter, as evidenced by the recent imposition of a windfall tax on banks’ income from forex transactions. This move, according to some experts, could potentially push banks into a loss-making position when providing such services.

Critics have also pointed out that the timing of the committee’s formation, just days before the arrival of an IMF team scheduled to assess Pakistan’s tax system, is likely not coincidental. Given the systemic flaws in the tax system, one of the committee’s unofficial objectives may be to align with – or at least facilitate compliance with – the findings of the IMF team, which are expected to be released in approximately two months.

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