Muhammad Aurangzeb, the finance minister, is prepared to use force to ensure that all sectors of Pakistan pay their fair amount of taxes. “Everyone would have to contribute to the economy,” he stated. Because our hand has been pushed as a nation, he declared, “We are going to be very firm, very firm on compliance and enforcement…. I am very clear about it and I want everybody to move forward with this clarity.” His comments followed the conclusion of an IMF mission’s impromptu discussions with Pakistan, which highlighted a growing deficit in the tax collection goal for the current fiscal year. Many worry that the government may have to levy more taxes in order to satisfy IMF targets because the FBR has a significant gap of Rs190 billion in its tax objective for the first four months.
According to the minister’s statement, the government has relied heavily on strict tax compliance and enforcement, as outlined in the newly approved FBR transformation plan, in order to meet the massive target of about Rs13 trillion. Indeed, one of the main causes of low tax compliance, underreporting, and tax evasion is the lax enforcement of tax rules. In actuality, we have far more serious tax issues. Since more than three quarters of the economy is made up of the services, real estate, and agricultural sectors—all of which are essentially outside the system—it would be naive to believe that our tax problems can be solved solely by enforcement. Furthermore, a few powerful lobbyists have obtained exemptions from their tax obligations of almost Rs4 trillion. Although strict enforcement is essential, the government cannot increase tax revenue unless all incomes, regardless of source, are taxed and exemptions are eliminated. In order to do this, the government would need to completely restructure the administration and tax code in order to make it equitable while also bolstering enforcement. Pakistan’s tax system is plagued by significant loopholes, allowing sectors like real estate and agriculture to largely evade taxation. Additionally, powerful interest groups have successfully lobbied for exemptions, resulting in a staggering Rs4 trillion loss in potential tax revenue. To rectify this, a comprehensive overhaul of the tax system is imperative. This overhaul should focus on taxing all income sources without exception and eliminating exemptions. Simultaneously, robust enforcement mechanisms must be implemented to ensure compliance. By adopting these measures, the government can significantly bolster tax collection and improve the overall fairness of the tax system.
While stricter enforcement is essential, it alone cannot address the systemic issues hindering tax collection. A fundamental restructuring of the tax regime is necessary to ensure that all individuals and entities, regardless of their sector or influence, contribute their fair share. By eliminating exemptions and broadening the tax base, the government can unlock substantial revenue potential. However, this requires political will and a commitment to tax reform, as powerful vested interests may resist such changes.
