Tax reforms are need of the hour, and the next Government must ensure that it embarks on
this difficult but mandatory path of tax reforms.
M. Amayed Ashfaq Tola & M. Ahsan Ahmed
Recently, an article was authored by Shahbaz Rana in the Express Tribune, highlighting that the
Salaried class paid tax worth PKR 264.5 billion on their income in Fiscal Year 2022-23 (“FY23”),
whereas, the exporters paid PKR 74 billion in taxes, and retailers paid PKR 15.6 billion in taxes.
This data is a worrisome reality of the inequitable taxation system of Pakistan. However, this is just the tip of the iceberg. This article aims to explain as to why tax reforms are needed in Pakistan, and that tax reforms in Pakistan are inevitable, be it by necessity or by choice.
Pakistan’s tax-to-GDP ratio has witnessed a steady decline in the past five fiscal years,
deteriorating from 9.70 in FY19 to 8.90 in Fy23.
Examining tax revenues as a percentage of the GDP highlights the disparities among the four
countries. India has achieved double-digit tax revenues as a percentage of the GDP in the past 4 out of 5 years, accounting for 11.1% of GDP in 2022-23. This indicates a better tax collection
system and a significant contribution to India’s economic resources. In contrast, Pakistan’s tax revenue as a percentage of GDP has declined, signaling a challenge in increasing tax revenues
relative to the size of the economy.
Moreover, it is not just the low tax-to-GDP ratio that is the problem. The taxation system and
policies in Pakistan are also regressive. What this means is that majority of the tax revenue
collected is from indirect taxes, which are levied on the consumption of goods by the public-atlarge.
The revenue machinery has failed to bring the percentage of direct tax in the total tax revenue collection up to a decent level. In FY23, share of direct taxes was low at 45.19% when compared to indirect taxes. On the other hand, India’s emphasis on direct taxes, where share of direct taxes is more than indirect taxes.
India’s strong tax revenue collection, demonstrate a more equitable tax system and effective fiscal
management. In terms of fiscal discipline, India has shown a relatively strong ability to manage its
fiscal affairs effectively, despite experiencing a mix of challenges and successes.
Furthermore, as per the interim report of the RRMC (“the interim report”), out of a total 3.6 million
income tax return filers in FY 22, only 13,958 filers paid 75% percent of the total income tax
collection in FY22.
The interim report further states that 90% of the total income tax collection, was paid by only a
meagre 126,908 filers. It is also interesting, and disappointing to note, that as per the interim report, out of 3.6 million filers in FY 22, only 2.2 million are taxpayers, whereas, 1.4 million were nil/zero tax filers.
The aforestated data is testament to how broken and regressive the taxation system is in Pakistan.
As such, tax reforms are need of the hour, and the next Government must ensure that it embarks on this difficult path to tax reforms. A few reforms that can be considered to make the tax system equitable are as follows:
1. Do away with the Final Tax Regime (“FTR”) from the Income Tax Ordinance 2001
(“ITO”). The final tax regime ensures that an income stream (for e.g. income from exports)
is taxed at a nominal tax rate (somewhere between 0% to 1%) and exempts the taxpayer
from an audit under the income tax laws of Pakistan. The FTR discourages documentation
as the true income of the taxpayer cannot be identified, rather the income in the tax
particulars of the taxpayer is then imputed. The FTR must be removed or phased out from
the ITO in order to ensure true documentation in all sectors of the economy and to give a
level playing field to all businesses.
2. Before introducing measures such as the Super Tax (vide Finance Act 2022) and the Windfall tax (vide Finance Act 2023) and milking the same old cow, the Government must tax the wholesale and retail sector, and the agriculture sector on their ability to pay. Both these sectors have a high contribution towards the overall GDP of Pakistan. Approximately, both these sectors have a contribution of 41% in the real GDP, in which Agriculture sector contributes 22.91% and the Wholesale and retail sector contributes 18% to the real GDP. Unfortunately, both sectors have a miserably low contribution towards the tax revenue generated in Pakistan.
3. Increase the FBR property valuation up to the actual fair market value of the property. This will discourage the grey or black economy from increasing in the real estate sector.
4. The interim report submitted by the RRMC must be implemented. As widely reported by the media, the said report contains equitable tax revenue measures worth PKR 1.5 trillion along with other reforms measures. These proposals by the RRMC must be implemented in order to create equity in the tax system in Pakistan.
The above are only a few of the many reforms that can be implemented in order to create equity and fairness in the tax system. Considering the economic turmoil Pakistan is in, this would not be a bad time to pursue the much need tax reforms, to help lift the country out of the economic uncertainty it is facing as of now.
Mr. M. Amayed Ashfaq Tola is an LLM in International Tax Law, and an Advocate of the High Courts of