Slide 1

Pakistan has grappled with persistent fiscal mismanagement spanning several decades, prompting calls
from both donors and the government for increased taxation as a solution. The prevailing issues
encompass a need for structural reforms to combat rent-seeking behavior, marked by the absence of
impersonal market relationships, a lack of competitiveness, violations of the rule of law, reckless
borrowing practices, and wasteful spending. The challenges extend to an outdated, inefficient, and non-
productive tax system, with insufficient attention given to its re-engineering and redesign. Previous
attempts at tax reforms have been patchwork and ineffective, emphasizing a higher tax-to-GDP ratio as
a cure-all, highlighting the complexity of the fiscal challenges facing Pakistan.

Slide 2

The current tax structure in Pakistan is characterized by a federal government with diverse and robust
revenue sources, while the provinces contribute a mere six percent to the total tax revenues.
Complicating matters, the federal government encroaches on the provinces' right to levy sales tax on
services. Despite numerous taxes imposed by the federal government, the fiscal deficit has reached
alarming levels. The Federal Board of Revenue (FBR) consistently falls short in realizing the actual tax
potential, with an estimated tax gap of at least 70%, largely attributed to an inability to address the
underground economy and curb tax evasion.

Slide 3
The Federal Board of Revenue (FBR) in Pakistan faces significant issues, including the overstating of
revenue collections through manipulation and the blocking of refunds, adversely impacting the
country's business climate. Despite the imposition of additional taxes and withheld refunds, the FBR
consistently fails to meet revenue targets. Notably, successive governments have refrained from
initiating inquiries into the persistent manipulation of revenue collection figures. Transparency
concerns arise from the FBR's lack of disclosure regarding undisputed and established refunds,
leading independent analysts and foreign institutions to express indignation over the board's
malpractices. There is a pressing need for genuine facts to be made public to enhance transparency
in the FBR's operations.

Slide 4
Pakistan faces challenges in tax collection at the federal level, with collections falling well below their
potential due to doubts about collection methods and an underground economy fueled by poor fiscal
policies, high tax rates, corruption, and enforcement issues. Additionally, concerns arise from issues with
the Federal Board of Revenue's reporting, including a contested claim of surpassing targets in 2015-16,
allegations of misreporting to inflate figures, and controversies over the categorization of non-tax
revenue and the Natural Gas Development Surcharge.
Slide 5
Challenges persist for both federal and provincial governments in Pakistan. The Federal Board of
Revenue's poor performance affects provinces heavily reliant on federal collections, with reluctance on
both sides to address taxation independently. Challenges with tax filings include a lack of clarity
between "taxpayer" and "return filer," a preference for higher tax rates on a limited base, and a notable
gap between mobile users paying advance income tax and the number of return filers. Additionally,
issues with tax collection practices involve the failure to collect due taxes from the wealthy, an
overreliance on withholding taxes (WHT), and concerns about the oppressive nature of the tax system
coupled with a lack of accessible public services.

Slide 6
Pakistan's tax system faces critical issues, including the imposition of regressive taxes on essential items
in an underdeveloped economy. The system is perceived as oppressive, disproportionately burdening
middle-low-income groups while providing exemptions for the wealthy. A significant problem lies in the
lack of balance between direct and indirect taxes, favoring the rich and contributing to a substantial
budgetary gap. This imbalance is fueled by policies appeasing the wealthy and excessive spending on
elite comforts. Despite the potential for achieving a tax revenue of Rs. 8 trillion through self-reliant fiscal
policies, the lack of political will and persistent reliance on foreign loans hinder the implementation of
rational fiscal reforms in Pakistan.

Slide 7:

Heavy and confiscatory taxation in Pakistan has led to widespread discontent among citizens, eroding
trust in the government due to perceived misuse of taxpayer money. Over-taxation is contributing to the
country's growing debt, with potential ramifications for societal radicalization. The extravagant lifestyle
of the elite, funded by taxpayers, is identified as a root cause of economic issues. The current tax system
is criticized for being manipulative and favoring the wealthy, with an unjust tax base burdening the
economically deprived. A call is made for a democratic tax system linking payments to benefits received,
incorporating progressive rate schedules, and balancing income, capital, and consumption taxes. Public
skepticism prevails regarding political motivations and financial discipline.

Slide 8
Pakistan grapples with a collection dilemma as weak enforcement and an outdated tax system hamper
efficient tax collection by both the Centre and provinces. The country's total tax potential, estimated at
around Rs. 12 trillion, remains largely untapped, including agricultural income tax and local taxes. The
potential for Rs. 5 trillion in federal income tax alone exists if the entire undocumented economy is
brought into the tax net, but current efforts have fallen short. The federal government's inability to
address the fiscal deficit exacerbates the national debt burden, with provinces criticizing the Federal
Board of Revenue's inefficiencies impacting their share. The lack of serious debate on increasing overall
tax revenue hampers the flourishing of both the Centre and provinces. The growth of a parallel,
undocumented economy is linked to tax administration practices, emphasizing the need for prudent
spending through transparent processes to gain public confidence.

Slide 9

Pakistan grapples with the adverse impacts of a black economy and tax losses, where black money and
evasion hinder growth, exacerbate economic uncertainty, and contribute to income inequality and
poverty. The informal economy constitutes a substantial 75% of the total, resulting in a tax gap of 75%,
higher than reported by the Federal Board of Revenue (FBR). Successive governments have exacerbated
the issue by pardoning and appeasing tax evaders through lenient laws and amnesty schemes. The
accumulated size of the informal economy is estimated at a staggering Rs. 50 trillion, creating a
significant budget gap and underscoring the urgent need for effective measures to curb tax evasion and
formalize economic activities.
Slide 10
A simplified, flat-rate taxation system is seen as vital for Pakistan, contingent on a strong enforcement
apparatus. Recommendations include adopting a harmonized sales tax (HST) with a single-stage, single-
digit rate under a National Tax Authority. The current income tax system is criticized for complexity, with
around 60 withholding taxes causing confusion. Customs collection faces challenges like smuggling and
invoicing discrepancies, necessitating comprehensive reforms for more effective revenue collection.