smartcybers786@gmail.com 
#Taxation #Uraan #Pakistan #Political #Economy
The Raan Pakistan Framework, unveiled by the Prime Minister the other day, which aims at macroeconomic stability and sustainable growth, focuses on fiscal reforms, particularly increasing the tax-to-GDP ratio. Historical inefficiencies and structural weaknesses continue to undermine progress in the meantime, casting doubt on the feasibility of achieving these goals.
Pakistan’s tax-to-GDP ratio is the lowest in the world. At 9.5 per cent for FY 2023-24, this is well below the emerging market average of 15-20 per cent – starkly highlighting the systemic challenges in tax collection, enforcement and policy implementation.
Over the past five years, Pakistan has struggled to keep its tax-to-GDP ratio above 10 percent. 9.6 percent on average. This chronic underperformance contrasts with regional peers, some of which have consistently achieved ratios above 15 percent. This disparity is due to reliance on indirect taxes, which account for nearly 70 percent of revenue in FY2024, and failure to effectively mobilize direct taxes. Withholding taxes, mostly in indirect mode, accounted for a staggering 60.5 percent of income tax collections in fiscal 2024, reflecting systemic inefficiencies in documenting and taxing income.
Uran Pakistan has ambitiously targeted a tax-to-GDP ratio of 15.5 percent by FY2029. However, historical precedents have raised questions about the viability of such increases. The plan proposes to broaden the tax base, particularly by consolidating taxed sectors like agriculture, services and real estate. These goals depend on overcoming strong obstacles, including political resistance, procedural failures and the large size of the informal economy.
The informal economy, tax evasion and systemic evasion significantly undermine income potential. Agriculture, which contributes 23.2 percent of GDP, is largely tax-free despite employing 37.4 percent of the workforce. Similarly, real estate and services, which have considerable revenue potential, are underutilized.
Inefficient documentation of these sectors perpetuates dependence on indirect taxes, increases inequality and inhibits growth. The inefficiency of the Federal Board of Revenue, which collected only 8.7 percent of GDP in fiscal 2024, compounds these challenges. Inadequate enforcement, lack of district-level offices and limited audit capacity have hampered efforts to improve compliance. In fiscal years 2023 and 2024, tax evasion and procedural inefficiencies cost an estimated Rs 3 trillion in potential revenue.
Despite the ambitious reforms outlined in Uran Pakistan, significant challenges remain in terms of implementation and political commitment. Perpetual reliance on indirect taxes, which often burden low-income households, continues to impede the progress of equitable fiscal policies.
Indirect taxes, such as withholding tax, sales tax and customs duty are regressive in nature and disproportionately affect the most vulnerable sections of the society. Without a clear and actionable shift towards direct taxes such as income tax, Pakistan’s fiscal policy remains unbalanced and deeply flawed, making sustainable economic growth difficult.
Political resistance to the implementation of tax reforms remains a major obstacle. Vested interests in powerful sectors such as agriculture and real estate continue to block efforts at progressive tax policies. The informal economy, a major component of GDP, is another major obstacle to effective tax collection.
With large numbers of small businesses and self-employed individuals operating without formal registration or documentation, lack of transparency and accountability is undermining revenue collection efforts. This lack of financial inclusion prevents the economy from fully integrating into the tax system, further perpetuating the cycle of low incomes.
While Uran Pakistan outlines a number of reforms, including automation, data integration and anti-trafficking strategies, the implementation mechanism remains unclear. For example, the proposed National Single Window and Authorized Economic Operator Program are intended to streamline the process, but their rollout is facing delays and bureaucratic hurdles.
Uraan Pakistan lacks clarity on how to address structural tax disparities. Reliance on regressive taxes not only burdens low-income groups but also undermines progressive fiscal policies. Despite the stated goal of reducing reliance on indirect taxes, no concrete timeline or strategy has been articulated to shift the revenue balance towards progressive taxation.
Accelerated adoption of digital systems, such as real-time transaction monitoring, can increase transparency and reduce tax evasion. Shifting the tax burden to direct taxes and rationalizing exemptions will promote fairness and fiscal stability.
Pakistan’s average tax revenue growth of 13.8 percent lags behind nominal GDP growth, indicating limited flexibility in the tax system. In contrast, regional peers have implemented more dynamic fiscal policies. For example, Bangladesh, with a tax-to-GDP ratio of 12 percent, has leveraged a digital tax system to increase compliance and broaden its base.
India has successfully implemented the Goods and Services Tax reforms which have streamlined indirect taxation and reduced evasion. A low tax-to-GDP ratio exacerbates Pakistan’s fiscal vulnerabilities, adding to the debt burden.
Public debt increased from 63.7 percent of GDP in 2018 to 74.8 percent in 2023, with overall fiscal requirements reaching 23.7 percent of GDP. A widening debt deficit due to inadequate revenues and rising expenditure leaves little fiscal space for development expenditure. As a result, critical sectors such as education, health and infrastructure lack funds.
The Uran Pakistan Agenda emphasizes widening the tax net through measures such as automated audits, enforcement of property valuations and integration of the informal sector. While these initiatives are critical, their effectiveness depends on overcoming challenges. Despite their potential, provincial governments generate negligible tax revenue. In fiscal year 2024, this combination was only 0.72 percent of GDP.
Capacity building and resource mobilization of provincial tax authorities is essential to achieve the targets. Although automation offers a promising improvement, previous initiatives have faced delays and limited adoption. For example, FBR’s point-of-sale integration is underutilized, involving only a fraction of eligible retailers. A differential tax regime for filers and non-filers has had mixed results. Strengthening enforcement while simplifying compliance procedures can significantly improve outcomes.
The federal government’s plan outlines a gradual increase in the tax-to-GDP ratio. However, the assumptions underlying these estimates appear overly optimistic. The policy targets a 1 percent annual increase in the ratio, depending on factors such as higher economic growth, reduced theft and better documentation.
In an economic environment characterized by high interest rates, political instability and limited administrative capacity, assumptions seem disconnected from the realities on the ground.
For example, the policy envisages a reduction in the fiscal deficit from 7.8 percent of GDP in fiscal 2023 to 4.2 percent by 2029. Achieving this reduction requires extraordinary revenue mobilization and spending cuts, both of which face significant political and institutional obstacles. The projected increase of Rs 2 trillion in annual tax revenue reflects the level of compliance and enforcement that Pakistan has historically struggled to achieve.
To overcome these challenges, Pakistan has to adopt a multi-pronged approach. Increasing the FBR’s reach, improving audit capacity and reducing the backlog of litigation are critical to enhancing revenue collection. Harmonizing federal and provincial tax policies can address disparities and ensure a more equitable distribution of fiscal responsibilities.
Accelerating the adoption of digital systems, such as real-time transaction monitoring, can increase transparency and reduce theft. Shifting the tax burden to direct taxes and rationalizing exemptions will promote fairness and fiscal stability. Ensuring transparency, accountability and coordination in government institutions is essential for effective policy implementation.
Documentation of the economy is a fundamental issue for broadening the tax base. A large informal sector operates outside the tax system. This unused capacity represents a massive loss of revenue. To achieve financial inclusion, Pakistan should prioritize digitization and formalization of the economy.
By improving documentation, using technology to track transactions and integrating the informal sector into the formal economy, the government can substantially increase the tax base. Furthermore, increasing financial inclusion through digital platforms and increasing access to banking services will enable the government to better monitor revenue sources and enforce tax compliance, ensuring that the tax burden is reduced. Distributed fairly in all sectors of society.
Uran Pakistan aspires to transform the country’s financial environment by addressing long-standing challenges in tax policy and administration. However, its success depends on bold and sustainable reforms, backed by political will and institutional capacity. Without them, the risk of ambitious targets remains, leaving Pakistan in a cycle of low incomes, high deficits and rising debt.
Dr. Ikram-ul-Haq, author and Supreme Court advocate, is an adjunct professor at Lahore University of Management Sciences.
Abdul Rauf Shakuri is a US-based corporate lawyer.
