A RECENT World Bank report update on Pakistan’s development challenges has sparked considerable consternation after it emerged that the financial institution wants Pakistan to consider, among other things, increasing the tax burden on more income categories, including those previously exempted from paying taxes. To wit, the lender has said that income taxes should also be imposed on people earning less than Rs50,000 a month (the current exemption limit) and that people making less than Rs500,000 should be taxed at higher rates. In a more equitably taxed economy, the suggestion would perhaps not have triggered the kind of outrage it has; after all, everyone has to chip in if the economy is to be rescued from the dire straits it is in. However, keeping in mind Pakistani authorities’ historic unwillingness to broaden the tax net, it is understandable why inflation-weary taxpayers are angry at the prospect of being squeezed further during a time when balancing their own household budgets has become a highly stressful task. The general expectation is — and not unrealistically so — that the axe will fall on the salaried classes again because the state will not go after tax cheats.

Due to the Federal Board of Revenue’s overreliance on indirect and withholding taxes to meet the government’s revenue targets, poor and middle-income Pakistanis end up paying a significantly larger proportion of their earnings in taxes than wealthier citizens do. Meanwhile, runaway inflation — which taxes incomes by reducing purchasing power — has also disproportionately impacted these income categories. With such a regressive taxation system in vogue, the first priority for tax authorities should be to take away the massive incentives, concessions and exemptions granted to various sectors of the economy and ensure that undertaxed segments are fairly taxed first. Agriculture, retail, real estate, sole proprietorship and non-salaried individuals’ earnings cannot remain untaxed or undertaxed while those employed in the formal sector are being squeezed harder and harder. Limiting government expenditures is the other side of this coin, and a list of related measures has been outlined in the World Bank report. Till Pakistan’s taxation system is fixed, the government should leave honest taxpayers alone. They have suffered enough.

Published in Dawn, October 7th, 2023