THE FBR’s decision to block mobile phone connections of more than half a million individuals who did not file federal tax returns for the tax year 2022-2023 indicates that the agency is stepping up its campaign against evaders. The FBR has issued a legally binding Income Tax General Order to mobile companies to disable the SIMs of 450,000 individuals who had earlier filed tax statements but did not do so last year. It has identified the remaining more than 50,000 tax delinquents through third-party data on their expenditures and consumption patterns. The punitive action comes after the tax evaders’ failure to respond to notices and repeated reminders. But is this enough to ensure tax compliance? The FBR’s action appears to be largely limited to those whose names are already in its database. Many will justifiably ask what is being done to expand the tax base itself. Under the law, any person earning an annual income of Rs600,000 or more, or owning a 1000cc car or a house is liable to file tax statements. However, less than 2pc of the population (4.5m persons) had filed their returns last year, down from 5.9m a year earlier. Besides, a very large number of filers do not show taxable income in their statements.

That the FBR has initiated action against non-filers amid reports that only 75 traders have registered themselves under the recently announced Tajir Dost Scheme, a voluntary tax compliance arrangement for retailers, underscores the difficulty in expanding a very narrow tax base. And yet, despite the tax agency’s past failure to execute multiple effective initiatives to increase direct taxation to boost the nation’s present tax-to-GDP ratio of below 9pc — one of the lowest in South Asia — we must keep our fingers crossed. Indeed, Pakistan’s current political leadership is committed to implementing FBR reforms, digitising the tax system to plug leakages and eradicating corruption and massive tax exemptions to powerful business lobbies. The intentions are sound. But the government would need to go much beyond automation and an anti-corruption drive; a paradigm shift is needed to make the tax system equitable to attract private investment and spur economic growth.

In addition to bringing untaxed and undertaxed sectors such as real estate, agriculture, retail, and overseas remittances into the net, the government will have to curtail the number of indirect taxes and significantly reduce high tax rates if it wants to improve compliance. The abysmally low tax revenue as a ratio of the size of the economy is at the heart of one of the worst financial crises being faced by the country for the last two years. This problem cannot be tackled without broadening the tax net, and making the tax administration and regime conducive to investment and growth.

Published in Dawn, May 2nd, 2024