PAKISTAN’S inefficient, growth-inhibiting, distortive and unjust tax system can justifiably be described as the country’s Achilles heel. Not only is it the root cause of the nation’s fiscal troubles and mounting debt, its role in the endless balance-of-payment crises, leading to continuous boom-and-bust cycles, has also proved damaging. Now, under the IMF’s oversight, the tax authorities are scrambling to meet elevated annual tax collection targets to ensure that the country achieves the primary budget surplus goal of the ongoing $7bn loan. In other words, tax targets, which were previously set to meet public sector expenditures, are now being revised to contain the burgeoning fiscal deficit and reduce the rising debt stock.

The problem, however, is that our fiscal policymakers have already squeezed existing taxpayers dry and the political leadership does not appear to be able to net elements outside the system — retail, real estate, agriculture, etc — because of their political clout. For this year, the FBR had imposed Rs1.3tr worth of new taxes — mostly on salaried individuals and the corporate sector — to plug the gap between the IMF-given target and the amount it could otherwise recover. For the next year, the IMF believes the tax gap will stand at around Rs1tr, which means additional taxation would be required to meet the proposed target of Rs14.3tr in FY26. While media reports suggest that the multilateral lending agency has narrowed its focus in the new budget to concentrate mainly on additional tax measures to achieve the new target, it remains unclear if the government plans to cover this gap by extracting more from existing taxpayers or finally tighten the noose around the sacred cows. The demerits of the FBR’s tax transformation plan apart, the government is facing stiff opposition from the country’s powerful business lobbies, which include textile owners, cement producers and traders who oppose the implementation of some of the measures suggested. The government is said to be working on providing ‘tax relief’ to salaried individuals. But that would hardly be possible unless those who are not paying their dues and are, in effect, stealing from the government are brought into the tax net. This is necessary to create space for the provision of relief to those most in need of it. It is about time that the government penalised the tax evaders, instead of taking more money from the despairing salaried class.

Published in Dawn, May 18th, 2025