FOR decades, the FBR has found itself stuck in a loop of introducing a series of simplified schemes to bring the vast informal sector into the tax net, only to watch them fall flat. The latest initiative, the Fixed Tax Asaan Scheme for traders, offered a simplified filing process, a flat one per cent tax on turnover, and immunity from routine audits. Yet, despite targeting an estimated 3.5 million eligible traders, only a few thousand enrolled, generating a negligible amount of tax against a target of Rs50 billion.
To understand why well-intentioned schemes consistently fail, we must look beyond administrative sprints and examine the dynamics between taxpayers and the tax collector. In a strategic environment, players choose their actions based on expected payoffs. An analysis of the tax system under a game-theoretic framework, pioneered in Pakistan by renowned economist Dr Hafiz Pasha, helps explain how taxpayers develop strategies to counter the efforts of tax authorities.
Consider, for example, the distinction between filers and non-filers, introduced to encourage greater formality. In essence, it is a weak policy lever: it penalises not being on the Active Taxpayers List rather than concealing income. An individual facing this distinction has three broad strategies: file honestly, file a return declaring nil or very little taxable income, or remain outside the tax system altogether. Honest filing can be the costliest option because it exposes income and assets to greater tax scrutiny. Staying outside the system, meanwhile, attracts higher tax rates on transactions such as property and vehicle purchases and certain financial transactions. The third option of filing with minimal declared income may be the cheapest route. Given the perception of FBR’s limited enforcement capacity, it may be a preferred strategy.
Interestingly, the evidence also supports this. Income tax return filing has risen sharply, from around 2m returns in 2018 to about 6m now. Yet tax payments associated with return filing have not always kept pace with the growth in the number of filers.
Traders are smarter than the FBR. This should be recognised.
Similar is the case with the recent Tax Asaan Scheme for traders. The FBR attempted to break the informality trap through incentives. By reducing compliance costs and offering audit protection, alongside a green plate as a visible identifier for compliant businesses, the scheme sought to lower barriers to entry and make participation in the formal economy safer and mutually beneficial. However, despite these incentives, the FBR has failed to establish a cooperative equilibrium.
Traders responded poorly to the scheme, which is an important lesson: making compliance cheaper and easier does not automatically make it attractive. A trader faces two choices. The first is to enter the tax system, declare turnover, pay tax, and establish a documented financial identity. The second is to remain outside the system. If staying outside carries little expected cost, the latter may still offer the greater payoff.
Traders are smarter than the FBR. This should be recognised. The FBR plays within fixed parameters, while taxpayers have many more ways to adjust their strategies and work around them. Moreover, the FBR may be myopic, driven by the immediate pressure to meet revenue targets, while businesses consider a much longer time horizon.
Perhaps the most serious issue with the design of this scheme is its time horizon. Traders have concerns about the next round of the game. They do not view tax compliance as a one-off decision; they evaluate it as a repeated game. Their primary concern may not be the paperwork required today, but the longer-term implications of documentation. They fear that disclosing the true scale of their businesses now could enable the government to change the rules in future rounds, requiring them to account for their sources of wealth, personal assets, and expenditure. They have legitimate concerns about policy continuity: will the 1pc tax rate remain unchanged? Will audit exemptions continue? Could the information disclosed today later be used for broader tax assessments?
If the FBR wants a genuinely cooperative equilibrium, it must move beyond ad hoc, short-term schemes and focus on restructuring the underlying payoffs. It should prioritise meaningful tax reforms over the pursuit of immediate revenue targets, with greater emphasis on policy stability and predictability. Taxpayers must be given credible assurance that the rules will not later be changed in ways that penalise those who voluntarily enter the formal system.
The writer is an economist.
Published in Dawn, October 12th, 2026
