The World Bank and IMF highlight a significant “tax gap” in Pakistan, estimated at seven to nine percent of GDP. This gap signifies the shortfall between actual tax collections and what should be collected under ideal enforcement. The blame for this gap is often placed on citizens for not paying due taxes, but a Dawn newspaper article argues that the real issue lies in flawed tax policies and weak state legitimacy.
The article points out that Pakistan’s tax system is marred by complexity and inefficiency, with separate federal and provincial jurisdictions leading to a fragmented structure. Excessive taxation, numerous exemptions, and convoluted policies create a burden on taxpayers, pushing even law-abiding citizens to navigate the system for survival. Many working adults fall below the income tax threshold, contributing to what may seem like non-compliance but is, in reality, a mix of poverty and deliberate exclusions.
Furthermore, the design of the tax system is criticized for its inefficiency, characterized by a multitude of complicated taxes, high rates, and over 230 withholding taxes that distort the system. Compliance processes are burdensome, paperwork is overwhelming, and frequent changes in laws add to the unpredictability. The gap in tax collections is partly attributed to documented policy, with official reports highlighting extensive exemptions that hinder the system’s efficiency.
The article warns against treating the entire tax gap as recoverable, as it could result in detrimental policies, unrealistic targets, and undue pressure on the Federal Bureau of Revenue. This approach leads to the harassment of compliant taxpayers, particularly salaried individuals and a few firms who bear a disproportionate compliance burden. The fear of the system discourages registration, encourages off-the-books transactions, and contributes to a shrinking tax base despite intensified enforcement efforts.
