Businesses also need a fiscal policy board independent of tax collection that aims to increase the tax-to-GDP ratio as an outcome of long-term policies that promote investment in priority sectors such as exports and indigenisation. The formal industry also raises concerns about a bias in favour of investment in the land—Fit for growth?, Ehsan Malik, The Dawn, March 6, 2025.
The federal government’s total debt stock surged by over Rs. 3 trillion during the first seven months of the current fiscal year (FY2025), primarily due to substantial borrowing from domestic sources to bridge the fiscal deficit. The overall debt stock surged to Rs. 72.123 trillion in January 2025, up from Rs. 68.914 trillion in June 2024, showing an increase of Rs. 3.209 trillion—July-Jan govt debt up 4.56% to Rs. 72.12trl, Rizwan Bhatti, Business Recorder, March 7, 2025
Now that the Federal Board of Revenue (FBR) has purportedly requested the International Monetary Fund (IMF) to lower the target of the current fiscal year (FY) 2024-25 by Rs. 579 billion, we must once again examine the real tax potential of Pakistan. The tax target originally fixed in the Federal Budget (2024-25) was Rs. 12.970 trillion, which may be revised down for the second time by the IMF between Rs.12.3 trillion to Rs.12.5 trillion, according to a news story adding that “IMF indicated lowering it by Rs. 435 billion to less than Rs.12.5 trillion but no formal decision has been taken”.
Earlier, after approval (sic) from the IMF, the FBR reportedly revised its own target fixed by the National Assembly from Rs. 12.970 trillion to Rs.12.913 trillion in July 2024. This confirms our level of subjugation before the lender of last resort. The FBR is now subservient to the IMF compared to the elected (sic) Parliament!
A country’s tax gap is measured by the amount of tax that remains uncollected due to complete or partial non-compliance with tax laws. In egalitarian states, people pay taxes voluntarily. In Pakistan, non-compliance is also due to bad policy, as in addition to taxing the real incomes, the income tax law imposes presumptive, minimum, consumption, and transactional taxes, etc., through withholdings)—see how the United States’ Inland Revenue Service (IRS) measures the tax gap.
In Pakistan’s context, we must also add monstrous tax expenditure to measure the real tax gap. According to verbal claims of FBR’s incumbent Chairman, the current tax gap is about Rs. 7.1 trillion. If we add tax expenditure of around Rs. 3.9 trillion for FY 2023, it comes to Rs. 11 trillion. Had this alone been bridged, the total collection of FBR for FY 2024 would have been Rs. 20.3 trillion (actual collection of Rs. 9.299 trillion-plus tax gap of Rs. 11 trillion).
In the last tax gap study, (perhaps only as well), uploaded on its website, titled Tax Gap Report 2022 [“the Report’], the FBR claims that its in-house researchers (sic!) have adopted “the top-down and bottom-up approaches to estimate the tax gap”.
The report says: “The top-down approach relies on the National Accounts Data and Supply-use Tables and is used to estimate the Sales Tax gap. The bottom-up approach relies on the microsimulations and is used to estimate the Income Tax and Customs Duty gap”.
As regards the methodology adopted by the FBR to determine the tax gap, it is faulty and flawed. The report does not take into account the huge informal economy and relies on official figures that are not even trustworthy. A detailed analysis of the same will be made in a separate article. This one is restricted to highlighting the real tax potential and tax gap.
The poorest of the poor are subject to oppressive and unjustified, rather unconstitutional withholding tax on mobile use, and yet Pakistanis are called tax thieves by FBR stalwarts, so-called local experts working for lenders and donors, and some all-knowing anchors of TV talk shows
The Report says that it “measures the compliance gap and does not account for tax expenditure”. The term “compliance gap”, itself is questionable. FBR has failed to tap the real tax potential by analysing simple data of unique mobile users as discussed in last week’s column.
Data related to unique mobile users, subjected to advance/adjustable income tax, is sufficient to explode the myth of the “compliance gap” created by FBR in the Report. The poorest of the poor are subject to oppressive and unjustified, rather unconstitutional withholding tax on mobile use, and yet Pakistanis are called tax thieves by FBR stalwarts, so-called local experts working for lenders and donors, and some all-knowing anchors of TV talk shows.
The reality is that the rich and mighty are not paying their due taxes and enjoying exemptions, concessions, waivers, and immunities in tax codes, besides benefitting from tax and asset amnesties offered frequently by the state about which the Report is completely silent.
The Report presents the following summary of the tax gap for the tax year 2021:
“Overall Tax Gap is Rs. 1,289 billion that is 26% of potential collectible tax under the current regime
- Sales Tax Gap is Rs. 519 billion, which is 24% of the potential collectible tax under the current sales tax regime
- Income Tax Gap is Rs. 730 billion, which is 31% of the potential collectible tax under the current income tax regime
- Customs Duty Gap is Rs. 40 billion, which is 11% of the potential collectible customs duty”
Adding insult to injury are the following words of appreciation by then Chairman FBR, Malik Amjed Zubair Tiwana, of FBR included in the Report:
“The efforts put in by the Revenue Analysis team, under the able guidance of the Director General (Revenue Analysis), in producing this Tax Gap Report are appreciated. I hope the tax gap report will be useful for stakeholders, particularly the policymakers, to devise future tax policy and strategies to tap the maximum potential of tax revenue”.
Quite strangely and contrary to the Report, the predecessor of Tiwana, Asim Ahmad, admitted that the tax gap of Pakistan was not less than Rs. 3000 billion. According to a Press report [Tax gap stands at Rs.3000bn: FBR Chief, The News, July 23, 2022], he said that this gap “is on an annual basis and exists mainly in the shape of tax exemptions for powerful lobbies, massive tax evasions, and the inability of the machinery to collect due taxes”. The then FBR Chairman was speaking at the Summer Camp of Lahore Tax Bar on July 22, 2022.
The above shows the huge difference in figures in the official FBR report and the claims of its various chairpersons about the tax gap of Pakistan. It also exposes the veracity of official numbers.
It is simply lamentable that in 2022, it was not brought to the knowledge of the public, what to speak of taking input from the stakeholders and local tax experts, that some study/analysis was undertaken to determine the tax gap by the in-house team of FBR, ignoring facts on the ground and reliable figures about size of burgeoning parallel economy.
The alliance government of the Pakistan Democratic Movement (PDM) assumed power on April 9, 2022. It had been criticising its predecessors for violating the principles of transparency, but itself violated all norms of good governance by commissioning a vital tax gap study without the knowledge of the public.
In the case of the study mentioned in the Lahore Tax Bar workshop, where the FBR Chairman made some startling revelations, none of the members were agitated about the issue. There was no reporting of the matter in the media until the above-cited report was published, which revealed the following:
“We have found that the total tax potential under the jurisdiction of the federal government stands at Rs9,000 billion out of which the FBR collected Rs. 6,000 billion so the tax gap was assessed at Rs3,000 billion on a per annum basis,” the chairman shared the outcome of tax analysis gap while addressing a Summer Camp 2022 arranged by Pakistan Tax Bar Association Friday night”.
In the event of Lahore Tax Bar in July 2022, the then Chairman FBR reportedly revealed that this tax gap analysis was conducted by hiring a consultant “on the directives of Prime Minister Shehbaz Sharif on the eve of budget-making exercise for 2022-23”. The incumbent Chairman has never referred to this study while giving his estimate of the tax gap of Rs. 7.1 trillion.
The Report made public at the website of FBR has no nexus with the one that according to a former Chairman FBR was assigned by Shehbaz Sharif to a foreign consultant to conduct the first-ever formal study to assess the ‘tax gap’!
At the time of preparing, the so-called “first-ever formal study” [yet not made public!] or in the Report, FBR’s stalwarts did not mention the tax gap study earlier prepared with the help of the World Bank. The study, titled, Pakistan Tax Gaps: Estimates by Tax Calculation and Methodology, a joint study of FBR and Andrew Young School of Policy Studies at Georgia State University and World Bank, provides in detail, tax gaps by type of tax and describes the methodologies and data used for such estimates—see details in The tax gap.
There was a time when FBR used to get over four million returns of individuals showing substantial amounts of tax and the tax-to-GDP ratio once reached 13%—the highest in the history of Pakistan!
Ignoring the official shenanigans of tax gap studies full of contradiction and ignorance, let us try to determine a rational income tax base for Pakistan once more. According to the 2023 official census, our population was 241,499,431, which as of today through live monitoring (March 7, 2025 at 12:33 am) is 253,959,011.
The dependent population of children under the age of 15 years is around 35% while 4% of people are above 65 years. Out of the total population, 140 million are below the poverty line, earning less than two dollars a day. Our employed labour force as per the Economic Survey of Pakistan 2024 is around 72 million—the majority based in rural areas [48.5%] that earned below taxable income or agricultural income falling outside the ambit of Income Tax Ordinance, 2001.
According to Pakistan Telecommunication Authority (PTA), accessed on March 7, 2025, at 12:36 pm, the total mobile cellular subscribers as on January 31, 2025, were 195 million (79.30% mobile density), 140 million mobile broadband subscribers (57.08% mobile broadband penetration), 3 million fixed telephone subscribers (1.10% fixed teledensity) and 144 million broadband subscribers (58.60% broadband penetration).
Analysing all the above figures (juxtaposed), individuals liable to income tax and eligible to file returns for the tax year 2024 could not have been more than 20 million. However, 120 million unique mobile users [total subscribers as of June 30, 2024, were 193 million] paid 15% advance/adjustable income tax, though return filers as per FBR’s performance report remained at 4.74 million (around 43% showing NIL income!).
According to a Press report, the details of individual income tax filers for tax year 2024 are as follows:
“….272,112 individuals reported taxable income up to Rs. 400,000, while 187,741 filers reported income exceeding Rs. 400,000 but not exceeding Rs. 500,000. Additionally, 484,517 filers reported income exceeding Rs. 500,000 but not exceeding Rs. 600,000, and 514,461 filers reported income exceeding Rs. 600,000 but not exceeding Rs. 700,000……
Similarly, only 308,278 filers reported taxable income between Rs. 700,000 and Rs. 800,000, while 243,538 filers reported income between Rs. 800,000 and Rs. 900,000. Furthermore, 181,131 filers reported income between Rs. 900,000 and Rs.1,000,000. Notably, only 1.3 million filers declared taxable income exceeding Rs.1,000,000 but not exceeding Rs. 5,000,000, highlighting the country’s skewed income distribution and tax base. Only 97,326 filers reported taxable income between Rs. 5 million and Rs. 10 million, while a mere 49,359 filers reported income between Rs. 10 million and Rs. 50 million. A tiny fraction of just 4,370 filers reported income between Rs. 50 million and Rs. 100 million, and a mere 3,651 filers reported income exceeding Rs100 million”.
The remedy to overcome the burgeoning fiscal deficit lies in accelerated higher and sustainable growth to achieve self-reliance and prosperity for all by creating new jobs
Unfortunately, until today, FBR has been claiming big success (sic) in broadening the tax base, but the reality is quite the opposite—it has been adding junk returns in the system—see details in a research study [Zehra Farooq & Muzammal Rasheed].
The FBR has even failed to regain its lost return filers paying tax on near-to-real incomes. There was a time when FBR used to get over four million returns of individuals showing substantial amounts of tax and the tax-to-GDP ratio once reached 13%—the highest in the history of Pakistan!
FBR stalwarts need soul-searching to find out what has gone wrong and where these taxpayers have vanished. Many writers have been giving warnings about the devastating effects of high indirect taxation and the excessive burden of withholding taxes. Yet the government insisted on these even on low-income levels and the result is now before us, there is tax defiance on a mass scale—it is evident from increasing numbers of NIL/loss filers, decreasing number of filers who are paying actual due taxes, and massive tax evasion in withholding tax regime.
As regards Pakistan’s tax potential, the latest study suggests that with low-rate taxes on the broadest possible base, at the federal level is Rs. 30 trillion (15% of GDP including the informal economy), and at the national level Rs. 34 trillion. FBR has failed to collect tax even from 10 million individuals having annual taxable income of Rs. 2 million as retailers. Total income tax collection from them alone at the prevalent income tax rates comes to around Rs. 3000 billion. Income tax collection from all sources can be Rs. 15 trillion provided all exemptions are withdrawn and the entire undocumented economy is brought into the tax net.
Harmonised sales tax (HST) at 10% has a potential of Rs. 12 trillion provided all kinds of taxes on goods and services, presently levied through federal and provincial assemblies, are merged and collected through a single efficient national tax agency or National Tax Council. Customs and federal excise have a potential of Rs. 3 trillion. Provinces can collect Rs. 4 trillion, if agricultural income tax, after amendments in their respective laws, is properly collected.
The existing tax system encourages a parallel economy. Thus, reforming it is nothing but a fallacy. Patchwork here and there would be an exercise in futility—no matter how many tax reform commissions or committees are formed! It is like curing the incurable. Reforming the FBR with an existing incorrigible mindset is just a waste of more national funds.
The remedy to overcome the burgeoning fiscal deficit lies in accelerated higher and sustainable growth to achieve self-reliance and prosperity for all by creating new jobs. To achieve this much-cherished goal, we need to dismantle elitist structures. There is an urgent need to move towards digitisation of the economy (cashless transactions). All this is possible with a paradigm shift in tax policy and dismantling of the existing tax apparatus, and their replacement with a lean and automated federalised national tax agency operated by professionals and supervised by an independent board of governors, answerable to the Senate and an independent National Tax Court, comprising competent judges knowing tax laws and having impeccable integrity.