Pakistan’s Tax Imbalance

The recently revealed data from the Federal Board of Revenue (FBR) has brought to light a concerning disparity in tax contributions within Pakistan. The wealthy elite and retailers evading a staggering 175 billion PKR in taxes is a massive blow to the nation’s economy. Their evasion tactics have shifted the tax burden onto middle- and lower-income groups, exacerbating economic disparities. The tax evasion rate of 35% among the affluent class alone resulted in a significant shortfall of 75 billion PKR in tax revenues. Similarly, entrepreneurs and retailers contributed a mere 89.5 billion PKR in income taxes last year.
The data reveals a shocking disparity in tax contributions between different segments of society. The affluent class pays a mere 1% of their total receipts in income tax, while retailers and wholesalers, constituting nearly 19% of the economy, contribute just 0.4% to the overall income tax collection. Policymakers must act decisively to plug these loopholes and ensure that those who have the means to contribute pay their rightful dues. The GIDC could be one avenue to bridge the fiscal gap, but it should not solely rely on increasing taxes and burdening the low-income group with higher inflation.
A multi-pronged approach is essential for effective revenue diversification. Focusing on sectors with untapped potential can yield substantial gains for the economy. Exporters, retailers, and the real estate market are prime examples of industries that have room for growth and can contribute significantly to state revenue if subjected to a reasonable tax framework. Implementing targeted tax incentives and measures can encourage investment and expansion in these sectors, creating a win-win situation for both the government and businesses.
The government should also explore avenues beyond income taxes. Broadening the tax base to include consumption-based taxes, such as value-added tax (VAT) or goods and services tax (GST), can bolster revenue streams. These consumption-based taxes spread the tax burden more evenly across society, capturing revenue from individuals with higher spending power and unreported income.
Combating tax evasion requires enhanced tax enforcement and transparency. Embracing technology, such as advanced data analytics and a robust track and trace system, can help identify tax evaders and strengthen compliance measures.
The government must also address the issue of undocumented and informal workers. Bringing these segments into the formal economy and taxing them appropriately can significantly boost revenue. Incentives, support, and simplified procedures should be offered to encourage businesses to operate within the formal system.

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