A considerable share of Pakistan's tax revenue is derived from indirect taxes such as GST and excise duties, which are inherently regressive. Although individuals earning less than Rs50,000 are exempt from income tax on paper, the actual amount they pay through various indirect taxes, including sales tax and levies on essentials like petrol, electricity, food, services, and phone bills, likely exceeds 40% of their income. The tangible effects of this tax burden are tenfold greater than a 40% tax on someone earning Rs5 million monthly. This inequity intensifies poverty and inequality, as low-income individuals are compelled to devote a larger portion of their limited earnings to basic needs, taxed at the same rate as luxury items.
Additionally, taxes on fundamental goods and services, such as food, fuel, and electricity, disproportionately impact the poor. In 2023, the official inflation rate soared above 28%, propelled by both external factors and domestic fiscal mismanagement. The rising cost of living, in conjunction with heavy indirect taxation, has drastically diminished the real disposable income of lower-income groups. Government efforts to alleviate poverty through targeted subsidies and cash transfers often fall short, suffer from poor implementation, or are misallocated.
In spite of these challenges, the Federal Board of Revenue (FBR) is set to impose stricter and more punitive measures on small businesses and everyday citizens, particularly those already contributing to the tax system. The recent “reminders” sent to current taxpayers are alarming, to say the least.
Is this taxation system fair and just? Have we secured the approval of over 90% of the population subjected to this involuntary taxation? Should we further increase the tax burden on sectors currently benefiting from exemptions and write-offs? Should non-resident overseas Pakistanis, with no income in Pakistan, be compelled to file tax returns? Have we adequately assessed the under-taxed sectors like agriculture? Why is there no increase in wealth tax and super tax rates? If the answer to these inquiries is "no," then this system can only be viewed as fiscal terrorism against the impoverished citizens of Pakistan.
Recent actions, including threats to suspend mobile services, restrict international travel, and pursue individuals with nil tax returns, are laughable at best and represent fiscal terrorism at worst. Is the FBR aware of how many overseas Pakistanis are submitting nil returns because they do not have any income in Pakistan, yet they are still being targeted? Many were pressured into filing returns in the first place. What does the FBR hope to achieve from this? Why impose additional administrative burdens without any actual revenue increase—except to instill fear?
How does compelling small businesses to pay taxes differ from extortion reminiscent of mafia tactics or “Jagga tax”? If these enterprises are subject to taxation, why doesn’t the FBR adhere to proper procedures, conduct investigations, issue notices, assess liabilities, and then levy taxes? This resembles “tax-tortion.” Nowadays, people feel more secure visiting a police station than an FBR office.
What is the necessity of a large FBR structure when more than 90% of revenue is derived from indirect taxes or withheld at source? What if the FBR were eliminated altogether? Revenue collection might decline, but so would the illicit earnings of some corrupt officials.
Pakistan’s tax framework is heavily reliant on indirect taxes, which are simpler to collect but regressive, imposing an unequal burden on lower-income demographics. Conversely, direct taxes, such as income and corporate taxes, contribute a smaller fraction of total revenue. The formal economy, encompassing large corporations and high-income individuals, contributes minimally to the tax base due to widespread tax evasion, lax enforcement, and numerous loopholes. For example, fewer than 1% of the population files income tax returns, and many businesses underreport profits to evade taxation.
An additional factor exacerbating inefficiency is the heavy dependence on import duties and consumption-based taxes, such as the General Sales Tax (GST). These taxes are straightforward to implement but impact consumers uniformly, regardless of income level. In the fiscal year 2022-23, indirect taxes represented roughly 60% of total tax revenue, with the GST, set at 17%, being a key contributor. The GST inflates the cost of essential goods and services, disproportionately harming the poor. This imbalance between indirect and direct taxation fosters a system that is not only inefficient but also fundamentally unjust.
Pakistan's fiscal and taxation framework is characterized by inefficiency, ineffectiveness, and systemic flaws. The over-reliance on indirect taxes, a narrow tax base, the penalization of compliant taxpayers, and widespread tax evasion have resulted in a regressive tax structure that imposes a significant burden on lower-income groups. The systemic inequity in taxation has escalated to such a degree that it constitutes fiscal terrorism—a gradual and painful decline of socioeconomic hope. May Allah (SWT) have mercy on us.
THE WRITER IS AN INTERNATIONAL ECONOMIST
