Enhancing Tax Revenue in Pakistan: Issues and

Challenges
Muhammad Aamir Ilyas*
th
*Inland Revenue Service, 28 MCMC (aamir.ilyas@fbr.gov.pk)
Introduction
Economic stability is the major concern for all present-day modern states. Indeed,
economic strength now overshadows political strength as well as military might on the
global political stage. That makes economic security imperative for national security
(Beckley, 2010). It is linked with the government's ability to generate wealth not only
from indigenous resources but also through outside world to sustain its economy. Out
of all such arrangements, what the governments gets in turn is tax in various forms.
Financial administrative pyramid of the state is stemmed with its government's ability
to maximize tax collection. As the governments need funds to invest in development to
eradicate poverty and provide public services to the masses to materialize the very idea
of a welfare state in which the public pays its due share in the form of taxes and the
government rationalize its need-based spending. A good tax system provides these
resources to the government to boost investment and growth to help spin the economic
wheel through cash flows. Moreover, the fair and transparent tax system also helps in
financial inclusiveness through technological advancement, encourages healthy
competition in different sectors by patronizing weak sectors, ensures good
governance, addresses income disparities, uneven wealth accumulation and promotes
social justice to make an egalitarian society wherein potential at individual level
differs but all are provided with equal opportunities. (World Bank, 2011).
Low revenue generation through taxation is amongst the major challenges being faced
by the economy of Pakistan since long. The tax-to-GDP ratio of the country is hovering
around 11 percent (Government of Pakistan, 2018-19)which is the lowest amongst
emerging economies. The developed economies are collecting around 40% of their
GDP in taxes whereas a typical developing economy collects 15% of its GDP in taxes
(Akitoby, 2018). The abysmal performance of revenue collection machinery has
resulted into abnormal increase in fiscal deficit and accumulation of huge
unsustainable public debt. The tax revenue of the country seems unable to provide
fiscal space to the government necessary for provision of healthcare, security and
education to masses besides expenditure on infrastructure and social welfare of
unprivileged stratum of the society.
141
Enhancing Tax Revenue in Pakistan: Issues and Challenges

Figure 1: Tax-to-GDP ratio (FY 2009-2019)

Source: Pakistan Economic Survey (2018-19)

Though, Federal Board of Revenue (FBR) has posted average growth of 14.6% per
annum in revenue collection during last five years yet growth in revenue remained fail
to finance developmental and non-developmental expenditures of the country
throughout this period. The revenue collection has been increased from Rs. 2,254
billion in financial year (FY) 2013-14 to Rs. 3,844 billion in FY 2017-18. During these
five years, average growth in Customs Duty was 21% while Income Tax, Sales Tax &
Federal Excise Duty (FED) grew by 15.7%, 12.2% & 12.1%, respectively .
Table 1: Net Collection and Growth for Last 5 Years (Head-wise)
Net Collection (Rs. billion)
Year
Income Tax Sales Tax FED Customs Total
2013 -14 877.3 996.4 138.1 242.8 2254.5
2014 -15 1033.7 1087.8 162.2 306.2 2590
2015 -16 1217.5 1302.4 188.1 404.6 3112.5
2016 -17 1344.2 1329 197.9 496.8 3367.9
2017 -18 1536.6 1485.3 213.5 608.4 3844

Source: Pakistan Revenue Automation Limited (PRAL) 2019

According to the World Bank (Pakistan Revenue Mobilization Project, 2019) tax
compliance in Pakistan is considerably low which deciphers into huge tax gap of about
50% between actual revenue collected and potential tax revenue. Although, FBR puts
utmost efforts to increase number of tax return filers during last three years and these
efforts culminated into significant increase in tax filers. However, taxpayers who
furnish income tax returns and actually pay tax has not kept up pace with the increase
in number of National Tax Number (NTN) holders.

142
 Pakistan Administration, July 2020

The database of Pakistan Revenue Automation Limited (PRAL) shows that total
number of persons with the tax department was 4.79 million (approximately 2.3% of
country's total population) during FY 2017-18. However, out of these total 4.79
million taxpayers only 1.85 million taxpayers filed tax returns in the FY 2017-18 while
only 1.28 million people pay income tax as highlighted in Table below:
Table 2: Low Compliance – Income Tax
Number of filers
Financial Number of Registered
Number of Return Filers who paid Income
Year Persons
Tax
2015 -16 3,977,984 1,511,178 981,955
2016 -17 4,245,886 1,805,536 1,151,512
2017 -18 4,786,939 1,852,101 1,284,383

Source: Pakistan Revenue Automation Limited (PRAL) 2019

Existence of huge undocumented and informal economy , narrow tax base, structural
flaws in revenue system and tax exemptions etc. actually twists the knife to slash
economic size by lowering tax collection. Such dismal situation may not help
sustaining in the long run hence modernizing tax system of the country is no less than a
challenge to generate more revenue for sustainable development without exacerbating
income disparity and social inequalities.
Moreover, weak tax administrations exist in almost all developing countries and
Pakistan is not an exception. While a well-functioning revenue administration is
crucial to mobilizing internal resources. Like other developing countries, many
sectors in Pakistan are hard-to-tax due to various social, economic and political
reasons. These include agriculture, traders, small retailers and professionals. The
incapability of the tax authorities to tax all sectors of the economy fairly and equitably
leads to tax evasion, non- compliance with fiscal laws, narrow tax base and low tax-to-
GDP ratio.
The government has introduced major changes in fiscal laws through the Finance Act,
2019-20 to broaden the tax base, documenting the economy and increase revenue
collection. These changes include compulsory disclosure of complete details of
unregistered persons in Sales Tax returns by the registered taxpayers, strict restrictions
on cash transactions to purchase properties to document the economy and elimination
of non-productive tax exemptions and concessions. In order to make the tax system
Enhancing Tax Revenue in Pakistan: Issues and Challenges

fair and just, the government is trying to provide level playing field to all taxpayers by
treating them equally. Therefore, most of the businesses such as commercial importers
and steel melters etc. which were falling under the Presumptive Tax Regime (PTR) or
the Fixed Tax Regime (FTR) in the past have been brought into the Normal Tax
Regime (NTR) this year.
Scope
Identification as well as eradication of the reasons responsible for sluggish revenue
mobilization in Pakistan in order to formulate a policy to enhance revenue collection is
the need of the hour for the economic betterment and the public good. Further, it is
important to increase tax collection for reducing fiscal deficit and debt servicing to
provide fiscal sustainability to the government to materialize its development agenda
in socio-economic sphere that may also instrumental in attaining political objectives
reflected in political manifesto as every subsequent regime promises to address such
issues at first. The problem of low revenue collection severely affects all walks of life
and it is one of the most important reasons of poverty and poverty related serious issues
such as terrorism etc. (Maleckova, 2002)
Research objectives
The objectives of this research paper encompass contemporary challenges and issues
in enhancement of revenue collection in Pakistan. Since the topic is too wide to cover
all aspects comprehensively so it is limited to issues and challenges being faced for
enhancement of revenue collection at the federal level but not at provincial level that is
dealt through provincial revenue authorities. Keeping in view the aforementioned
limitation of this vast topic, objective of this research study is to analyze existing tax
system and to find out some pragmatic solutions to enhance tax collection of the
country. Further, the study will answer following research questions:
1. How confidence building measures to promote voluntary compliance and
rationalization of concessionary regime can help in enhancing revenue collection
in Pakistan?
2. What measures should be taken by the Federal government to document the
economy to plug the loopholes for expanding revenue collection?
3. How the government can broaden the tax base of the country to improve its
tax-to-GDP ratio?
 Pakistan Administration, July 2020

Literature Review
Several studies have been carried out internationally to find out the determinants of tax
revenue for developing and developed economies, however, not a single
comprehensive study is available to help determine issues responsible for low tax
revenue in Pakistan (Waseem, 2018).
There are various factors which are responsible in low tax collection in Pakistan. Such
as the share of agriculture sector is large in GDP of Pakistan, however, its meagre
contribution in tax revenues is evident on account of political reasons. This makes the
sector too difficult to get into the tax net at par with its size in the economy (Ahmed &
Mohammad, 2010). The agriculture sector is exempted from federal Income Tax under
the provisions of Constitution of Islamic Republic of Pakistan. The exemption of tax
on income earned on account of agricultural activities creates distortion in tax system
because tax evaders have been laundering their untaxed money by misdeclaration of
its agriculture income. However, recent changes in the Income Tax Ordinance, 2001
and improvement of tax collection and monitoring by provincial revenue authorities. It
has become difficult to understate tax liability in the guise of this constitutional tax
exemption.
It should be primary concern of the revenue authorities of a good tax system to
promote voluntary compliance with tax laws (OECD, 2013).Irrespective of the fact
that tax morale is considered as individual thing, it is responsibility of the government
to take various motivational actions to encourage tax compliance in the country. In
order to formulate strategy to promote voluntary compliance it is important that tax
authorities understand preferences of an individual taxpayer. Morale of a taxpayer
could be assessed through several mechanisms which are mutually exclusive from
each other. The mechanisms are: a) deep-down motivation, which is an extra term in
the utility function that increases in the sum total of taxes that the individual is willing
to pay; b) reciprocity, which means perception of a taxpayer about the fairness of the
tax system and relationship of an individual to the state; c) social influences and peer
effects, in which the additional utility term for paying taxes depends behaviors and
views of peers and other individuals; d) long-run cultural norms and factors also affect
the keenness to pay taxes; and e) probability of detection of evasion of taxes (for
example, taxpayers may perceive that revenue authorities are unable to detect their tax
evasion due to information imperfections) (Torgler, 2011). The study further
Enhancing Tax Revenue in Pakistan: Issues and Challenges

established that there is significant correlation among tax morale and tax compliance
in both developed and developing economies. Therefore, tax morale is crucial
determinant to promote voluntary tax compliance.
Tax concessions and incentives have played significant role in spurring economic
growth and attracting Foreign Direct Investment (FDI). For instance, in Singapore and
Korea, tax incentives and concessions- proposed as part of broader policy to attract
FDI – seem to have promoted rapid industrialization (Vito & Zee , 2000). However, in
most of the cases tax incentives attract little or no new investment. Some studies offer
insight into factors responsible for effectiveness of different tax incentive schemes
(UN, OECD, IMF, World Bank, 2015). For instance, resource seeking FDI (to exploit
and utilize natural resources), strategic asset-seeking (to exploit technology or local
know-how) or market-seeking (to penetrate in local niche markets) shows meager
response to tax concessions. FDI that is efficiency seeking (to get benefit from cost
advantages in production to achieve economies of scale necessary to capture world
market) response positively towards tax exemptions (Gulbert, Harry, & Mutti, 2004).
During mid-1980s and mid-2000, China is an example of successful implementation
of wide range tax incentive polices to promote industrialization in the country. The
country offered tax concessions for special economic zones, significantly reduced
rates of taxes for FDI and tax holidays for strategic industries. The economy of the
country witnessed accelerated inflows of FDI during this period and many
multinationals chose China as a preferred destination for their industries. For instance,
Cheng & Kwan (2000) find that special economic zones in China boosted FDI inflows
between 1985-1995. However, contrary to China, tax incentives are found less
effective in Africa (Parys & Sebastian, 2010).
Moreover, the formal sector of the economy pays taxes while huge undocumented and
informal sector of the country is out of tax net. The undocumented economy fuels on
cash transactions making it impossible for a tax system to trace these transactions.
Therefore, existence of underground economy in the country is an impediment in
enhancing tax revenue in Pakistan (Ashraf & Kemal, 2019). He also suggested that
economy can be documented by increasing in the number of legal documentation,
strengthening the public institutions, improving governance, eliminating the
unnecessary regulations and curbing smuggling through rationalization of tariff to
reduce tax evasion.
 Pakistan Administration, July 2020

The government has been striving hard to document the economy to enhance tax
revenue. The Ministry of Finance & Revenue has launched a program to increase
financial inclusion which will help in the documentation of economy.
The economy of Pakistan has been facing serious challenges for many years such as
inadequate infrastructure, ineffective tax collection system and narrow tax base .
Aamir (2011) studied comparison between Pakistan and India regarding collection of
revenue through direct and indirect taxes. They established that tax system of Pakistan
is more relying on indirect taxes than direct taxes while Indian tax authorities collect
more direct taxes than indirect taxes. The indirect taxes are regressive in their nature;
therefore, they promote inequality and hinder efforts of the government to mobilize
resources. Furthermore, the indirect taxes such as the Sales Tax and Custom duty are
inflationary, therefore, they increase cost of living of poor strata of the country . Failure
of the government to collect Income Tax from rich and affluent class of the society
weakens its writ. Ultimately, a society where the government collect tax from all its
people at a single benchmark irrespective of their income level and tax contributing
capacity becomes more prone to economic collapse due to financial disparities and
social injustices. A sustainable economic system is designed by the individuals living
into it who withstand all its odd as per one another's capacity to perform that's why in
developed countries the rich are more responsible than the poor or the rich protects the
system and the system protects the poor to stabilize the economy with no social divide
between the classes .
The governments of developing countries remain incapacitated to provide their people
with basic amenities and social securities that ultimately add to their miseries.
Therefore, individuals of the country lose trust over the system and start doing things
on their own by not paying tax that, according to them, only fills the government's
pockets instead of addressing public grievances. Stashing money and tax evasion fulfil
their social needs first ignites burgeoning informal economy that has no role in
national economy despite its presence in the geographical and well as legal boundaries
of the country. The governments of developing economies are responsible for this
ignominy due to their inefficiency and lack of resolve to address the basic issues that
add up to be indicated on national economic chart.
The objective of this literature review is to understand the concept and importance of
tax structure and its collection at national level. This research study shed some light on
Enhancing Tax Revenue in Pakistan: Issues and Challenges

the corrective measures and workable suggestions for increasing tax revenue by
promoting voluntary compliance and broadening the tax base in order to spin the
economic wheel towards national development.
Research Methodology
Both quantitative and qualitative methods have been used in this study to comprehend
a research problem necessary to answer stated research questions.
Pakistan Economic Surveys, numerical data given in different International Monetary
Fund (IMF), World Bank, Organization of Economic Cooperation and Development
(OECD) reports, Yearbooks of FBR, publications of Pakistan Bureau of Statistics
(PBS) and the State Bank of Pakistan (SBP) will be analyzed during course of this
research. Moreover, relevant provisions and schedules to the Income Tax Ordinance,
2001, The Sales Tax Act, 1990, The Federal Excise Act, 2005 and The Customs Act,
1969 will also be scrutinized. The qualitative research method will be used to
formulate recommendations for enhancing tax revenue through confidence building
measures necessary to promote voluntary compliance, analysis of tax exemptions and
concessions to devise an actionable strategy to rationalize these exemptions to make
the tax system fair and investment friendly. The data has also been analyzed to evaluate
risk-based audit framework which is in place in FBR to minimize tax evasion and
avoidance and to create deterrence of tax authorities vital to make the Universal Self-
Assessment Scheme (USAS) effective and to provide recommendations for
documentation of the economy and broadening of the tax base.
The qualitative analysis of different public documents such as IMF Executive Board's
approval of US$6 billion 39-months extended Fund Facility Arrangement for
Pakistan, FBR strategy papers 2017-18 and 2018-19 has also been carried out as a part
of qualitative research methodology. Therefore, both quantitative and qualitative data
analysis is done to draw meaningful conclusion during course of this research study.
The subject research has been done by collecting and analyzing a sizeable data of
secondary sources of primary and secondary data. Dearth of time, lack of physical and
financial resources restrained to go for further collection of primary data or to conduct
direct interviews in the concerned quarters. Moreover, latest data in all respects is
normally not available as the major certified reports having high credentials related to
the veracity of data are issued annually, bi-annually or quarterly. However, figures turn
out monthly or even weekly in the media reports that may be conflicting or debatable.
 Pakistan Administration, July 2020

Despite all this, efforts have been made to ensure maximum representation of facts and
figures to reach a logical and justified conclusion.
Findings and Discussion
Confidence Building Measures
The business community of the country often complains about power abuse or misuse
of authority by the revenue department is creating trust deficit among taxpayers. In
response, FBR is putting utmost efforts to bridge the trust gap which exists between
taxpayers and business community.
Tax amnesty schemes
The government introduced two consecutive tax amnesty schemes within a year with
the objective to build trust of citizens on tax system of the country. The Foreign Assets
(Declaration & Repatriation) Ordinance, 2018, the Voluntary Declaration of Domestic
Assets Ordinance, 2018 and the Assets Declaration (Amendment) Ordinance, 2019
played a vital role in bringing potential taxpayers into tax net. A large number of
resident and non-resident Pakistani individuals, Association of Persons (AOPs) and
companies availed these tax amnesty schemes and declared their undisclosed
incomes, un-declared and under declared expenditures, local and foreign asset such as
cash, prize bonds, precious metals, vehicles and residential and commercial properties
etc. to the tax revenue authorities. The philosophy behinds the amnesty schemes was
to encourage business community to participate in the legal and documented sector of
the economy. The persons who furnished declarations at nominal amount of tax have
become tax filers and these schemes would help FBR in enhancing revenue in future.
Bar on conducting raids
Section 38 of the Sales Act, 1990 empowers the Inland Revenue department of FBR to
conduct raids on business or manufacturing premises of a taxpayer to inspect and
impound documents, records, statements and accounts, bank statements, utility bills,
information regarding sources and nature of funds and business assets to ascertain the
declared facts about business transactions and its volume. However, raid under section
38 of the Sales Tax Act can only be conducted after seeking prior approval from the
Magistrate. The Sales Tax law also provides vast powers to the tax authorities to arrest
and prosecute tax fraudsters involved in tax fraud which is cognizable offence under
the law.
Enhancing Tax Revenue in Pakistan: Issues and Challenges

Moreover, section 175 of the Income Tax Ordinance allows tax department to enter
and search premises of a taxpayer without obtaining search warrant from the
Magistrate. The field formations of FBR exercise powers of section 38 of the Sales Tax
Act, 1990 and section 175 of the Income Tax Ordinance, 2001 to plug revenue
leakages. However, the business community agitates against raids and usually
complains that FBR arbitrarily exercises this power which damages reputation of their
businesses.
FBR has recently placed restrictions on conducting of raids to improve confidence of
taxpayers on the tax system. These restrictions will boost morale of the honest
taxpayers, however, at the same time cost of doing tax evasion has also been reduced
which will be counterproductive for the optimal collection of revenue.
Change in procedure of attaching business banks accounts
The fiscal laws of the country facilitate tax department in recovering of outstanding tax
arrears by empowering them with the authority to attach bank accounts of tax
defaulters. Section 140 and Section 40 of the Income Tax Ordinance, 2001 and the
Sales Tax Act, 1990, respectively allow FBR to recover tax from bank accounts of a
person who remains fail to discharge his tax liability within specified period of time
under the law.
However, the incumbent Chairman FBR has devised and circulated a lengthy
procedure which is required to be followed by the department before taking stern
actions against tax defaulters. Now, prior approval of the Chairman FBR followed by
the intimation to the tax defaulter by the Commissioner is prerequisite to attach any
bank account of the taxpayer. The philosophy behind this procedure is to build
confidence of the taxpayer, however, this process has made recovery of tax arrears
cumbersome for the Inland Revenue department of FBR.
FBR-NADRA database link
FBR has linked its database with the database of National Database and Registration
Authority (NADRA) to promote and ensure taxpayer friendly environment. It has
enabled taxpayers to check their personal information such as details of assets,
transactions and records available with FBR from e-Sahulat centers of NADRA. This
facility also exists on the official website of FBR.
 Pakistan Administration, July 2020

Having access to this information will enable the taxpayers to preemptively prepare to
explain their position before tax authorities, without waiting to receive the
departmental notice. It would help build confidence of the taxpayers resulting into
increase in tax revenue.
Ease of doing business
The significant changes have been made in the Sales Tax Act, 1990 through the
Finance Act, 2019-20 to gear up efforts on “Ease of Doing Business”. For instance,
simplified Sales Tax registration process has been reduced which would eliminate
contact between the taxpayers and tax collectors. Similarly, restriction on purchase of
vehicle and property by the non-filer has also been withdrawn which is another
confidence's building measure.
FBR has also introduced a mobile app to facilitate taxpayers in filing of returns of
income under the Income Tax Ordinance, 2001.
All the above-mentioned measures point towards the clear direction that FBR is
taking, i.e. making the tax machinery more friendly and trustworthy for the individual
taxpayer to enhance tax revenue to improve tax-to-GDP ratio of the country.
Tax exemptions and concessions
The purpose of tax exemptions and concessions is to support local industry by
lowering the value of their inputs and machinery and incentivize export-oriented
business through duty and tax remission. Therefore, The Federal Government has
given different tax incentives to export oriented sectors to promote growth and to build
up foreign reserves by attracting new investments in manufacturing sector. The
government has also given tax holidays to Independent Power Producers (IPPs) to
encounter a major issue of power crisis and to attract FDI in this sector.
Tax exemptions in Income Tax
In 2010, the government made a change in the Income Tax Ordinance, 2001 and
announced a ten years tax break to all new investments. These concerns are allowed to
claim 100 percent tax credit till end of year 2019. This tax break attracted huge
investment in manufacturing, agriculture and mining sectors.
The government also announced hundred percent income tax exemption to power
producers to combat a major issue of electricity crisis. Same incentive is also given to
Information Technology sector to promote investment and to generate employment
for qualified youth.
Enhancing Tax Revenue in Pakistan: Issues and Challenges

Tax expenditure in respect of direct taxes during FY 2018-19 has been reflected in
Table 3 below:
Table 3: Tax Expenditure of Direct Taxes during FY 2018-19
Cost (Rs
# Description
billion)
1 Tax credit for charitable donations u/s 61 2.448
2 Tax credits u/s 64A 1.191
3 Tax credit u/s 64AB deductible allowance on education expenses 0.067
4 Tax credit for employment generation by manufacturers u/s 64B 0.0096
Tax credit for investment in balancing, modernization and replacement of
5 90.954
plant & machinery u/s 65B
6 Tax credit for enlistment u/s 65C 0.356
7 Tax credit for newly established industrial undertakings u/s 65D 5.487
Tax credit for industrial undertakings established before the first day of
8 6.458
July 2011 u/s 65E
9 Tax credit u/s 100C 13.977
10 Tax credit for investment in shares and insurance u/62 2.055
Tax loss due to exempt business income claimed by IPPs under clause
11 18.034
(132) of Part I of the Second Schedule
Tax loss due to exemption to export of IT services under clause (133) of
12 0.608
Part I of Second Schedule.
Grand Total 141.645

Source: Pakistan Economic Survey (2018-19)

The table 3 shows that the government sustained loss of tax revenue on account of tax
exemptions of Rs. 141.645 billion in the year 2018-19. The tax exemptions provided to
IPPs and newly established industrial undertakings caused loss of Rs. 18.034 billion
and Rs. 5.487 billion, respectively to the national exchequer. Likewise, in the year
2018-19, the government forewent Rs. 13.977 billion revenue by giving 100% credit
to NPOs and NOGs under section 100C of the Income Tax Ordinance, 2001.
Tax exemption in Customs Duty
The government of Pakistan slashed custom duties on import of raw materials to
reduce cost of manufacturing to encourage investment in the country. The Prime
Minister of Pakistan.
 Pakistan Administration, July 2020

Table 4: Tax Expenditure of Customs duty during FY 2018-19

S.# Description Cost (Rs Million)

Concession of customs duty on goods imported from SAARC and ECO

1 348.8
countries

2 Exemption from customs duty on import into Pakistan from China 2.5

Exemption from customs duty on import into Pakistan from Iran under
3 0
Pak-Iran PTA.
Exemption from customs duty on imports into Pakistan from under
4 1,614.80
SAFTA Agreement

5 Exemption from customs duty on import into Pakistan from China 31,620.70

6 Exemption from customs duty on goods imported from Mauritius 6

7 Exemption from customs duty on import into Pakistan from Malaysia 3,162.70
Exemption from customs duty on import into Pakistan from Indonesia
8 3,950
under Pak-Indonesia PTA.
9 Exemption from customs duty on imports from Srilanka 2,401.60
Conditional exemption of customs duty on import of raw materials and
10 4,755.10
components etc. for manufacture of certain goods (Survey based)
Exemption of customs duty and sales tax to Exploration and Production
11 5,725.70
(E&P) companies on import of machinery equipment & vehicles etc.

12 Exemption from customs duty for vendors of Automotive Sector 26,604.40

13 Exemption from customs duty for OEMs of Automotive Sector 38,818.80

14 Exemption from Customs Duty on Cotton 2,275.90

15 Exemption from Customs Duty for CPEC 1,009.20
16 Exemption from Customs Duty for Lahore Orange Line Metro Train 749.1
17 Exemptions [Special Classification Provisions] 10,530.80
18 Exemptions/ concessions 99,558
Grand Total 233,134

Source: Pakistan Economic Survey (2018-19)

The table shows that the government has granted exemptions of customs duty of Rs.
233.134 billion on import of various goods during the year 2018-19.
Tax exemption in Sales Tax
Sales Tax exemptions and concessions under the Sales Tax Act, 1990 has caused loss
of Rs. 597.7 billion during last financial year. However, the government has
withdrawn exemption on local supplies of five zero rated sector through recent
Finance Act.
Enhancing Tax Revenue in Pakistan: Issues and Challenges

Tax expenditure in respect of Sales Tax during FY 2018-19 has been reflected in Table
5 below:
Table 5: Tax Expenditure of Sales Tax during FY 2018-19

S# Description
C o s t ( R s

billion)
1 SRO 1125(1)/2011, dated 31.12.2011 (leather, textile, carpets, surgical) 86.7
2 Import under 5th Schedule 0.59
3 Local supply under 5th Schedule 53.5
4 Imports under 6th Schedule. 53.7
5 Local supply under 6th Schedule 247.3
6 Imports under 8th Schedule 62.7
7 Local supply under 8th Schedule 93.3
Grand Total 597.7

Source: Pakistan Economic Survey (2018-19)

The table 5 shows that the government sacrificed Rs. 597.7 billion last year on account
of Sales Tax exemptions. Exemptions on the local supplies of 6th schedule items and
five zero rated sectors caused loss to the national exchequer of Rs. 247.3 billion and Rs.
86.7 billion, respectively.
Negative impact of Tax exemptions on the tax system
Tax exemptions and concessions allowed certain positive economic activities under
different concessionary regimes have resulted in loss of considerable revenue in the
past. Exemptions and concessions allowed under different concessionary Statutory
Regulatory Orders (SROs) of Customs, Sales Tax, Federal Excise Duty and Income
Tax laws have caused distortions in the economy and ended up creating a complex
tariff regime leading to widespread exercise of discretionary powers. Moreover, no
mechanism in place to monitor efficiency of tax exemptions, therefore, tax fraudsters
can easily misuse these concessions.
Broadening of the Tax Base
FBR has been focusing on broadening of the tax base for last many years because there
are very low numbers of tax filers in the country and most of potential taxpayers are
keeping themselves out of tax net. The tax system of the country could not attract
people to file their tax returns in spite of the fact that the government introduced
Universal Self-Assessment Scheme (USAS) in the Income Tax Ordinance, 2001.
 Pakistan Administration, July 2020

According to the press statement of the chairman FBR, 2.51 million returns were filed
for the year 2018 which are 67% more returns compared to the preceding year .
However, huge room still exists to broaden the tax base to enhance collection of
revenues and to improve tax-to-GDP ratio.
Establishment of dedicated BTB zones
During 2017, an extensive BTB initiative was propelled by FBR to address this core
issue and respond to all challenges ahead. The Directorate General Broadening of Tax
Base (BTB) headed by a BS 21 officer of Inland Revenue Service (IRS) was
established under section 230D of Income Tax Ordinance, 2001. Subsequently, three
dedicated BTB Zones were put into operation at Lahore, Karachi and Islamabad
during the 1st phase of BTB restructuring plan . However, dedicated BTB zones don't
exist in other major cities such as Peshawar, Faisalabad, Rawalpindi, Gujranwala,
Multan, Hyderabad and Sialkot.
In 2015, the government introduced different tax rates for filers and non-filers of tax
returns in the Income Tax Ordinance, 2001. FBR started generating Active Taxpayers'
List (ATL) consists of taxpayers who had filed tax returns for last two consecutive
years. According to the Income Tax Ordinance, rates of withholding tax of the active
taxpayers were less than non-filers of tax returns. For example, adjustable tax under
section 236K of the Income Tax Ordinance, 2001 on purchase of plot or constructed
building was 2% of value of the property for active taxpayers while it was 4% for
inactive taxpayers. This increase in the tax cost of non-filers resulted into broadening
of the tax base.
The Finance Act 2018-19 placed restrictions on inactive taxpayers on purchase of
vehicles and properties of worth Rs. 4 million or above. The change in law had
impacted negatively on auto and real estate, however, it helped FBR to broaden the tax
base of country. This restriction on purchase of vehicle and property has been
withdrawn by the government through the Finance Act, 2019-20.
As discussed above, the law i.e. the Income Tax Ordinance, 2001 is supporting tax
authorities in broadening of the tax base because it has raised tax cost of non-compliant
persons. At the same time, it has reduced tax cost of compliant filers of tax returns.
However, it is imperative that administrative steps should also be taken to increase
number of tax filers to enhance revenue. The broad tax base will also reduce tax burden
of compliant taxpayers and documented sector of the economy.
Enhancing Tax Revenue in Pakistan: Issues and Challenges

Salient Features of Recent BTB Initiatives

The salient features of recent BTB initiatives can be summarized as follows:
· BTB Zones at Islamabad, Lahore and Karachi have become operational and
they are conducting field visits for identification of high net worth individuals who are
unregistered, plazas' mapping, survey of commercial markets in recently developed
areas, mapping of major commercial and residential projects and exhaustive surfing of
real estate portals like zameen.com.
· BTB Zones have developed close liaison with National Database &
Registration Authority (NADRA) for identification of unregistered potential
taxpayers
· FBR has obtained data from Electricity Distribution Companies (DISCOs) for
identification of those manufacturers who have industrial meters and liable to file tax
returns under the Income Tax Ordinance, 2001 and the Sales Tax Act, 1990 but they are
not registered with the tax department.
Challenges in broadening of the tax base
Commercial banks play central low in commercial activities. Therefore, the Income
Tax Ordinance, 2001 obligates banks to share information of their account holders
with the tax department. However, banks are reluctant to provide this information due
to various reasons. Moreover, a robust tax culture is not being promoted and it is quite
unfortunate that tax evasion and nonpayment of due taxes is quite acceptable in our
society. The mindset to consider tax cheating as norm is a major challenge in the
broadening of the tax base.
Conclusion
Economic situation of the country is mainly due to the issue of low tax-to-GDP ratio
amongst other significant challenges responsible for economic meltdown.
Sustainable economic growth can be achieved by enhancing tax revenue to finance
socio-economic development across the country.
The tax system of Pakistan is facing multifarious issues and challenges which are
impeding desired growth in tax revenue. Low number of income tax returns filer
speaks volume about trust deficit of general public into tax system of the country.
Therefore, this research study discussed ways to build confidence of the taxpayers to
enhance tax revenue.
 Pakistan Administration, July 2020

The government introduced tax amnesty schemes and simplified tax registration
process to build trust of individuals, AOPs and companies. Similarly, FBR is toeing the
line of taking a few confidence building measures such as restriction on conducting
raids and searches, approval of the Chairman FBR prior to attaching bank accounts of
tax defaulters to recover outstanding tax and developed link with the database of
NADRA etc. Significant rise in number of tax filers in the year 2018-19 is self-evident
of encouraging public response towards these confidence building measures.
However, the government should go an extra mile to facilitate taxpayers to achieve
intended objective of increase in tax revenue.
As discussed in this research study that unnecessary tax exemptions and concessions
create distortions in the economic system as these exemptions are prone to be misused
by different interest groups when no effective monitoring and evaluation mechanism is
in place. For instance, the government has given tax holidays to newly established
industrial concerns. However, this incentive is being widely misused by the
manufacturing sector as they are availing themselves by splitting up their already
established industrial units. Resultantly, country is sustaining huge revenue losses due
to these tax incentives.
This study suggests transforming of the tax culture, both within the government bodies
as well as the general public's attitude, by incorporating workable provisions into the
existing tax laws and encouraging people to understand win-win approach to yield
benefits. Although, the government has taken some drastic legal and administrative
measures to bring businesses into tax net which include raising tax cost of non-filers
and establishment of dedicated BTB zones, yet FBR should also develop linkages with
commercial banks for real time exchange of information. To conclude, onus of running
a successful and growing economic system does not lie on the government unilaterally
to accomplish this cumbrous task of enhancing tax revenue but a collective
responsibility of the society as well by promoting voluntary tax payment culture. So,
understanding challenges and compulsions at both ends would be a welcome
development to materialize the dream of socio-economic well-being of the society
having a competitive global economy.
Policy Recommendations
This research study suggests following policy recommendations to enhance tax
revenue in Pakistan:
Enhancing Tax Revenue in Pakistan: Issues and Challenges

· The complete ban on field formations of FBR on conducting raids and

searches under the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001 has been
widely appreciated by the business community, however, it reduced cost of tax
evasion. Likewise, this confidence building measure (CBM) may be misused by tax
fraudsters in their own favor to cause loss to the national exchequer. So, instead of
making enforcement provisions of fiscal laws redundant, Standard Operating
Procedure (SOP) to regulate raids and searches should be developed to protect rights
of honest taxpayers to boost their confidence but not at the cost of state exchequer to be
plundered through such CBMs.
· Under the USAS regime, it is a responsibility of the taxpayers to discharge
their tax liability truly and honestly. In order to enhance tax revenue, the database of
FBR should be linked with third parties' IT systems such as database of commercial
banks, Federal Investigation Agency to obtain information related to travel details of
passengers, housing authorities, developers, builders, architects and departmental
stores selling luxury goods to assess true tax and broadening of the tax base.
· Moreover, in the absence of monitoring and evaluation system, it is
impossible to evaluate a tax exemption or concession to determine whether it is
achieving its objectives or not. For instance, subject to few conditions, the government
is allowing hundred percent tax credit to newly established manufacturing units to
attract investment and to create employment opportunities in the economy. However, a
comprehensive and well-defined monitoring and evaluation system should be
developed to assess, whether this exemption is achieving its objectives by attracting
investment or it is causing revenue loss by encouraging existing taxpayers to shift their
profits from their taxable manufacturing units to exempt units to reduce their tax bill.
Therefore, periodic reviews of tax incentives are necessary to determine whether these
incentives are achieving intended goals or otherwise.
· The real estate sector is widely considered a parking ground of ill-gotten
money in Pakistan. However, data available on online property portals such as
zameen.com, graana.com and olx.com should be used for broadening of the tax base.
The Director General, BTB should allocate dedicated human and physical resources to
obtain, scrutinize and synthesize information exist on property portals to enhance tax
revenue.
 Pakistan Administration, July 2020

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