Tax reform has been a pressing issue for many countries striving to enhance their economic stability and growth. The case of Pakistan serves as a poignant example of the challenges and opportunities in reforming tax systems to achieve fiscal sustainability and economic development. The journey from establishing the Central Board of Revenue in 1924 in the subcontinent to the contemporary efforts in expanding the tax net and curbing tax evasion encapsulates a long history of administrative, legal, and policy-oriented changes to improve tax collection and administration.

The inception of the Central Board of Revenue marked the beginning of a structured approach to tax collection in the subcontinent. This system, designed during the colonial era, laid the foundation for government revenue collection. Post-independence, Pakistan inherited this system and continued its operation, adapting it over the years to meet the country’s changing economic and administrative needs.

The continuity of this system underscores the enduring significance of established revenue collection mechanisms, which have been incrementally reformed to address contemporary challenges.

A notable aspect of Pakistan’s tax system is the disproportionate burden borne by the salaried class. According to a report, during the first half of the current financial year, the salaried class paid 243% more tax than exporters. This statistic illuminates a critical issue in the tax structure, where direct taxes, particularly income tax from the salaried class, constitute a significant portion of the tax revenue, overshadowing contributions from other sectors. Such a disparity raises concerns about equity and fairness in the tax system and highlights the potential for expanding the tax base to include other sectors more effectively.

The World Bank’s report indicating Pakistan’s low ranking in the overall tax payment among Asia Pacific countries underscores the inefficiencies and challenges within the tax system. With indirect taxes comprising about 70% of the tax revenue and direct taxes only about 30%, the tax structure heavily relies on taxes that are often considered regressive, burdening the lower and middle-income segments more than the wealthy.

This imbalance indicates the need for a more equitable tax system to distribute the tax burden fairly across different income groups and sectors.

One of the critical challenges in Pakistan’s tax system is avoiding tax payments by exploiting complicated procedures. This issue, coupled with low tax collection rates, has led to the accumulation of trillions of rupees of foreign debt, putting significant pressure on the country’s economy. The complicated nature of tax procedures and the lack of a broad tax base have historically hindered the effective collection of taxes, necessitating comprehensive reforms to simplify tax codes, enhance transparency, and broaden the tax base.

In response to these challenges, Pakistan has undertaken several reforms and initiatives to revitalize its tax system. Efforts by the military and political leadership to expand the tax net, curb corruption and tax evasion, and collect taxes more efficiently from retailers represent a concerted push toward fiscal sustainability. The introduction of automated transmission systems, the restructuring of the Federal Board of Revenue (FBR), and the launch of the Dost mobile app are steps designed to modernize the tax collection process, making it more efficient and less prone to evasion. The Special Investment Facilitation Council’s (SIFC) approval to increase the tax-to-GDP ratio to 18 percent by 2029 from the current low of 8.5% is an ambitious goal that reflects the government’s commitment to enhancing fiscal capacity.

Identifying new taxpayers through an automated system is a pivotal strategy in broadening the tax base and ensuring a more equitable distribution of the tax burden.

Improving tax collection rates and reforming the tax system is crucial for providing the country with the financial resources needed for economic recovery, debt repayment, and the implementation of development projects. An equitable and efficient tax system can serve as the backbone of a sustainable economy, fostering growth, and reducing reliance on foreign debt.

Continued efforts in policy reform, administrative restructuring, and technological integration are essential to achieve these goals. Simplifying tax procedures, enhancing transparency, and fostering a culture of compliance are critical to increasing tax collection and ensuring a fair tax system. Moreover, engaging with stakeholders, including businesses, taxpayers, and international organizations, can provide valuable insights and support for implementing effective tax reforms.

In conclusion, tax reform in Pakistan, rooted in the historical context of the Central Board of Revenue and navigating through contemporary challenges, embodies a complex yet vital endeavor for economic stability and growth. The journey towards a more equitable, efficient, and broad-based tax system requires sustained commitment, innovative strategies, and an inclusive approach that considers the needs and contributions of all segments of society. With the right reforms and initiatives, Pakistan can enhance its fiscal capacity, reduce economic disparities, and pave the way for sustainable development and prosperity.