Key Takeaways
- IMF Director Jihad Azour calls for a fairer, broader and more predictable tax system in Pakistan.
- The current tax system disproportionately burdens compliant taxpayers while under-taxed sectors escape scrutiny.
- Tax administration weaknesses, including a narrow tax base and widespread evasion, need to be addressed.
The International Monetary Fund (IMF) has called for Pakistan to reform its tax system, aiming for a fairer, broader and more predictable framework. This recommendation, made during a recent tax reform workshop, highlights the need to address persistent economic challenges, particularly the inequitable distribution of tax burdens.
Jihad Azour, Director of the IMF’s Middle East and Central Asia Department, emphasized the importance of bringing under-taxed sectors into the tax net, rationalizing concessions, and easing the burden on compliant taxpayers. Without such reforms, Pakistan risks undermining its economic stability and the foundations of sustainable, inclusive growth.
Pakistan’s tax system faces three interlinked weaknesses: a narrow tax base, elite capture, and widespread evasion facilitated by an administration vulnerable to corruption and bribery. These issues exacerbate the burden on compliant taxpayers while allowing influential sectors to contribute less than their due.
The salaried class and documented corporate sector have been repeatedly squeezed to meet revenue targets, an approach that is neither equitable nor sustainable. The fundamental problem, according to noted taxation expert and former FBR chairman Shabbar Zaidi, lies in tax administration.
Zaidi argues that the Federal Board of Revenue (FBR) has failed to develop effective means of identifying and tracking economic activity beyond the already documented economy. Tax policy has often compensated for administrative shortcomings by raising rates on those easiest to tax, rather than identifying those who should be paying but do not.
To address these issues, Zaidi proposes emphasizing the potential of Pakistan Revenue Automation Limited (PRAL), a public-sector entity established in 1994. PRAL provides the FBR with tax automation, data management, and IT infrastructure, including the IRIS tax-filing system. Strengthening its operational autonomy and technical capacity could allow technology and data analytics to play a greater role in identifying economic activity and enforcing tax compliance.
Zaidi suggests recognizing that Pakistan already possesses the building blocks for a more intelligent tax system. The computerized national identity card, combined with properly governed data-sharing arrangements linking NADRA, banks, property registries, utilities, corporate records, and provincial revenue authorities, can help establish a clearer picture of economic activity.
Data analytics can identify discrepancies between declared income, asset ownership, property transactions, and business activity, flagging potential taxpayers for verification. Such systems must incorporate due process, data security, and safeguards against arbitrary assessments to ensure technology makes evasion harder without turning compliance into indiscriminate surveillance.
Automation can also reduce opportunities for rent-seeking by limiting discretionary bureaucratic intervention. By leveraging technology and data analytics, Pakistan can move towards a more equitable and sustainable tax system, ensuring that all sectors contribute fairly to the economy.
The fundamental problem lies in tax administration.
Shabbar Zaidi, Noted taxation expert and former FBR chairman
