Friedrich Ebert Stiftung report highlights tax compliance gaps in Pakistan’s corporate sector

ISLAMABAD: Pakistan has the potential to generate Rs65 billion through Agriculture Income Tax (AIT) by applying tax rates similar to those in other sectors, as highlighted in a report released by the Friedrich Ebert Stiftung on Tuesday.

The estimates presented in the FES report are based on data from 2010. In line with conditions set by the IMF, provincial legislatures are currently working on AIT legislation, with Punjab’s Assembly having already approved it, albeit without specific rates; those rates are expected to be established through related regulations.

Other provinces—Khyber Pakhtunkhwa, Sindh, and Balochistan—will need their assemblies’ approval for their AIT legislation. The report identifies a substantial tax compliance gap of Rs1.2 trillion from the corporate sector, pinpointing five major sectors contributing to this gap: tobacco, tea, real estate, automobiles, and pharmaceuticals.

During a roundtable discussion on Pakistan’s National Tax Policy, chaired by the Chairman of the Senate Standing Committee on Finance and Revenue, Senator Saleem Mandviwalla, it was discussed that both dictatorial and democratically elected governments have inadequately addressed distortions in the tax system.

He noted the irony that salaried individuals pay more taxes than retailers, while the real estate sector, being the largest in the country, fails to contribute adequately. He expressed uncertainty about how much tax rates could be lowered under the current IMF programme, emphasising the need for political will to correct existing tax regime distortions.

Former senator Farhatullah Babar stressed the importance of eliminating all tax exemptions enjoyed by military and civilian elites, arguing that abolishing such exemptions is crucial for achieving equity in the tax system. “These tax exemptions benefit a select few, but it is vital to communicate a strong message that everyone is treated equally and that there are no exceptions,” he remarked.

Kate Lappin, the Asia-Pacific Regional Secretary of Public Services International (PSI), voiced concerns regarding privatization. The discussion on establishing a fair and equitable taxation regime coincides with the G20’s upcoming consideration of imposing a 2% tax on wealthy billionaires. The report also points out corporate tax evasion as a significant issue, with major sectors—such as tobacco, tea, real estate, automobile (tyres and lubricants), and pharmaceuticals—reportedly evading taxes, leading to an estimated loss of nearly Rs310 billion by 2021.

The tobacco industry’s tax evasion has been particularly concerning for experts and analysts in Pakistan. The nation faced a direct tax gap of Rs1,961 billion, primarily driven by the corporate sector, which owed Rs2,833 billion in Corporate Income Tax but only managed to collect Rs1,655 billion, resulting in a tax gap of Rs1,178 billion (41%).

The report asserts, “Taxation in South Asia is primarily regressive and contravenes fundamental principles of tax justice on numerous levels.” In Pakistan, the contribution of Goods and Services Tax (GST) comprises just 3.4% of GDP, while the contribution of Corporate Income Tax, Profits, and Gains hovers around 4.4% of GDP.