Tax base expands in Pakistan, but collection remains low

ISLAMABAD: Pakistan’s registered taxpayers have reached an all-time high of nearly 10 million, according to a recent report by the World Bank. However, a meager 4.4 million of these taxpayers filed annual tax returns, with only one-fourth of them actually paying any taxes in the past fiscal year.

The report, titled “Implementation Status and Results,” which pertains to the $400 million Pakistan Raises Revenue project, sheds light on the persistent weaknesses in Pakistan’s tax enforcement system. This system often compensates for its inefficiency by imposing more tax burdens on already financially strained individuals and businesses.

As of June 2023, the total number of registered income taxpayers stood at 9.865 million, with 4.434 million classified as active income taxpayers or “compliant taxpayers.” This indicates that there were an additional 5.43 million individuals and companies registered with the Federal Board of Revenue (FBR) who failed to file annual tax statements. This figure suggests that the FBR was unable to track 55 percent of registered taxpayers.

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Out of those who did submit their tax returns, only 2.32 million actually paid taxes. This means that only 24 percent of registered taxpayers fulfilled their tax obligations in the last fiscal year.

In FY2022, nearly 8 million individuals were registered with the FBR, of which only 3 million filed their returns by June 2022. To address the poor enforcement of tax regulations, the FBR extended the deadline for filing annual income tax returns from the original date of September 30 to October 31, 2023, as less than 2 million taxpayers had submitted their returns by the statutory deadline. This means that only 18 percent of the current 10.5 million registered taxpayers had filed returns by the deadline.

According to the law, any individual earning income above a specific threshold or having assets in their name is required to submit annual income and wealth statements.

The findings of the four-year World Bank-funded program underscore the need for Pakistan to exhibit strong political will, employ efficient tax collection methods, and implement existing tax laws effectively in order to collect taxes owed by both individuals and companies.

Despite ongoing efforts by the interim government to enhance the tax base through the promulgation of a presidential ordinance, it appears that the core issue lies in enforcement, rather than data sharing. The tax authorities are also projected to miss key targets under the $400 million project and fail to increase tax revenues to 17 percent of the country’s GDP.

The report highlights that as of June 2023, the total tax-to-GDP ratio was a mere 9 percent, representing a significant decline compared to June 2018 when it stood at 13 percent. This ratio has further decreased compared to the previous fiscal year.

If Pakistan were to achieve the 17 percent tax-to-GDP ratio, it would have collected approximately Rs15 trillion in taxes. However, this year’s tax target is set at Rs9.41 trillion, which accounts for just 9 percent of the GDP. The low tax collection rate implies increased borrowing by the federal government.