By Editorial
Copyright dawn
THE FBR’s admission that the Rs3.6tr sales tax gap — only slightly less than the last fiscal year’s collection of Rs3.9tr — cannot be plugged due to the retail sector’s “fragmentation and informality”, reflects the government’s unwillingness to make politically tough decisions as well as its lack of capacity to enforce tax compliance where it does not exist. Despite decades of promises, successive governments have failed to integrate retail, property, agriculture and other sectors into the tax net, in spite of realising that the gap can only be covered through enforcement. An FBR report indicates that the gap in the retail sector alone stands at nearly Rs310bn. It also highlights the challenges of taxing all economic sectors equitably, which force the FBR to unfairly burden compliant and documented segments. The FBR’s argument that its best bet lies in enforcement at the manufacturing stage — where most collection is done by manufacturers through withholding taxes, which is easier to monitor — supplemented with digital invoicing to track transactions across supply chains also holds little water. The revenue body’s decision to treat cash bank deposits above Rs200,000 as digital transactions, for instance, has undermined the very attempt to discourage cash-based businesses. Without policy consistency and political will, digital interventions will do little more than add another layer of bureaucracy. That is only a convenience, and not a solution. Even in the manufacturing sector, the FBR’s assessment of the sales tax gap of Rs814bn in the textile industry, Rs384bn each in petroleum and food products, Rs326bn in chemicals and fertiliser, Rs200bn in iron and steel, etc, shows that the challenge of tax evasion and theft exists across most sectors, including documented ones.
The FBR boasts of having collected Rs874bn — more than the amount mobilised through new taxes last year — through enforcement, lifting the tax-to-GDP ratio from 8.8pc to above 10pc. In the present budget, it had introduced certain measures to punish tax cheaters and increase compliance. However, those measures appear to have been put in abeyance due to the backlash from powerful business lobbies. Under the IMF programme, Pakistan is committed to raising the tax-to-GDP ratio to 13.7pc by 2027. Meeting that target requires not only technology but also the political will to confront powerful lobbies and resist policy backtracking. Until then, the tax gap will remain more of a political problem rather than an accounting one.
Published in Dawn, September 24th, 2025
