The Asian Development Bank (ADB) has warned Pakistan that expanding the tax base without raising the compliance level through effective enforcement is unlikely to generate increased revenue. The policy guide issued by ADB indicates that efforts to widen the tax base without focusing on compliance often fail to produce optimal fiscal gains.

 

Instead of boosting revenues, such fiscal policies tend to result in higher administrative costs, as per the policy guide. The ADB’s report highlighted the need for lawmakers to compare the benefits of both improving compliance and increasing the tax base.

 

Reports suggest that Pakistan should focus on increasing compliance with domestic tax laws over expanding the tax net. Data from recent reports suggests that illicit cigarette manufacturing operations alone are causing the national exchequer to lose approximately Rs300 billion to Rs1 trillion. 

 

If the Federal Board of Revenue (FBR) had been successful in getting the tobacco industry to comply with tax laws, the Rs1.08 trillion shortfall in the tax watchdog’s revenue in fiscal year (FY) 2024-25 could have been plugged.

 

The ADB’s report highlighted the need for lawmakers to compare the benefits of both improving compliance and increasing the tax base.

 

According to the policy guide, pursuing an expansion of the tax net should be considered if non-revenue benefits, such as improvements in the availability of economic data and economic formalisation are greater than the incurred administrative costs. 

 

Reports have outlined how domestic revenue from taxation has remained at an abysmal three to four percent of Gross Domestic Product (GDP) for approximately a decade despite a threefold increase in the number of registered filers. 

 

The number of filers has tripled over the 2007 to 2019 period without any notable revenue increases. The reason is that the majority of new filers report either a very low or no taxable income. ADB thus outlines that increasing the number of filers does not translate into a boost in tax revenues.

 

The ADB’s observation holds weight as tax revenues remain stagnant despite Pakistan’s formal economy having grown by approximately 200 percent between 2014 and 2021. Reports have revealed that the ADB believes that Pakistan needs to conduct a “strategic reassessment” of its fiscal policy objectives.