Journal of Public Policy Practitioners (JPPP)

Volume 2 Issue 2, Fall 2023

ISSN (P): 2959-2194 , ISSN (E) : 2959-2208
Homepage: https://journals.umt.edu.pk/index.php/jppp

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Broadening of Tax Base: Policy Challenges and the Way

Title:
Forward
Author (s): Attiya Ammar

Affiliation(s): National Institute of Management, Lahore, Pakistan

DOI: https://doi.org/10.32350/jppp.22.05
History: Received: August 31, 2023, Revised: November 29, 2023, Accepted: December 23, 2023,
Published: December 29, 2023
Ammar, A. (2023). Broadening of tax base: Policy challenges and the way forward.
Citation: Journal of Public Policy Practitioners, 2(2), 101–
115. https://doi.org/10.32350/jppp.22.05
Copyright: © The Authors
Licensing: This article is open access and is distributed under the terms
of Creative Commons Attribution 4.0 International License
Conflict of
Interest: Author(s) declared no conflict of interest

A publication of
School of Governance and Society
University of Management and Technology, Lahore, Pakistan
 Broadening of Tax Base: Policy Challenges and the Way Forward
Attiya Ammar *
National Institute of Management, Lahore, Pakistan
Abstract
The developmental process in Pakistan has been hindered due to the large
informal economy and insufficient tax compliance. Successive
governments have failed to change the mindset due to flawed policies,
administrative constraints, and rambling corruption. The gap in tax revenue
is due to tax evasion and avoidance practices. The economy is constrained
by individuals who fiddle with policies that affect both the society and the
state. The core issues have been delineated along with the potential results.
Qualitative research method has been employed to analyze the performance,
challenges, and prospects of broadening the tax base. The findings of the
study portray that although the implementation of tax policy aimed to
broaden the tax base has improved considerably, however, simplifying tax
codes and making them clearer can improve compliance, reduce errors, and
make the system fairer. This can be achieved by minimizing exemptions,
deductions, and loopholes. This policy could prove beneficial for
stakeholders, particularly the policymakers, to formulate the future tax
policy and strategies in order to obtain maximum tax revenue.
Keywords: Informal economy, policy making, tax base, tax revenue
Introduction
Tax revenue functions as a catalyst for a country's economic growth.
Comparing Pakistan to other developing and regional economies, the
country's tax-to-GDP ratio remains relatively low. Experts estimate that
Pakistan's population and economy require a sustainable growth rate of at
least 8% to support around 2.5 million jobs every year, based on research
by the International Monetary Fund (Cevik, 2016).
Pakistan's federal tax system encompasses various taxes, such as income
tax, sales tax, customs duties, and other levies. A substantial portion of
economic activities in Pakistan remains informal, resulting in many
individuals and businesses operating outside the tax net. Tax evasion and
avoidance are prevalent issues, with some taxpayers deliberately

*
Corresponding Author: [email protected]
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underreporting income, engaging in fraudulent practices, or exploiting

loopholes in the tax system to reduce their tax liabilities. Weak compliance
and low documentation of the economy provide a safe passage to millions
of potential taxpayers to stay out of the tax net. Owing to the low tax-to-
GDP ratio, Pakistan heavily relies on aid from foreign resources like the
World Bank (WB), International Monetary Fund (IMF), and International
Donor Agencies (IDA) to meet its financial needs. Improvements are
necessary in Pakistan’s tax policy to address the evolving demands of the
contemporary world and to promote public services and growth. Pakistan's
tax system is complicated, has a limited scope, and has inefficient
administrative procedures. The government's continued dependence on
borrowing from external and domestic sources reflects a lack of public trust
and unscrupulous activities. To boost economic activity, the government
has introduced amnesty programs for asset declaration, tax breaks for the
building sector, and whistleblower awards programs (Amjad, 2021).
Pakistan ranked 161st among 190 economies for “paying tax” indicator
in the 2020 Doing Business Report. The low performance for this indicator
is attributable to the complex tax structure and high tax compliance costs
(Khalid, 2020).
Expanding the tax base in Pakistan is a critical challenge that requires
immediate attention and effective policy-driven solutions. The population
of Pakistan is approximately 238.1 million, out of which 2,472,609
individuals filed their tax returns in 2020, which shows that there is an
urgent need to bring more people into the tax net. In a recent tax gap study
conducted by FBR, the careful annual potential tax gap in Pakistan amounts
to approximately Rs1,289 billion, leading to significant revenue shortfalls.
These shortfalls hinder the government's ability to fund essential public
services, promote economic development, and address socio-economic
disparities. The primary reason for the FBR’s failure to expand the tax base
in the country lies in the weak political will of the Government and its non-
responsive policies. This policy paper shall examine a proposed scheme for
the Broadening of the Tax Base (BTB).
The challenges of tax collection are not new, as historical examples like
the Romans hiding gold to evade luxury taxes or homeowners hiding
fireplaces to avoid hearth taxes illustrate (Oates & Schwab, 2015). Tax
collection remains a challenging task in any society, as there will always be
individuals in society who attempt to evade taxes. Pakistan's economic
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conditions have long been challenging, and tax funding is crucial for
running huge government machinery and providing public services.
Statement of Problem
The broadening of the tax base in Pakistan poses a significant challenge
that hampers the country's economic development and fiscal stability.
Despite having a population of 238.1 million, only a fraction of individuals
and businesses are part of the formal tax system i.e. less than 1% of the
population of the country submits their annual tax returns. The low tax
compliance, characterized by widespread tax evasion and avoidance, leads
to substantial revenue shortfalls, hindering the government's ability to fund
essential public services and address socio-economic disparities. The
government’s non-responsive policies and practices further impede efforts
to expand the tax base. Pakistan’s complex tax system and lack of trust in
government services contribute to the persistently narrow tax base.
Resolving these issues is crucial to ensuring sustainable revenue generation
and promoting economic growth in Pakistan.
Research Questions
What factors contribute to the persistent challenge of a narrow tax base
in Pakistan?
How can policymakers address those issues to effectively broaden the
tax base and promote sustainable revenue generation for economic
growth?
Scope
The policy paper on broadening the tax base in Pakistan aims to analyze
the challenges and factors hindering the expansion of the country's tax net
in the last ten years. It also examines the effectiveness of the current
strategies and campaigns in bringing a wider range of potential taxpayers
into the tax net. The study explores the reasons for the non-documentation
of the economy and the failure to develop a fair, effective, and efficient
policy to ensure that every potential taxpayer pays their fair share of taxes.
The research provides insights to identify the limitations of tax agencies in
widening the tax base and provides proposals for policymakers and
stakeholders to develop effective policies for BTB. Pakistan’s taxation
system is suffering from a narrow tax base. The table based on FBR data

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from 2013-2016, shows that a reliable number 0.61% of the population files
tax returns and only 2.13 % of the population is registered with FBR.
Table 1
Data about Return Fillers for Five Years TY 2012 to TY 2016:
Taxpayer’s Tax year
Sr.
category 2012 2013 2014 2015 2016
1 Companies 25,912 26,945 29,414 30,936 31,359
2 AOPs 41,012 44,790 47,154 47,674 48,652
Business
3 561,658 588,787 702,820 752,339 735,415
Individual
Salaried
4 185,823 250,660 330,712 409,209 405,060
Individual
Total 814,405 3,660,509 3,802,002 3,977,949 1,220,486

Broadening of Tax Base

The BTB involves various interconnected sets of actions, including the
registration of eligible individuals with the tax department, filing of income
returns, and payment of due taxes within a given time. A successful
expansion of the tax base can have a significant impact on the overall GDP
ratio of the nation, assuming other variables remain constant.
In the early 2000s, FBR undertook several initiatives to expand tax net
in the country. The campaign was initiated through a laborious nationwide
door-to-door survey conducted by joint teams of FBR and military
personnel, to gather extensive data on potential taxpayers. However, despite
the accumulation of a substantial amount of actionable data, the impact of
this endeavor was minimal due to the inability of tax agencies to utilize the
data effectively. Over time, political will was diminished and the collected
data became redundant. A serious campaign was lost as the goals of
documentation and expansion were not achieved. Again after 2009, on
frequent and multiple demands of donor agencies, i.e. IMF and World Bank,
BTB campaigns were started and legal frameworks were developed to bring
potential taxpayers into the tax net. These efforts helped to implement a
strong withholding taxation regime in Pakistan to document the economy
and gave birth to famous notion of filer and non-filer.
This withholding taxation regime was aimed to document the economy
and most withholding taxes are adjustable which often results in the
issuance of refunds but this has helped FBR bring many potential taxpayers
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into the tax net. This also helped tax agencies in creating economic profiles
for taxation purposes. Data on economic activities, such as real estate
purchases, vehicle acquisitions, air travel, service usage, school fees, and
other expenses were recorded in a central database and categorized using
the common denominator of the Computerized National Identity Card
(CNIC). This laid strong foundations for data keeping, particularly of
financial transactions.
Literature Review
This study analyses the experiences of Asian nations from a comparative
standpoint and addresses the issues of what kind of taxes and tax base
expansion are preferable from the standpoint of economic theory. A nation
that has more government spending relative to its gross national product is
more likely to have a budget deficit. Import and export taxes, among other
trade levies, are detrimental to development because they generate market
distortion and encourage strategies focused on import substitution.
Although desired, land and property taxes are rarely enacted due to political
challenges. Despite the desirability of a personal income tax, its ability to
generate money is constrained (Hamada, 1994).
Tax reform is not a novel topic on developing nations' economic
agendas. Since 1945, more than a hundred initiatives have been made in
emerging nations to alter their tax systems, as noted by Gillis. Nonetheless,
a lot of these nations may have seen a shift in their reasons for tax reform
over the past 25 years. Policy reform has moved from being something that
was wanted or chosen to something that is now required. Tax reform
became necessary for some nations to close their budget deficits, but it also
became critical for others to preserve—and in some cases, improve—their
competitiveness internationally (Diokno, 1993).
In order to establish a framework for deciding how much the
environment needs to be safeguarded, an operational definition of
sustainability is provided. After examining the causes of environmental
issues, the study explores potential policy solutions. Alternative policy
tools, including tradeable permits, taxes, and subsidies, are studied. These
tools can be used for both incentive-based and command and control
policies. There is a discussion of the advantages, expenses, efficacy,
distributive implications, implementability, and suitability of alternative
policy tools for various kinds of issues (Parikh, 1994).

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Prichard et al. (2019) in their paper present a conceptual framework that

identifies three dimensions of innovation in tax compliance: policy,
administration, and technology. Policy innovation involves developing new
tax policies, such as introducing incentives or simplifying tax codes, to
encourage compliance.
The amount of taxes is essential to the government's survival. The
purpose of this paper is to identify the factors that contribute to tax evasion
and avoidance in Pakistan. The correlation between the factors that
contribute to tax evasion and avoidance is also examined. After examining
the literature, a questionnaire is created to gather responses. Percentages,
arithmetic means, variance, standard deviation, central limit theorem,
cumulative normal distribution calculator, factor analysis, and correlation
techniques are used to analyse data. The findings show that every variable
related to the causes and reasons of tax evasion and avoidance in Pakistan
is accurate. Additionally, at the 100% significance level, there is a highly
significant positive correlation between the individual variables of the
causes and reasons for tax evasion and avoidance in Pakistan
(Mughal, 2012).
With the increasing global debt levels due to the COVID-19 pandemic
and the Global Financial Crisis (GFC) of 2007-2008, expanding the tax base
has been suggested by the World Bank as a means to address rising debt.
The study reviewed identifies the tipping point where sovereign debt
becomes problematic, and it suggests that gradual fiscal consolidation and
tax base expansion can lead to a decline in the debt-to-GDP ratio and a rise
in output, ultimately achieving stable economic conditions over time
(Ghufran et al., 2022).
Informal Economy
The informal economy of Pakistan constitutes an estimated 35% of the
GDP and plays a significant role in the country's economic landscape. It
encompasses a wide range of economic activities that are not regulated or
officially recognized by the government, including street vending, small-
scale manufacturing, household enterprises, and unregistered businesses.
The informal economy poses several challenges as it operates outside the
tax net, leading to revenue losses for the government. This limits the
government's ability to provide essential services and invest in
infrastructure and social development.

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Efforts have been made to formalize the informal sector and bring it into
the mainstream economy. However, addressing the complexities and the
needs of the informal economy requires comprehensive policies and
targeted interventions across all federal and provincial departments to
ensure documentation of the economy and sustainable economic & revenue
growth.
Methodology
This study is conducted using qualitative methods to analyze the
performance, challenges, and prospects of BTB. Primary Data was collected
from FBR and secondary data was collected from articles, research papers,
books, and policy documents of the FBR. Also, the NIM library was
consulted for available literature and all the sources available on the e-print,
Jstore, emerald, and newspapers were explored. A comprehensive phone
interview was conducted with Mr. Zubair Bilal, Director General BTB,
heading the Directorate General of Broadening of Tax Base, FBR HQ. This
research also sought insights from Dr. Hamid Attique Sarwar, ex-member
policy, regarding the current situation of the tax net in Pakistan.
Tax Gap
Tax Gap is a buzzword these days and widely used across developing
economies. In the U.S. the ‘official’ IRS definition of the tax gap is simply:
“The difference between the tax that taxpayers should pay and what they
pay on a timely basis” (Gemmell & Hasseldine, 2012). FBR’s Tax to GDP
Ratio is 9% for the year 2021-22. Its tax-to-GDP ratio excluding agricultural
income is 11.8% whereas, its provincial tax to GDP Ratio is 0.9%. Tax gaps
also include taxes to be paid by the undocumented economy, tax evasion,
and tax expenditures. BTB deals with the undocumented economy and tax
evasion.
The tax is usually collected from a few already registered persons; while
many potential taxpayers with huge financial transactions dodge tax
authorities and evade the tax by not filing tax returns (The World
Bank, 2019).
Broadening the tax base is possibly the most critical economic challenge
facing Pakistan. The lower side estimated of annual income tax gap is 730
billion rupees or 31% of the total income tax that could be collected (Federal
Board of Revenue Pakistan, 2022). For reliability, a similar tax gap was
examined for salaried people using the Labour Force Survey (LFS).
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Addressing this huge tax gap in Pakistan requires sincere efforts by the
government involving improvements in the tax policy, making effective
enforcement, and eradicating the trust deficit between taxpayers and tax
agency.
Tax Evasion and Avoidance
Avoiding tax through legal means by taking advantage of legal
loopholes, asking lawyers and accountants to calculate less amount of tax is
"Tax Avoidance". A tax avoidance scheme is used to circumvent paying
higher tax. However, in Pakistan, a large number of wealthy citizens avoid
paying their taxes by scheming with tax officials to minimize their incomes
or by taking advantage of legal loopholes. These are ways to reduce the
taxes by introducing investments like tax-exempt municipal bonds that may
be difficult to confront (Dyreng et al., 2019).
Tax evasion is a deliberate act of a person not registering with the tax
department or paying less tax with the intention of reducing their due tax
liability. Tax avoidance is also not legal in Pakistan and is termed as tax
evasion, attracting prosecution.
Issues and Challenges
There are numerous challenges of governance and social behaviors in
Pakistan that keep defeating the drive and spirit of BTB. According to a
study conducted by Rana (2021), there are approximately 4.7 million
citizens in Pakistan who possess valid National Tax Numbers (NTNs) but
avoid filing tax returns, despite the legal obligation under Section 114(1) b
(vii) for NTN holders to file tax returns. Additionally, out of the total 7.2
million companies, only 2.7 million have filed income tax returns.
Encouraging compliance among these individuals and companies poses a
significant challenge for the FBR under Universal Self-Assessment Scheme
(USAS). The widespread mistrust of public in government as a result of
decades of corruption leads many to avoid paying the tax. Corruption in tax
department enables taxpayers to pay fewer taxes and also helps potential tax
payers to stay out of tax net. Moreover, according to the research survey
conducted regarding BTB “individuals primarily choose non-compliance
due to the complexity of tax laws and the high costs associated with
compliance. The FBR's return-filing software, IRIS, is recognized for being
extremely complicated and user-unfriendly, further supported by the survey
findings.”
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BTB in Pakistan faces several challenges, and high level of informality

in the economy is one of them. Poor tax compliance is also influenced by
the complex tax system and lack of trust in the government's ability to
provide essential services. Additionally, tax officials, usually in collusion
with the potential taxpayers through informal consultancies, help them
either stay out of the tax net or assist them pay much less tax than due taxes.
This policy paper will look into the policy options of the tax machinery,
identify potential bottlenecks for the implementation of different measures,
and present recommendations as the outcome of the research.
Proposed Tax Policy
FBR has taken a number of initiatives and persuaded many campaigns
to expand the tax base in the country, but these efforts have faced significant
challenges. There is a huge consensus amongst all stakeholders of the state,
economy, and tax system that broadening the tax base is the single most
important area to optimize tax revenues in the country. Unfortunately,
besides undisputed agreement, non-willingness of the business
communities, lack of political will by successive governments and non-
cooperation of federal and provincial governments have frustrated all
efforts to increase the tax net. FBR had established a full fledge directorate
of Broadening of Tax base in 2009-2010 to devise policies and action plans
to increase return filling, but due to policy shift, it was dissolved and BTB
functions were given to field offices without any direct and active
monitoring of FBR. Since then, often and on BTB remained in talks and
agendas with varied focus until recent years. Now a full fledge Directorate
General has been established at FBR and it has developed a live monitoring
mechanism with field formations. A number of different action plans are
under implementation to increase taxpayers’ numbers.
The tax agency has failed to get credible information on huge
investment transactions about potential taxpayers, beside that every
department responsible for the documentation of valuable transactions has
been digitalized. These data sets are isolated and have been fetched as per
requirements of the FBR.
There have been many efforts made by FBR to align all such data
centers with FBR’s requirements for documentations, but many practical
issues are still unresolved. For example, transactions of immoveable
properties are being recorded and maintained by local governments at every

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district level; similarly, registration of motor vehicles is managed and

recorded at every district level by the Excise and Taxation Office, both are
provincial departments. Every Government department wants to keep its
data isolated and monopolized, that’s why sharing of data has been a huge
issue. It is also found that many a time, shared data is not actionable due to
the absence of real-time details.
FBR’s Side of Story
Researchers contacted the responsible office of BTB and sought their
version and input, according to the DG BTB “Due to the lack of
administrative ownership by the chief commissioners of RTOs where BTB
commissioners and their teams were stationed, the operational design of the
BTB wing was also problematic. According to the system, BTB
commissioners were responsible for reporting to the DG BTB at FBR but
were reliant on the chief commissioners of RTO for funding. Other
difficulties included conflicting jurisdictions, a lack of RTO-level
ownership, double reporting structures, and a lack of administrative
monitoring. The databases of other organizations, particularly those in the
public sector, were not linked to those of FBR. As a result, it became very
challenging to create an economic picture of a potential taxpayer. Later on,
the BTB zones were eliminated.
“The tenth schedule to the Income Tax Ordinance of 2001 has
encouraged those who are not registered to do so in order to benefit from
lower withholding tax rates. The key is to go after the big fish; amid all
these considerations, the true difficulty would be to include those taxpayers
on the tax registers who considerably improve revenue collection”
(Malik, 2022).
Two-Pronged BTB Policy
Efforts are underway to expand the tax net through campaigns utilizing
different types of third-party data including data from commercial and
industrial consumers of power distribution companies, gas companies,
immovable property registrations, and motor vehicle registration
authorities. There are many practical issues in reaching out to potential
taxpayers like lack of updated data of NADRA, incomplete addresses of
land owners, and CNICs of the consumers using utilities i.e. gas and
electricity. Health and actionability of data remained a major source of
failures of previous BTB campaigns. The research proposes a two-pronged
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policy for the Broadening of the Tax Base having the following main
features of effective policy to improve the tax base.
Legal Framework
Income Tax Ordinance, 2001 provides a complete solution to improve
the tax base, but as per the outcome of the research, this paper proposes the
following legal interventions for effective BTB drive.
1. Increase the cost of doing business for non-registered taxpayers.
2. Effective punitive measures against non-filers.
3. Capturing online businesses.
4. Enhanced tax rates on non-filer buyers of property.
5. Sales through online system by integrated enterprise.
6. Sharing of information by NADRA.
7. Enhancing the time Limit for making assessment of non-filers.
Administrative Measures
The Following administrative measures are also proposed for
broadening of tax base
1. Development of data bridges with all provincial, federal, and local
authorities.
2. Establishment of dedicated units of broadening of tax base at all field
formations.
3. Updating and revamping of “malomaat” portal on the FBR website.
4. Discrete digital market surveys.
5. Taxpayer awareness campaigns.
6. Utilization of digital tools for identification of new taxpayers.
Findings
The following data has been sought from the Federal Board of Revenue
During recent years, the implementation of tax policy aimed to broaden the
tax base has improved considerably. Simplifying tax codes and making
them clearer can improve compliance, reduce errors, and make the system
fairer. This can be achieved by minimizing exemptions, deductions, and
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loopholes. The following table shows the difference in the number of

registered persons and filers spanning the years 2017-2023. It is visible that
the number of filers has increased due to policy interventions.
Table 2
Registered Persons and Filers Spanning the Years 2017-2023
Income Tax Percentage growth
Tax Year Registered Person Filers (Tax Reg VS Return fillers)
2017 4,257,280 2,100,219 49.33 %
2018 4,800,746 3,017,402 62.85%
2019 5,349,921 3,391,837 63.33%
2020 6,552,399 3,698,130 56.43%
2021 7,287,829 4,596,008 63.06%
2022 7,969,009 5,438,972 68.25%
2023 9,865,326 3,415,416 34.62%
Note. *Returns are being filled for TY 2023; numbers of returns are
expected to increase.
Figure 1
No. of Filers compared to Registered persons

Conclusion
As evident from the discussion above, FBR deals with problems on many
different levels, including poor strategy, a lack of resources, and a
workforce that is both undertrained and unmotivated, among other issues.
The withholding tax system is very important to Pakistan's tax base as this
paves the way for the documentation of numerous financial transactions of
potential taxpayers. Section 114 of IT Ordinance 2001 outlines a
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comprehensive list of individuals obligated to file their annual income tax

returns, which serves as the legal framework in place today. However, the
vast majority of those required to file returns largely disregard this national
obligation. The documentation of the economy is a collective exercise
involving all government departments and provides foundations for
broadening the tax base. Two prolonged policy measures proposed by this
research aim to enable tax agencies to improve compliance and strengthen
legal and administrative frameworks.
Recommendations
This research has proposed actionable policy measures to enable FBR
to expand its tax net. To broaden the tax base effectively, it is important to
have a real-time centralized database of all transactions regarding
immovable properties, utility customers, and motor vehicles. Introducing a
simple and user-friendly online system for the public to file income tax
returns is crucial. Moreover, there is a need to shift from manual to real-
time digitized invoices and capturing of sale/purchase transactional data on
a real-time basis. The need to integrate businesses and banks’ software with
FBR’s computer system is essential. A lot of initiatives have been taken to
broaden the tax base by using technology such as Taxray, the FBR database,
and collaboration with NADRA. It is anticipated that tax agency, after
considering policy proposals of this research, would be able to double the
number of their taxpayers within the next five years, reaching the milestone
of 15% tax to GDP ratio.
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Broadening of Tax Base: Policy Challenges…

9042302/pdf/Project-Information-Document-Pakistan-Revenue-
Mobilization-Project-P165982.pdf

Journal of Public Policy Practitioners

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