ANALYSIS AND DISCUSSION
1. Political Instability and Weak Governance
Political instability in Pakistan has severely limited tax collection efficiency. Frequent
government changes, weak institutional frameworks, and corruption have resulted in poor tax
administration and low compliance rates. Additionally, the tax base remains narrow, with a high
reliance on indirect taxes rather than direct income taxes, which would more fairly distribute the
tax burden. Pakistan's tax-to-GDP ratio remains low, at around 10.4%, well below the global
average. Comparatively, more politically stable countries in the region, such as Bangladesh,
have seen improvements in their tax collection by implementing reforms aimed at simplifying tax
systems and improving trust between the government and taxpayers.1
2. Economic Informality and Tax Evasion
Pakistan’s large informal economy, which is estimated to account for a significant percentage of
GDP, poses a major challenge for tax authorities. Many small businesses operate outside the
formal tax net, leading to high levels of tax evasion. Corruption exacerbates the issue, as
political elites and other influential groups benefit from tax exemptions and lax enforcement of
tax laws. This is further worsened by fragmented tax administrations and weak enforcement
mechanisms. Countries like India have combated similar issues by adopting digital tax systems
(like GST) and incentivizing formalization, measures Pakistan could consider.2
3. Comparative Analysis with Neighboring Countries
When comparing Pakistan to its neighbors, several strategies stand out. For instance, India has
implemented a Goods and Services Tax (GST) that has helped bring more businesses into the
formal economy and increase tax compliance. Bangladesh has similarly worked on improving
tax collection by implementing reforms that address loopholes and digitizing its tax systems.
Pakistan can draw lessons from these countries, particularly in the areas of reforming tax
exemptions, reducing corruption, and improving tax administration.3
Addressing Unique Challenges
Pakistan’s political and economic environment creates a unique set of challenges for tax reform.
To overcome these issues, strategies like simplifying the tax system, reducing the number of
1 The Friday Times, SpringerLink
2 The Friday Times
3 The Friday Times
exemptions, and improving tax collection technology are essential. Furthermore, rebuilding trust
between citizens and the government by ensuring that tax revenues are used effectively can
also play a key role in improving compliance4
Discussion Point 1: Role of Political Instability and Weak Governance in Limiting
Tax Revenue
● Political Instability: Pakistan has historically experienced frequent shifts in government,
military interventions, and inconsistent policies. These changes lead to a lack of
continuity and long-term planning in economic and fiscal policy. Compared to
neighboring countries like India and Bangladesh, Pakistan has had a less stable political
environment, contributing to weaker governance.
4 SpringerLink
● Weak Governance: Pakistan's governance issues include corruption, lack of
accountability, and an inefficient bureaucracy. The Federal Board of Revenue (FBR)
often fails to meet tax collection targets due to political interference and insufficient
reforms. Corruption in tax administration weakens enforcement, making it harder to hold
individuals or businesses accountable for evasion.
● Comparative Perspective: Countries like India have faced political instability but have
established more robust tax systems through reforms and technology integration (e.g.,
India's Goods and Services Tax, or GST). Pakistan's lack of digital reforms and poor
transparency mechanisms are key differences that exacerbate the problem.
Discussion Point 2: Impact of Economic Informality and Tax Evasion on
Pakistan’s Low Tax Collection
● Economic Informality: Pakistan's informal economy is among the largest in the region,
with estimates suggesting it contributes more than 30-40% to the GDP. Informal sectors
(e.g., retail, agriculture, services) often operate outside the formal tax net. Unlike India,
which has undertaken steps like demonetization to curb informality, Pakistan has not
seen the same level of initiative.
● Tax Evasion: Tax evasion in Pakistan is rampant, with large portions of income
remaining undeclared, especially by high-income groups like politicians, business elites,
and even landowners. The tax-to-GDP ratio has stagnated around 10-12%, which is low
compared to international standards. Common methods of evasion include
underreporting income, misinvoicing, and exploiting loopholes in property tax laws.
● Tax Exemptions: Tax exemptions and incentives for certain sectors further erode the tax
base. Special treatment is often given to agriculture and real estate, both of which
account for a significant part of Pakistan's economy but contribute little to tax revenue.
Discussion Point 3: How Neighboring Countries Overcame Similar Issues
(Comparative Analysis)
● India's Reforms: India struggled with tax evasion and a vast informal economy, but the
introduction of the GST and reforms in digitizing tax payments (e.g., Aadhaar-linked tax
systems) improved compliance. India also strengthened its enforcement through anti-
corruption drives and greater transparency, which is something Pakistan could explore.
● Bangladesh's Success: Bangladesh has improved its tax collection by widening the tax
base and implementing VAT reforms. Its tax-to-GDP ratio is still low, but efforts to bring
more people into the tax net through simplified registration processes have shown some
progress. Bangladesh also tackled informal markets with better enforcement and data-
sharing mechanisms.
● Malaysia’s GST System: Malaysia introduced GST (later replaced by Sales and Service
Tax, SST) to improve tax collection and reduce dependency on income taxes. This
comprehensive indirect tax system helped formalize the economy. While Malaysia's
political context is different, this kind of systemic tax reform could be considered for
Pakistan.
