Page 56 - CMA Journal (May-June 2025)

Focus Section

The Price of Complexity: Why Pakistan’s

Tax System Discourages Compliance

Fiscal sovereignty is grounded in paying taxes. But in redundant documenta-
emerging economies like Pakistan, ensuring that every tion and repeated
person follows the rules is difficult due to systemic issues. disclosure of data that
The primary issue is the tax structure itself, which is overly tax authorities already
complex. The public often blames tax evasion on have. Furthermore,
individuals not understanding or not enforcing the law excessive reliance on
properly. However, the real issue lies in the way the withholding agents
system is structured—numerous legal layers, shifts the burden of tax
bureaucratic hurdles, overlapping government roles, and collection to third
reforms that do not happen consistently. parties, many of whom
are either ill-equipped
Understanding Compliance in Pakistan or unmotivated to Muhammad Ammad

Pakistan's tax-to-GDP ratio has consistently remained perform this role effec- Ansari, ACMA
below 10%. It is one of the lowest in South Asia. This is tively. All these factors Manager Litigation and Audit
true even though reforms are ongoing, such as the raise the cost and stress Sui Southern Gas
introduction of digital filing (IRIS), enhanced of compliance, under- Company Limited (SSGCL)
withholding, CNIC-based registration, and monitoring of mine public confidence
point-of-sale transactions. Behavioral theories suggest in the system, and
that people do not follow the rules because they lack eventually drive even well-meaning taxpayers out of the
trust in the system or perceive it as unfair. In contrast, formal economy. The general complications fall into one
structural theories place more emphasis on how of the following categories:
administrative overwork can prevent people from • multiple taxes on the same base (e.g., income tax,
following rules. Pakistan’s tax code consists of the Income minimum tax, turnover tax, advance tax);
Tax Ordinance 2001, the Sales Tax Act 1990, the Federal • overlapping jurisdictions, especially for sales tax on
Excise Act 2005, and the Provincial Sales Tax Acts. Each services (FBR vs. provincial revenue boards);
requires its own registration, filing, and paperwork. You
need professional support even to comply with the • overly frequent legal changes via SROs;
basics. This intricate system leaves people confused, • redundant documentation for routine filings; and
intimidated, and outside the formal tax net.
• excessive reliance on withholding agents.
Complexity as a Barrier to Voluntary Compliance These issues increase compliance costs, time burdens,
The tax system in Pakistan is not just complex—it is and legal ambiguity, becoming key factors that drive
deeply entrenched and difficult by design. Taxpayers even honest taxpayers away.
often pay multiple taxes on the same stream of income, Major Tax Gaps in the Pakistani System
which creates confusion and makes compliance more
difficult. Contradictory rules between the Federal Board Effective revenue collection in Pakistan is hampered by
of Revenue (FBR) and the Provincial Revenue Authorities four unified and enduring deficiencies in tax compliance.
are another result of overlapping jurisdictions. This
• The first is the unregistered class, which comprises
fragmentation leads to regulatory ambiguity and redun-
millions of individuals who earn a living but are
dant efforts. Statutory Regulatory Orders (SROs) change
entirely exempt from taxes—particularly those who
tax responsibilities mid-year and disrupt planning for
are self-employed or operate informal shops,
both taxpayers and practitioners. Routine filings require
services, or other businesses.
54 ICMA’s Chartered Management Accountant, May-June 2025