Page 57 - CMA Journal (May-June 2025)

Focus Section

Table 1: Key Sources of Tax System Complexity in Pakistan and Their Impact on Compliance

Source of Complexity Description Impact on Taxpayer Compliance
Multiple Taxes on the Income taxed via multiple
Same Base mechanisms (income tax, minimum liability unpredictably
tax, turnover tax)
Overlapping Dual control over services taxation by Legal ambiguity; duplication of
Jurisdictions FBR and provincial boards
Frequent Legal SROs modify rates/exemptions Reduces predictability; complicates
Changes (SROs) frequently, often mid-year tax planning
Redundant Repetition in returns (e.g., asset
Documentation declarations, CNICs, bank data) voluntary participation
Requirements
Excessive Use of Reliance on third parties for tax Leads to errors, refunds backlog,
Withholding Agents collection (banks, telcos, utilities, etc.) and mistrust in
system fairness

• Second, there are stop-filers—taxpayers who were Small and medium-sized enterprises (SMEs), in particular,
previously enrolled but have stopped submitting are discouraged from remaining within the formal
returns regularly, often due to complicated system, as the complexity of compliance outweighs
procedures, fear of audits, or financial difficulties. perceived benefits. A dynamic and unified taxpayer
registration system across federal and provincial levels is
• Third, there are those who continue to file tax returns
urgently needed to reduce administrative burdens and
but deliberately misreport their income or expenses.
build public confidence in the tax system.
They take advantage of insufficient audit coverage
and the low perceived risk of detection. Stop-filer Crisis and Legal Overload
• Lastly, there are the delinquents—taxpayers who file The growing number of stop-filers in Pakistan highlights
returns and have their tax responsibilities assessed a deeper structural problem. Harsh compliance
but do not pay on time. They often exploit delays in regulations discourage individuals from re-entering the
the appeals process to avoid enforcement. formal tax system. Many taxpayers who previously filed
returns are reluctant to do so again due to accrued
These categories are not distinct but reflect a wide
penalties, interest charges, and the threat of audits. The
spectrum of noncompliance. If enforcement focuses on
current legal framework acts as a barrier rather than a
only one or two of these gaps, evaders are likely to shift to
bridge by requiring complete payment of all past dues
the least enforced category. A coordinated and systemic
before returns are accepted. This rigid approach
approach is therefore essential to close all gaps
undermines efforts to broaden the tax base.
simultaneously and discourage evasion across the board.
A more lenient strategy is needed, including presumptive
Administrative Registration Challenges
assessments based on observable income indicators,
The Single Taxpayer Registry (STR), a critical component time-bound waivers for penalties and interest, and
for effective tax administration, is still not fully integrated well-structured amnesty programs. Such measures can
or implemented in Pakistan. Currently, income tax, sales reduce the financial and psychological barriers to
tax, and provincial taxes all require separate registrations. rejoining the tax system and help foster long-term
This leads to redundant administrative efforts, inaccurate compliance.
taxpayer data, and diminished audit efficiency.
Delinquency and Procedural Rigidity
Real-time data integration and verification procedures
are lacking in enforcement. Even after the introduction of In Pakistan, tax delinquency is driven not just by deliberate
CNIC-based Taxpayer Identification Numbers, gaps avoidance but also by institutional inefficiencies and
remain. Databases frequently fail to update changes in procedural rigidity. Lengthy appeals, poor coordination
business addresses, operational status, or jurisdictional between assessment and enforcement units, and delays in
reclassifications, resulting in confusion and missed tribunal decisions are major contributors.
enforcement opportunities.

ICMA’s Chartered Management Accountant, May-June 2025 55