Page 58 - CMA Journal (May-June 2025)

Focus Section

inefficiencies weaken trust and discourage voluntary
compliance. To address this, Pakistan should simplify the
withholding tax system, digitize reporting and
reconciliation, and restrict withholding to sectors where
real-time income tracking is feasible.
Audit Weaknesses in a Complex Environment
Most audits in Pakistan are still conducted manually, with
minimal resources and inconsistent execution. The FBR’s
audit coverage rate remains below 2%. A lack of trained
personnel, along with complex and frequently changing
Taxpayers also face operational challenges such as laws, leads to subjective interpretations that reduce the
complex payment procedures, frequent errors in effectiveness of audits.
challans, and delayed payment confirmations.
This undermines the deterrent effect of audits and
FBR must adopt digital enforcement tools such as discourages voluntary disclosure, as taxpayers fear
automated bank account attachments, property liens, arbitrary assessments or prolonged litigation. The
and real-time integration with asset registries. It should absence of a transparent, criteria-based audit selection
also delegate the recovery of smaller arrears to licensed process further erodes public trust. To remedy this, the
agents and prioritize the timely collection of large dues. FBR should implement a risk-based audit system
These actions will improve the efficiency and credibility targeting specific sectors, regions, or income brackets
of the tax administration. using objective data. Audits should also aim to educate
taxpayers and promote consistent enforcement
GST Gap and Sectoral Disparities
practices.
Estimates suggest that over 30% of potential revenue is
not collected under Pakistan’s Goods and Services Tax Tax Evasion, Avoidance, and Legal Ambiguities
(GST) regime, indicating a serious compliance shortfall. Pakistan’s disjointed and complex tax system creates
Several issues contribute to this gap, including exploitable legal gaps, particularly benefiting
widespread non-invoicing practices, misuse of multinational enterprises (MNEs). These companies often
zero-rating provisions, and excessive exemptions that engage in aggressive tax planning—manipulating
effectively conceal taxable activity. Fraudulent invoicing transfer pricing, exploiting capital gains exemptions,
in business-to-business (B2B) transactions allows using hybrid mismatches, and shifting profits to low-tax
companies to falsely claim input tax credits, further jurisdictions. The FBR lacks a strong General
weakening the tax base. Anti-Avoidance Rule (GAAR), which limits its ability to
Pakistan’s complex GST structure, coupled with challenge such practices. Moreover, Pakistan’s
overlapping federal and provincial jurisdictions, results in participation in global tax transparency frameworks like
double taxation, delayed refunds, and poor invoice the OECD’s Base Erosion and Profit Shifting (BEPS)
cross-verification. These factors deter voluntary initiative is underdeveloped, with minimal cross-border
registration and compliance. To improve GST efficiency, data sharing.
Pakistan must streamline rate structures, rationalize
exemptions, and foster better coordination between
federal and provincial tax authorities.

Withholding Tax Overuse and
Structural Duplication
Withholding taxes are a major feature of Pakistan’s tax
system, applied across sectors such as utilities, imports,
real estate, banking, and salaries. While they generate
substantial revenue, they also add layers of complexity. A
large share of these taxes are either non-adjustable or
treated as minimum tax, undermining equity and
disproportionately affecting individuals and small firms.
Many taxpayers experience long refund delays—
sometimes spanning years—and face repeated
deductions due to overlapping jurisdictions. Such

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