New Delhi, April 12 (NationPress) Various financial institutions such as the World Bank and the IMF, along with tax experts, consistently highlight that Pakistan faces a troubling "tax gap" estimated between seven and nine percent of its GDP.

This gap signifies the discrepancy between actual tax collections and the potential revenue that could be generated under ideal enforcement conditions. This scenario often leads to a narrative blaming citizens for not fulfilling their tax obligations. However, as highlighted in an article from the Dawn newspaper, this perspective conveniently allows tax collectors and policymakers to evade accountability for their own shortcomings while exerting increased pressure for compliance.

The article argues that attributing this collection shortfall solely to taxpayer evasion is misguided. A significant portion of this gap stems not from dodging taxes but from flawed policy choices. By conflating evasion, avoidance, and policy-related exclusions, the focus diverts from a fundamentally flawed tax system and the lack of state legitimacy.

Furthermore, Pakistan's tax architecture is described as distorted and fragmented, influenced by separate federal and provincial regulations. The system is plagued by numerous exemptions, concessions, and preferential treatment, compounded by an overwhelming number of taxes. This excessive taxation, combined with a convoluted policy landscape, compels even law-abiding citizens to find loopholes for survival. Additionally, many working adults earn below the income tax threshold, making what may seem like non-compliance a reflection of both poverty and intentional exclusion.

The article also points out the inefficiencies in the system's design, characterized by a multitude of complex taxes, high rates, and an over-reliance on more than 230 distortive withholding taxes. The frequent changes in laws and procedures contribute to unpredictability. Moreover, the compliance process is so intricate that even those willing to pay taxes find it challenging. It's noteworthy that much of the perceived tax gap is actually a result of documented policy. Official reports on tax expenditures reveal extensive exemptions throughout the system. Additionally, the sales tax framework is undermined by exemptions that disrupt the value-added chain, indicating that what appears as a gap often results from a poorly designed system.

Considering the entire tax gap as ‘recoverable’ can lead to misguided policies, subpar outcomes, unrealistic targets set by the IMF, and undue pressure on the Federal Bureau of Revenue. This situation results in the 'squeezing of the already squeezed,’ targeting compliant salaried individuals and a select few firms that serve as collection agents for the FBR. These entities face penalties merely for being visible in the data. The repercussions are predictable: fear of the tax system discourages registration, businesses fragment to evade thresholds, transactions shift to the informal sector, and cash usage soars (currently, Rs 12.1 trillion is in circulation, with an increase of Rs 1.5 trillion this year). The effective tax base continues to diminish, even as enforcement becomes more stringent, as the article concludes.