The stability of the Pakistani economy—and ultimately its frequent collapses—hinges greatly on how subsequent governments choose to manage the country’s budget. However deep-rooted structural issues within the tax system and the continued negligence of the regulator in fixing it in order to raise adequate revenues from the existing base not only exacerbate the budget deficit but also transfer the burden of its borrowing. Much more than the nation can afford. The other problem is, the tax revenue faucet is also leaking.

By the government’s own estimates, tax expenditures, or revenue foregone (that include all manners of exemptions, concessions, tax credits, and other discriminatory or preferential treatments) stood at Rs3.9 trillion in FY23 or a whopping 54 percent of the tax revenues FBR collected during the year. This has only been growing. In the previous year, foregone taxes were 36 percent, and a decade ago or so ago, they were 13 percent of the FBR tax revenues.

In just one year alone, the tax expenditures in rupee value grew by 73 percent. In the same period (FY23), FBR’s revenue collection efforts (which are predominantly indirect in nature) grew 17 percent. Revenue mobilization has been growing, but not as fast as government expenditures (a major portion of which is debt servicing) and nearly not as stealthily as tax expenditures.

This is not a local phenomenon. Governments around the world offer various forms of tax incentives to select groups to boost investment or provide protection to the disadvantaged. Statistically, the global average for revenue foregone is between 3 and 5 percent of the GDP, and certainly, Pakistan has not exceeded these levels by any means (see graphs). However, the world is collecting much more taxes than Pakistan is.

Contrast Pakistan’s dormant tax to GDP of 9 percent to the average tax to GDP for the Asia Pacific region of about 20 percent, and for the OECD region of 33 percent. That’s a big difference. Countries with high tax expenditures are collecting enough taxes to justify these sacrifices. They also have larger tax bases, lower incidence of tax evasion, and most importantly, they have systems in place to monitor and evaluate the concessions doled out to see what benefits they reaped. Tax expenditures are considered a menace around the world, but in Pakistan, the right questions are never asked.

These questions may be along the lines of: what is the policy objective/goal, are the concessions incentivizing specific behaviors such as an increase in investment, R&D or growth in exports, etc., cost and benefit analysis, what is the research behind this analysis, are their metrics to set and monitor performance targets, is performance being tracked so that it can inform future policy decisions, what is the distributional impact of the tax incentive and, so on. The latter is extremely important—while only a select group enjoys a certain tax incentive, the cost of it is distributed amongst all taxpayers.

Unable to meet the tax potential, tools to raise quick revenues are then used. Hikes in tax rates, or other forms of tax such as super-tax, additional sales tax, regulatory duties, and non-filer taxes. Meanwhile, studies to evaluate tax expenditures in the country suggest over the last two decades, there has been a progressive surge in provisions that facilitate tax expenditures. Global data for foregone revenues supports this. In 2020, the number of provisions that fed forgone revenues stood at 106 for the world (average), 137 for Asia Pacific, 338 for South Asia, and 665 for Pakistan! That is telling.

Imagine this: even within the scope of the current tax base—which is by far severely deficient—if FBR were collecting all the taxes it is foregoing, the tax to GDP rate would come up to 14 percent. That tax-to-GDP ratio has never been achieved in Pakistan’s history.