The discussion on the budget would remain incomplete without a focus on taxation. Pakistan’s budget for fiscal year 2024-25 walks a tightrope between the need for increased tax revenue and the challenge of fostering economic growth in a fragile environment. With a projected deficit of Rs 9,600 billion and a stagnant economy, tax reform is a central theme in the proposed budget. However, navigating this path requires striking a delicate balance between broadening the tax base, streamlining the system, and avoiding stifling economic activity. The Challenge: A Narrow Tax Base and Stagnant Growth Pakistan’s tax-to-GDP ratio remains stubbornly low at around 10%, highlighting a narrow tax base. According to the World Bank, only one million individuals filed income tax returns in 2021, a tiny fraction of the potential tax-paying population. This reliance on a small group of taxpayers creates vulnerability and limits the government’s ability to invest in essential public services. Further compounding the issue is Pakistan’s sluggish economic growth. The IMF projects a modest 3.5% GDP growth for 2024-25, leaving little room for significant organic revenue increases from existing tax structures. This scenario necessitates reform to capture new revenue streams without stifling economic activity. Proposed Reforms: A Mixed Bag of Measures The government has proposed a mix of reforms aimed at broadening the tax base and increasing efficiency. These include: Raising the Tax Exemption Limit: The proposed increase in the tax exemption limit for salaried individuals from Rs 600,000 to Rs 900,000 aims to provide some relief to middle-income earners. Taxing Non-Filers: A renewed focus on collecting taxes from non-filers, particularly those operating in the informal sector, could potentially bring a significant number of new taxpayers into the fold. Withholding Tax Reforms: The government proposes revising withholding tax rates for various sectors to capture additional revenue. Raising taxes without addressing underlying issues in the business environment could discourage investment and hinder economic growth. Digitalization: Embracing digitalization in tax collection can improve efficiency and reduce opportunities for evasion. Potential Impact: Balancing Benefits with Risks The proposed reforms have the potential to generate much-needed revenue. According to the Federal Board of Revenue (FBR), raising the tax exemption limit might reduce revenue by Rs 150 billion, while taxing non-filers could potentially add Rs. 1,300 billion to the national coffers. Digitalization efforts have proven successful in other countries, offering significant efficiency gains. However, concerns exist regarding the potential negative impacts of some reforms: Increased Compliance Burden: Businesses, particularly small and medium enterprises (SMEs), might find the additional compliance requirements associated with withholding tax revisions burdensome. Discouraging Investment and Growth: Raising taxes without addressing underlying issues in the business environment could discourage investment and hinder economic growth. Social Inequality: Critics argue that a focus on indirect taxes disproportionately burdens low-income earners who spend a larger share of their income on necessities. Striking the Right Balance: A Look at Alternatives To maximize the positive impact of reforms and minimize negative consequences, the government should consider: Simplifying the Tax Code: A complex tax code is difficult to navigate and increases opportunities for evasion. Simplifying the code and reducing compliance burdens would be beneficial. Enhancing Tax Administration: Strengthening tax collection authorities with improved training and resources can drastically improve efficiency. Promoting Tax Compliance: Public awareness campaigns and incentives for timely filing can encourage voluntary compliance. Reviewing Tax Exemptions: A comprehensive review of existing tax exemptions and subsidies might reveal opportunities for rationalization and revenue generation. International Comparisons: Learning from Others Pakistan can learn valuable lessons from other developing countries that have successfully implemented tax reforms. Vietnam, for example, doubled its tax-to-GDP ratio in a decade through a focus on broadening the tax base, simplifying tax procedures, and strengthening tax administration. However, while the taxation reforms prove to be a challenge shouldn’t the government focus on an effective remittance policy? A Careful Course Correction Tax reform is essential for Pakistan’s fiscal health and long-term economic growth. However, the government needs to carefully navigate this process. By adopting a balanced approach that combines revenue generation with measures to improve the business environment and promote investment, Pakistan can achieve sustainable economic growth while ensuring a fairer and more equitable tax system. To be honest, the way I see current taxation reforms will only add fuel to the fire and fury the Pakistani masses hold against the incumbent government and may lead to country-wide protests. (Concluded) The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.