Govt struggles to expand tax base as illicit trade surges

The government of Pakistan is facing significant challenges in widening its tax base while simultaneously combating the rise of smuggling and illicit trade, both of which could generate crucial revenue for the national economy. Efforts to bring more traders into the tax net have shown limited success, highlighting the complexity of the issue.

Earlier this year, the Federal Board of Revenue (FBR) launched the Tajir Dost Scheme (TDS) to integrate more traders into the formal tax system. The initiative, which began on April 1st, targets 3.2 million traders across 42 cities, including major urban centres such as Karachi, Lahore, and Islamabad. However, since its inception, only 64,000 retailers have registered, underscoring the difficulties the government faces in achieving compliance among traders.

Despite the retail and wholesale sectors contributing approximately 20% to Pakistan's Gross Domestic Product (GDP), their tax contributions remain alarmingly low, accounting for just 4% of total tax revenue. Income tax collections from traders participating in the TDS have been disappointingly minimal, with only Rs503,363 collected from 207 registered traders. This disparity highlights a critical issue: registration alone does not ensure tax compliance.

Illicit trade and tax evasion are exacerbating the country's economic woes. Research indicates that these activities lead to annual losses exceeding Rs956 billion across vital sectors. The real estate sector is particularly hard hit, with an estimated Rs500 billion lost each year due to tax evasion. The illicit tobacco trade is another major contributor, costing the government Rs310 billion annually. Other industries, such as tires and lubricants, pharmaceuticals, and tea, also play a significant role in the country's substantial tax losses. Furthermore, smuggling activities, particularly through the Afghan Transit Trade (ATT), are believed to cost the government around Rs1,000 billion annually in lost tax revenue.

Macroeconomic analyst Osama Siddiqui emphasised the urgent need for the government to implement comprehensive strategies aimed at expanding the tax net and curbing illicit trade. "A multifaceted approach that includes stringent enforcement measures, public awareness campaigns, and incentives for tax compliance could significantly enhance revenue collection and bolster economic stability," Siddiqui stated.

Siddiqui further stressed the importance of addressing tax evasion and the flow of illegal goods to foster fair competition among businesses and contribute to overall economic growth. "It is imperative for the government to prioritise sustainable policies that secure revenue for the national treasury while promoting an environment of compliance and accountability," he added.