Poor tax design, not evasion, keeps ratio low

Behavioural fixes like pre-filled returns and ring-fenced funds could boost compliance

ISLAMABAD:

Pakistan's tax-to-GDP ratio has remained around 9% to 10% for several decades now – a figure that is alarmingly low for a country of its size and potential.

The established explanation for this could be attributed to our culture of celebrating tax evasion, along with a lack of political will for deep structural reforms. But a more accurate diagnosis points towards the overall poor design of our systems.

The compliance process is costly, the human actors are corrupt, and the perceived contract between citizens and the state is broken; resulting in rational actors trying to stay outside the system.

However, the good news is that this is a solvable problem that countries like Estonia, India, the United Kingdom and Australia have been tackling over the past two decades by using behavioural public policy instruments and insights.

Unfortunately, Pakistan continues to head in the opposite direction. Take for example the new proposed income tax return forms launched by the Federal Board of Revenue (FBR) for the year 2026, which will now require additional information from filers, instead of making their job easier.

In contrast, Estonia's e-Tax system pre-fills income, salary, dividend, pension and other information using third-party data from employers, banks and government databases. The result is a tax return that hardly takes three minutes to complete for most citizens, something which is hailed as a national cultural moment.

Similarly, Pakistan's tax system has failed to address the core behavioural issues holding back civic compliance for years. This failure becomes glaringly obvious in public debates, where most Pakistanis routinely counter with the argument, "I pay Zakat, so I shouldn't have to pay income tax" – a fascinating and deeply ingrained behavioural phenomenon.

At its root, this justification represents a psychological conflict between religious obligation and civic duty, one that is heavily influenced by a lack of institutional trust. Consequently, income tax demands are not seen as a legitimate civic duty, but rather as a form of "double dipping" by the state.

In response, the government should use public messaging that works with religious sentiments rather than fighting them. Partnering with respected religious scholars to clarify that Zakat is a private spiritual duty for poverty relief, while income tax is a collective civic contract for macro-infrastructure development (roads, airports, defence), can behaviourally decouple the two in the public mind.

Similarly, the state could use "ring-fenced tax funds" that allow citizens to opt for a percentage of their income tax to be locked exclusively into a particular sector, say, healthcare or public transport. The state should introduce "citizen budgets" and public digital dashboards showing exactly where tax money goes.

If a new bridge in sector G-8 of Islamabad is given a description saying: "Built using the local income tax collected from the G-8 commercial markaz," the behavioural link between tax contribution and reward becomes tangible.

In the United Kingdom, HMRC sends behaviourally framed messages like "Nine out of ten people in the UK pay their tax on time" to taxpayers who have failed to pay yet. Furthermore, inspired by the US Internal Revenue Service (IRS), HMRC is launching an enhanced reward scheme for informants of non-compliance with special focus on offshore schemes.

Meanwhile, research conducted by Australia's tax authorities revealed that the first communication a new taxpayer receives affects their long-run compliance behaviour. Those who received clear, friendly explanations of tax obligations complied at higher rates than those who got notices of penalties. Taking a leaf out of this playbook, the FBR should start sending a welcome kit to new tax registrants, especially young, first-time job holders.

At the same time, Pakistan should seriously consider adopting faceless audit assessments on the lines of what India does. Cases are randomly allocated by algorithm, both parties remain anonymous, and reviewing officers are in a different jurisdiction to prevent local influence. Additionally, the FBR could have mandatory video hearings for disputes above a threshold. This preserves the anti-corruption benefits while ensuring substantive engagement where it matters.

In a nutshell, fixing Pakistan's tax-to-GDP ratio is not merely a matter of rewriting tax codes or weaponising an archaic system, but rather the system needs to change its lens from blind enforcement to behavioural engineering. Until the state makes compliance cheaper, automated and psychologically rewarding, rational citizens will continue to choose the shadows.

THE WRITER IS A CAMBRIDGE GRADUATE AND WORKS AS A STRATEGY CONSULTANT