Causes Of Low Tax Collection In Pakistan

Generally, direct taxes are considered as fair and equitable way of raising revenues for the governments. Direct taxes make the system more progressive through balancing income distribution and narrowing down the inequality gap. In Pakistan, the use of such redistributive tools has remained under-utilized and the tax structure remained tilted towards the regressive indirect taxes, contributing around 60 percent of total taxes.

Income Tax Ordinance 2001 provides exemptions and preferential treatments to different segments of the society. These are called tax expenditures and their annual loss stood at 1.6 percent of GDP or around 14 percent of total FBR taxes. To the extent of income tax, the second schedule of the Income tax ordinance gives comprehensive list of exemption both for individuals and corporates. 

Some Main Causes Of Low Tax Collection In Pakistan Are Given Below

Corruption and tax evasion

Pakistan has a long history of corruption, which has led to a culture of tax evasion among businesses and individuals. This is one of the main reasons for low tax collection in Pakistan.

Lack of proper tax administration

The Federal Board of Revenue (FBR) is responsible for tax collection in Pakistan but it is often criticized for its lack of efficiency and effectiveness. This leads to a lack of proper tax administration, which further reduces tax collection.

Inadequate tax laws and regulations

Pakistan’s tax laws and regulations are often seen as complex and confusing, which makes it difficult for businesses and individuals to comply with them. This leads to low tax collection as many people avoid paying taxes.

Lack of enforcement

Pakistan’s tax laws are not enforced properly, which leads to a lack of compliance among businesses and individuals. This results in low tax collection as many people do not pay taxes.

Poverty and unemployment

High poverty and unemployment rates in Pakistan make it difficult for many people to pay taxes. This results in low tax collection as many people are not able to afford to pay taxes.

Political instability

Political instability in Pakistan has led to a lack of continuity in government policies and tax collection efforts. This makes it difficult to implement effective tax collection policies, resulting in low tax collection.