Pakistan, a country already grappling with multidimensional extremism and terrorism, is now confronting a new form of hardship: fiscal terrorism. This form of economic oppression isn’t imposed by external enemies, but by the state itself. The nation’s tax system, primarily dependent on regressive indirect taxes, affects every aspect of the socioeconomic landscape. It is a heavy burden, particularly for those at the lower end of the income spectrum, deepening poverty and inequality across the country.
The Tax Burden on Lower-Income Pakistanis
A large portion of Pakistan’s tax revenue comes from indirect taxes like the General Sales Tax (GST) and excise duties. These types of taxes are considered regressive because they impose the same rate on everyone, regardless of their income. The problem here is clear: while individuals earning less than Rs50,000 per month are officially exempt from income tax, they end up paying far more through indirect taxes. For a person with such a low income, indirect taxes on everyday necessities like petrol, electricity, food, phone services, and even healthcare can consume more than 40% of their total earnings.
This stark reality reveals a major flaw in Pakistan’s tax system. The regressive nature of indirect taxes disproportionately affects the poor, while wealthier individuals and businesses face a much smaller relative impact. For someone earning Rs5 million per month, a 40% tax burden may be inconvenient, but it does not threaten their standard of living. For someone earning Rs50,000 or less, this taxation system can mean the difference between survival and poverty.
Rising Inflation and the Increased Tax Burden
In 2023, Pakistan experienced a staggering inflation rate of over 28%. This surge was driven by a combination of external factors and domestic fiscal mismanagement. Rising prices for food, fuel, and electricity, combined with the heavy burden of indirect taxes, have severely reduced the real disposable income of lower-income households. Even as wages stagnate, the cost of basic necessities continues to climb, making it harder for families to make ends meet.
The government’s attempts to alleviate the suffering of the poor through subsidies and cash transfers have proven largely ineffective. These programs are often poorly implemented, with funds either being misallocated or insufficient to cover the growing cost of living. The gap between the government’s promises and the reality on the ground has only widened, leaving the poorest segments of the population to bear the brunt of the economic crisis.
A Punitive Approach Toward Existing Taxpayers
As if the existing tax burden weren’t enough, the Federal Board of Revenue (FBR) has taken a more punitive approach toward small businesses and individual taxpayers. Recent reminders sent to taxpayers are increasingly aggressive, threatening to penalize those who are already struggling under the weight of the current system. Small business owners, shopkeepers, and ordinary citizens, many of whom are already paying their fair share of taxes, are being pushed to the brink.
This raises important questions about the fairness and equity of Pakistan’s taxation system. Why are sectors enjoying tax exemptions and write-offs not being held accountable? Why is there no serious effort to reform the under-taxed agriculture sector, which remains one of the largest contributors to the economy? The wealthiest segments of society, including overseas Pakistanis with no income in the country, are often coerced into filing tax returns or face punitive measures like threats to close mobile connections or restrict international travel.
The Failure of Pakistan’s Tax Infrastructure
Pakistan’s tax system is heavily skewed toward indirect taxation, which is easier to collect but places an unfair burden on lower-income groups. Direct taxes, such as income and corporate taxes, contribute far less to the nation’s revenue. This imbalance is due in part to the weak enforcement of direct tax laws, widespread tax evasion, and numerous loopholes that allow businesses and high-income individuals to avoid paying their fair share.
In fact, less than 1% of Pakistan’s population files income tax returns. Many businesses underreport profits or hide their income altogether to avoid taxation. Meanwhile, the FBR continues to focus its efforts on individuals and small businesses that are already part of the formal economy, penalizing them instead of addressing the real issue: the massive tax evasion taking place in more affluent sectors.
The Inefficiency of Indirect Taxation
Indirect taxes like the GST are among the easiest to impose but are also the most harmful to consumers. These taxes affect everyone equally, regardless of income level. In the fiscal year 2022-2023, indirect taxes accounted for around 60% of Pakistan’s total tax revenue. The GST, set at 17%, is a significant contributor to this figure. However, the impact of these taxes on essential goods and services like food and fuel is felt most acutely by those with the least ability to pay.
This over-reliance on indirect taxation creates a system that is not only inefficient but deeply unfair. The poorest segments of the population are forced to spend a larger proportion of their income on taxes, while the wealthiest individuals and businesses continue to evade their responsibilities. The government’s efforts to increase tax revenue have done little to address this imbalance, and the gap between the rich and poor continues to widen.
Fiscal Terrorism and Socioeconomic Decline
Pakistan’s reliance on indirect taxation, combined with the FBR’s punitive measures and the government’s failure to reform the system, has created a form of fiscal terrorism that is slowly eroding the country’s socioeconomic foundation. As inflation rises and the cost of living continues to increase, lower-income groups are being pushed further into poverty. This regressive tax regime is not only inefficient but deeply unjust, targeting the most vulnerable members of society while allowing the wealthy to avoid their obligations.
The systemic inequities in Pakistan’s tax system have reached a critical point. Without serious reform, the country risks further socioeconomic decline. The over-reliance on indirect taxes must be addressed, and efforts should be made to widen the tax base by targeting those sectors and individuals who have long avoided paying their fair share. Wealth taxes, super taxes, and reforms in agriculture taxation are necessary steps to create a more equitable system.
Conclusion
Pakistan’s fiscal and tax system is in dire need of reform. The current structure, which relies heavily on indirect taxes and penalizes those who are already struggling, is unsustainable. The country must move toward a more equitable system that places a fairer burden on the wealthy while relieving the pressure on lower-income groups. If these reforms are not implemented, Pakistan’s tax regime will continue to resemble a form of fiscal terrorism, driving the country further into poverty and economic despair.
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