The government is struggling to expand the tax base as the illegal trade grows

LAHORE:

The government of Pakistan faces significant challenges in expanding its tax base while combating the rise of smuggling and illicit trade, both of which could generate critical revenue for the national economy. Efforts to bring more traders into the tax net have met with limited success, underscoring the complexity of the issue.

Earlier this year, the Federal Board of Revenue (FBR) launched the Tajir Dost Scheme (TDS) to bring more traders into the formal tax system. The initiative, which was launched on April 1, targets 3.2 million merchants in 42 cities, including major urban centers such as Karachi, Lahore and Islamabad. However, since its launch, only 64,000 retailers have signed up, highlighting the difficulties the government faces in achieving compliance among traders.

Despite the fact that the retail and wholesale sectors contribute about 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 TDS were disappointingly meager, with only Rs 503,363 collected from 207 registered traders. This difference highlights a critical issue: registration alone does not ensure tax compliance.

Illegal trade and tax evasion exacerbate the country’s economic woes. Research shows that these activities lead to annual losses exceeding Rs 956 billion in vital sectors. The real estate sector is particularly affected as an estimated Rs 500 billion is lost every year due to tax evasion. Illegal tobacco trade is another major factor that contributes Rs 310 billion annually to the government. Other industries such as tires and oils, pharmaceuticals and tea also play a significant role in the country’s significant tax losses. In addition, smuggling activities, particularly through the Afghan Transit Trade (ATT), are believed to cost the government approximately Rs 1,000 billion annually in lost tax revenue.

Macroeconomic analyst Osama Siddiqui stressed the urgent need for the government to implement comprehensive strategies aimed at expanding the tax net and curbing illicit trade. “A multi-pronged approach that includes strict enforcement measures, public awareness campaigns and incentives for tax compliance could significantly enhance revenue collection and enhance economic stability,” Siddiqui said.

Siddiqui further emphasized the importance of tackling tax evasion and the flow of illicit goods to promote fair competition among businesses and contribute to overall economic growth. “It is imperative for the government to prioritize sustainable policies that ensure revenue for the national exchequer while promoting an environment of compliance and accountability,” he added.