Pathways to Development: Insights on Taxation from Dr. Mazhar Waseem

During this year's Pathways to Development Conference, Dr. Mazhar Waseem, Professor of Economics at the University of Manchester, delivered a thought-provoking session on Pakistan’s taxation system. Drawing on his extensive research and expertise, he explored the challenges of tax compliance, the inefficiencies in enforcement, and the socio-political dynamics shaping Pakistan's fiscal landscape. Here are some of his most impactful insights from the session.

This year, Pakistan received more than 5.3 million income tax returns—a phenomenal eight times increase from 2007. Despite this, there has been no growth in tax revenue. In fact, as a share of GDP, we are collecting less revenue today than we did in 2007.

The first key problem is that our war on non-filing is not targeted. We should target only people who are non-compliant, non-filers. Our costly measures to punish non-filing affect everyone. There is a loss of economic activity because we are preventing these people from engaging in certain transactions. Policies to punish non-filing are trying to restrict consumption and investment options of non-filers. And here lies the second key problem with our war on non-filing: an individual has to file a tax return, but consumption takes place at the household level. If you ban some of the consumption of non-filers, you are punishing the whole household.

One thing that can be done is targeted enforcement. So FBR can identify taxpayers who should be in the tax net, but they are not. They can identify these taxpayers, and they can send them pre-filled tax returns, like it happens in many other countries. Then the taxpayer will have the option to amend the data, modify the return that they received from FDR, and file it.
Another way is to make every self-employed person in the economy file a tax return. Tax evasion is usually more at the self-employment level. You can lower the requirement to file a tax return. The benefit will be that you will have more filers, who will ultimately become taxpayers.

I will give you a helicopter view of why Pakistan cannot collect more revenue. There are different explanations. One is weak state capacity; the quality of our governance, our judicial institutions is very low. This is important because FBR has to enforce their tax demands through the existing judicial system of the country. If judicial institutions of the country are so weak, they cannot enforce their demands. Ultimately, cases against tax evasion will fail if these judicial institutions do not improve.
The second thing is that there is no taxation without information. You can tax only what you observe. If all transactions in the economy are cash transactions, so then no revenue authority, however sophisticated they are, can collect revenue. In terms of formal banking channels, we are one of the worst countries in the world. And some of the policies that we are using are making it even worse because people will not be allowed to open a bank account when in fact we should be saying the opposite. The FBR cannot collect tax if the transaction is not through digital channels or leaving any information trail.

An audit has no deterrence effect. Tax evasion happens because costs of tax evasion in the economy are low relative to benefits.

Why cannot FBR recover the amounts which they detect as tax evasion? There could be two reasons. One is that quality of our judicial institutions is so low that even when their detections are good, they cannot enforce it. The second reason could be that the quality of their detection is so low that they cannot be enforced through an independent judicial review. The quality of their detection is so low because there is no smoking gun because all transactions are in cash. So as a result of that, evasion costs in the country are low.