ISLAMABAD: Despite a substantial 76% increase in the number of income tax return filers in the tax year 2024, Pakistan’s tax revenue only grew by a modest 30%, while the country’s tax-to-GDP ratio alarmingly dropped to 8.7% from 10.6% in 2016-17. These discrepancies have been highlighted in a recent report by the Auditor General of Pakistan (AGP), raising significant concerns about the effectiveness of tax broadening efforts.
The AGP attributes this disparity to a prevalent trend where many individuals are filing tax returns primarily to benefit from reduced tax rates on transactions such as property and vehicle sales, rather than genuinely contributing substantial taxes to the national exchequer. These individuals are effectively leveraging the system for procedural benefits without fulfilling meaningful tax obligations.
Broadening of Tax Base Wing Under Scrutiny
The AGP’s report, which critically evaluates the Federal Board of Revenue’s (FBR) Broadening of Tax Base (BTB) wing, noted that the number of tax filers increased from 2.959 million in 2023 to 5.215 million in 2024. However, this impressive surge in filer numbers did not translate into a proportional rise in tax revenue, suggesting a fundamental flaw in the BTB strategy.
The audit found that most of these new filers appear to be entering the tax system merely for the procedural advantages associated with filing, rather than to declare and pay taxes on their actual income.
Persistent Non-Compliance Among High-Income Earners
Further compounding the issue, the report revealed that despite the FBR having access to extensive third-party data – including information on industrial electricity and gas connections, ownership of high-end vehicles, and frequent foreign travel – many high-income individuals continue to file nil returns, effectively contributing no taxes.
The audit also pointed out that several critical issues highlighted in a special audit report from 2016-17 remain unresolved. These include the non-registration of 1,807 individuals operating with industrial electricity connections, a failure to ensure tax return filing by 702 industrial electricity connection holders and 992 gas connection holders, and the absence of registration or filing from 744 individuals owning motor vehicles above 1500cc.
Unverifiable Progress and Recommendations
While the FBR claims its BTB wing has undertaken various initiatives to expand the tax base, the audit found no verifiable evidence of progress on the ground. The Departmental Accounts Committee (DAC) had previously directed the FBR to submit a detailed update on its BTB efforts by January 2025; however, no such update was received prior to the completion of the AGP’s report.
In light of these findings, the AGP has put forth several key recommendations:
Mandatory registration of potential taxpayers identified through utility data, vehicle registration records, and foreign travel information.
Granting auditors direct access to key data portals to facilitate better scrutiny.
Strengthening collaboration with NADRA, motor and property registrars, and other withholding agents to ensure robust compliance and data integration.
The audit’s findings underscore a critical challenge for Pakistan’s revenue authorities: translating increased tax filer numbers into tangible revenue growth and addressing persistent non-compliance among affluent segments of society.
