Qudsia Bano

Pakistan’s recent tax policy measures, intended to increase government revenues, have instead led to significant economic distortions and widespread revenue losses, according to experts and industry analysts.

The unintended consequences of these policies have sparked concerns about the country’s fiscal stability, with businesses, consumers, and the informal sector all feeling the impact. The Federal Board of Revenue had projected an increase in tax collection following the implementation of new policies, including higher indirect taxes and stricter compliance regulations.

However, rather than improving revenue streams, these measures have reportedly driven businesses underground, exacerbating the already large informal economy. Small and medium enterprises, in particular, have been struggling to cope with rising operational costs, which has forced many to shut down or reduce their workforce.

Dr Ahmed Faraz, an economist and policy analyst at Pakistan Institute of Development Economics, believes that the policy was poorly designed and failed to consider ground realities. He noted that excessive reliance on indirect taxation has made goods and services more expensive for consumers while discouraging business growth.

“Instead of broadening the tax base, the policy has created an environment where tax evasion has increased, further reducing the government’s ability to generate revenue.” Another concern is the impact on investment. Tax uncertainty and sudden policy shifts have discouraged both local and foreign investors. Ali Hassan, a financial expert and former tax consultant at a renowned firm, explained that businesses require long-term stability to plan their investments.

“Frequent changes in tax rates and compliance requirements create unpredictability, which drives investment away to more stable markets.” He warned that if Pakistan did not reform its tax structure in a way that encouraged compliance rather than avoidance, the long-term economic consequences could be severe. The government, however, remains adamant that its tax measures are necessary to meet revenue targets set by international financial institutions.

Despite reassurances from policymakers, businesses and consumers are already feeling the pressure of these policies. With inflation on the rise and economic growth slowing, experts suggest that a more balanced approach focusing on direct taxation, reducing the burden on businesses, and improving enforcement mechanisms is crucial to reversing the damage caused by the current tax framework.

Credit: INP-WealthPk