AS expected, the government’s attempts to fit out the tax authority with ramped-up powers has produced a backlash. And against this backlash, we see the old instincts swinging into play.
The prime minister has reportedly asked the FBR to ‘go slow’ with the powers they have been vested in the Finance Act for FY26, and the finance ministry has formed a committee to hold talks with the business community around these powers. Against these steps, the leadership of the Karachi-based Federation of Pakistan Chambers of Commerce and Industry has reportedly postponed its strike call given for this Saturday, while the Lahore business community appears steadfast in its resolve to continue with the strike plan.
This is as per newspaper reports, and it is still possible that either of these associations could change their minds before the big day. The business communities of these cities are usually very risk-averse in their dealings with the government and issue strike statements routinely to get attention from the policymakers and then walk it all back once this goal is achieved. We will know by Saturday how serious they are in their resolve this time round.
But we don’t need to wait for Saturday to see that coercive powers such as these are usually not very helpful in realising revenues or aiding documentation. Efforts have been launched in the past to push the business community to document themselves by requiring conditions such as retaining the CNIC of their vendors for each transaction, or manually serving notices on hundreds of thousands of individuals in an effort to get them to file their returns.
Remember when Shabbar Zaidi, as FBR chairman back in 2019, announced that 3.1 million consumers had commercial electricity connections without any presence on the tax rolls, and 347,000 had industrial electricity connections without being registered? Remember when he served approximately 100,000 tax notices on non-sales tax compliant people who could be seen to be running businesses otherwise? That was probably the strongest single effort at manual documentation we had seen in a long time. But despite a very strong push, it came to nothing, as a strike call by the traders forced the government to capitulate rapidly.
Having failed to broaden the tax net, they are now talking of ‘tax deepening’.
This time there are important differences, no doubt. But the fact that it is a manual documentation drive, rather than an automated process, that they are launching is common to both efforts. Our own history shows us that despite the claims of the government of the time, the brunt of such efforts falls first on those that are already compliant, from whom they extract more and more. Meanwhile, the non-compliant find ways to ward off the administrative machinery of the FBR.
This time, a rather large confrontation seems to be getting going. The FBR’s powers have been ramped up significantly, with the most important one being the power to arrest people for the purpose of tax recovery. Anecdotal evidence suggests the courts are clearing out the pipeline of stay orders that had been issued against tax demands in the past, and this process has helped clear the way for more than Rs800 billion worth of recovery through ‘enforcement measures’ that the government claims for FY25. In the coming year, it appears the courts are not likely to be of much help to those who have had tax demands served on them, and the FBR will have significantly more power to pile on the pressure on those who have had a demand created on them. Whether this results in smoother and more buoyant revenue collection or turns into a source of significant friction between state and capital remains to be seen, but it is difficult to envision how this can become a sustainable model for meeting the next generation of the country’s revenue needs.
At best, they will squeeze another year’s worth of revenue out of existing taxpayers through means such as these, after having squeezed them dry in FY25 already. After that, they will turn to more radical steps to meet their revenue needs — perhaps a constitutional amendment to allow them to reverse the NFC award and let resources from the provinces flow back to the centre.
The state hit the limits of its resource envelope a few years ago. Perhaps the year in which it had to pay out more in interest payments than it could bring in as tax revenue was one of these turning points. From there onwards, it has been scrounging harder and harder to find the next generation of revenues to meet its needs. Having failed to broaden the tax net, they are now talking of ‘tax deepening’ and searching within their own professed tax gaps to see if ramped-up enforcement can serve up the next generation of revenues.
It is easy to see how this effort will fail, and FY26 is likely the year when this failure point is hit. The FBR does not have the machinery to reach the vast majority of incomes that comprise this tax gap, nor can it reach the incomes of the traders or small enterprises it is trying to reach with its ramped-up powers this fiscal year. They are going to try nonetheless, and most likely along the way increase the burden on those they can reach.
The question is, how much damage will they do along the way? They are trying to act like a ‘hard state’ without actually being a hard state, and this sort of behaviour does more harm than good. So far, they’ve managed to squeeze an annual target’s worth of revenues out of the compliant citizenry using these means. And their effort to ramp up this drive has already hit choppy waters at the outset of the new fiscal year, forcing them to retreat just a tad. But the months ahead promise ramped-up confrontation and a more muscular approach to taxation that borders on outright appropriation.
The writer is a business and economy journalist.
Published in Dawn, July 17th, 2025
