To tackle Pakistan’s ongoing fiscal challenges and boost tax compliance, the Federal Board of Revenue (FBR) has rolled out new, stringent measures aimed at non-filers through the Tax Law Amendment Bill 2024-25. These initiatives are intended to expand the tax base, deter tax evasion, and increase revenue collections, representing a notable pivot towards establishing a more transparent tax system.

During the presentation of this amendment in the National Assembly, Finance Minister Muhammad Aurangzeb highlighted its importance in securing macroeconomic stability and improving Pakistan’s relatively low tax-to-GDP ratio.

Key Measures Proposed by the FBR

1. Restrictions on Asset Purchases

Vehicle Purchases: To enforce compliance, the new regulations prevent non-filers from purchasing any vehicle with a capacity over 800cc. However, they can still buy motorcycles, rickshaws, and tractors, which are essential for everyday transport and agricultural activities.

Property Transactions: Non-filers are also restricted from acquiring properties above a certain value, which aims to limit the scope of undocumented or informal investments in the real estate sector.

2. Banking Limitations

Account Freezing: The FBR now holds the authority to freeze the bank accounts of business owners who have not registered for sales tax, compelling them to comply with tax regulations.

Transaction Restrictions: There are now severe restrictions on the number and types of financial transactions non-filers can engage in, further pushing them towards compliance.

3. Stock Purchase Restrictions

Non-filers are now excluded from participating in stock market investments, a move designed to prevent the circulation of undocumented wealth through such channels.

4. Higher Tax Rates

Tax Increases: Non-filers will face higher tax rates on earnings from debts and business operations, a strategic move to encourage them to document their financial activities.

5. Enforcement Mechanisms

Property and Business Seizure: The government has the authority to seize or seal properties and business assets of those who remain unregistered, ensuring compliance through direct action.

Utilities and Travel Restrictions: Restrictions extend to personal utilities and travel; non-filers may find their mobile and utility connections cut, and their ability to travel abroad can be restricted.

6. Family Tax Compliance

A novel feature of the bill is that it automatically considers the immediate family of registered filers—parents, spouses, and children under 25—as compliant, streamlining the process and reducing avenues for evasion through family members.

Why Did the Government Enforce These Laws?

Pakistan’s economic stability is jeopardized by its low tax-to-GDP ratio, currently at 10.3%, which is significantly lower than most other countries in the region. This new legislation by the FBR is a targeted effort to expand the tax base, combat rampant tax evasion, and mitigate the extensive informal economy that has long undercut the nation’s fiscal health. These stringent measures are pivotal in restructuring Pakistan’s fiscal framework towards a more equitable and transparent system.

Objectives Behind the Measures

Increase Revenue Collection

The FBR’s recent actions are primarily driven by the need to close a significant tax revenue gap, projected at Rs5.1 trillion. By targeting sectors and entities not yet fully compliant, the government aims to harness this untapped potential effectively.

Broaden the Tax Base

Key to these reforms is the integration of undocumented individuals and enterprises into the formal economy. This shift not only promises increased fiscal inputs but also a fairer distribution of tax responsibilities.

Discourage Tax Evasion

With the implementation of more rigorous asset and banking oversight, the new policies specifically target existing gaps that have allowed non-filers to avoid their fiscal duties.

Finance Minister Muhammad Aurangzeb emphasizes that reaching a tax-to-GDP ratio of 13% is crucial for Pakistan’s sustained economic growth.

Impact of the New Laws

Encouraging Compliance

The strict nature of these laws is intended to foster a culture of compliance. One anticipated outcome is a significant rise in taxpayer registration as entities seek to avoid new restrictions.

Enhancing Transparency

A notable focus is the reduction of large-scale cash transactions, particularly within the real estate sector, which is often prone to undervalued reporting and tax avoidance.

Supporting Economic Stability

By increasing tax collections, the government can enhance its ability to fund essential public services and lessen its dependency on foreign loans.

Challenges and Opportunities

While the new legislation has been met with some resistance, particularly concerning potential disruptions to business operations, FBR Chairman Rashid Mahmood Langrial insists that these changes are vital for remedying fiscal inconsistencies and broadening the tax net. The approach is aimed at not just filling immediate revenue gaps but also at building a long-term culture of compliance.

Conclusion

The stringent measures introduced against non-filers signify a decisive move towards greater fiscal discipline and transparency within Pakistan’s economy. These reforms are expected to narrow the gap in tax compliance and foster a more equitable economic environment.

Despite potential short-term challenges, these changes are essential for Pakistan’s path towards financial autonomy and reduced economic disparities. For non-filers, the choice is becoming increasingly clear: integrate into the formal system or face progressive constraints.