Bankruptcy of ideas—IX  The Digital Leviathan  

The previous articles in this series examined Pakistan’s debtocracy, the extractive state, the rentier state, the petroleum levy state and the evolution of an oppressive tax system, increasingly dependent on withholding, advance taxation and indirect extraction. A natural question now arises. If taxation has increased, documentation requirements have expanded, withholding taxes have multiplied and citizens are subjected to unprecedented reporting obligations, why does the State continue demanding more information, more surveillance and more enforcement powers?

The answer lies in a simple reality. The existing model has failed. Despite decades of increasing taxes, expanding withholding regimes and repeated documentation drives, Pakistan continues struggling with fiscal deficits, rising debt and narrow tax bases. Instead of questioning the model itself, policymakers increasingly place their faith in technology.

The result is the emergence of what may be called the digital leviathan.  Budget 2026-27 and the Finance Bill 2026 place extraordinary emphasis on digital transformation.

The Federal Board of Revenue (FBR) is moving toward:

• Centralised data repositories.
• Integrated databases.
• Algorithm-based risk profiling.
• Faceless audits.
• Electronic invoicing.
• Real-time transaction monitoring.
• Expanded third-party information gathering.
• Automated compliance systems.

These measures are presented as transformational reforms. Technology undoubtedly has a role in modern tax administration. The question is whether technology can compensate for weaknesses in policy.

The case for digitisation is straightforward. Automation can reduce corruption. Electronic records can improve transparency. Integrated databases can identify inconsistencies. Risk-based selection can reduce arbitrary audits. Faceless interaction can limit direct contact between taxpayers and officials. These are legitimate objectives.

No modern economy can function without substantial digitisation. The problem begins when technology is expected to achieve objectives that are fundamentally political or economic rather than administrative. 

Pakistan remains predominantly a cash-based economy. Large segments of retail trade operate informally. Agricultural transactions remain weakly documented. 

Property valuations frequently diverge from market realities. A substantial share of employment exists outside formal payroll systems. Many businesses still maintain parallel records. These realities create a fundamental challenge.

The quality of administrative decisions depends upon the quality of underlying data. Weak data produce weak outcomes. Digital systems do not eliminate errors. They often automate them.

India introduced faceless assessments in 2020 with the objective of reducing discretion and corruption. The reform was widely praised. Yet implementation generated significant challenges. Taxpayers complained about procedural difficulties, communication gaps, algorithmic misunderstandings and inadequate opportunities for meaningful hearings. Indian authorities subsequently modified aspects of the system and restored certain safeguards.

The lesson is important. Technology works best when combined with strong institutions, reliable data and effective procedural protections. It cannot substitute for them. Pakistan faces even greater challenges because documentation levels remain lower and data quality remains more uneven.

The most striking feature of Pakistan’s tax system is that it already possesses vast amounts of information. Banks report transactions. Employers report salaries. Utility companies report consumption. Telecom operators report usage. Property registries report transfers. Importers and exporters submit detailed documentation. Withholding taxes capture millions of transactions. 

The issue is therefore not a complete absence of information. The issue is how information is used. If decades of expanding data collection have not produced a broader and fairer tax system, policymakers should ask whether the problem lies solely in the quantity of data.

The most successful tax systems in the world rely on something more important than technology. They rely on trust. Citizens comply voluntarily when they believe:

• taxation is fair;
• laws are applied uniformly;
• privileges are limited;
• public services justify fiscal burdens.

Technology can facilitate compliance. It cannot create legitimacy. A citizen who perceives the system as inequitable will remain sceptical regardless of how sophisticated the software becomes.

There is another concern. Digitalisation inevitably expands the State’s capacity to observe economic activity. Such powers require corresponding safeguards. Access to financial information, commercial data, property records and personal transactions must be accompanied by robust protections against misuse. 

Without adequate safeguards, digitisation risks transforming tax administration into financial surveillance. The distinction is important.

A modern state requires information. A free society requires limits. The challenge is maintaining both. The fundamental weakness of Pakistan’s fiscal system is not technological. It is structural. It is also worthwhile to note that until this day Pakistan has not passed Personal Data Protection Bill, 2023 pending for three years!

Taxation remains concentrated on documented sectors. Economic rents remain undertaxed. Petroleum levies continue expanding.Tax expenditures remain substantial. Debt servicing consumes fiscal space. No software can resolve these problems.

Technology may improve collection. It cannot determine what should be collected, from whom and for what purpose. Those remain questions of policy. Technology is a tool. It is neither a substitute for sound economics nor a replacement for political courage. The danger lies not in digitisation itself. The danger lies in believing that a fundamentally flawed fiscal model can be rescued through increasingly sophisticated methods of surveillance and enforcement.

Pakistan’s challenge is larger than improving tax administration. It is redesigning a fiscal system that currently rewards privilege, taxes productivity and finances development through borrowing. Until that challenge is addressed, digitisation may improve efficiency. It will not transform outcomes.

The next article concludes this series by examining the relationship between debt, taxation and democracy itself. The central question is whether a state can remain fiscally sustainable, politically accountable and economically sovereign when an ever-growing share of public resources is devoted to servicing past obligations rather than building future prosperity.

[To be continued] 

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.