Bankruptcy of ideas—VIII The Oppressive (Tax) State

The previous article argued that Pakistan is gradually evolving into a petroleum levy state where indirect extraction increasingly substitutes for genuine fiscal reform. An equally important transformation has occurred within the tax system itself. For years, policymakers have repeated a familiar claim: millions of Pakistanis remain outside the tax net.

This factually fallacious assertion is used to justify new withholding taxes, advance taxes, documentation requirements, data collection exercises and increasingly intrusive enforcement measures. The evidence tells a different story. Pakistan does not suffer from an absence of taxation. It suffers from an absence of rational taxation, ruthless borrowing and mindless spending. The country has gradually evolved into a tax state without taxpayers (return filers).

The Rise of Withholdingisation

Modern tax systems are largely based on a simple principle. A taxpayer earns income. The tax authority determines/verifies taxable income. Tax liability is assessed. Tax is then collected. Pakistan increasingly follows the reverse sequence. Tax is collected first. Income is determined later—if at all.

The result is a fiscal structure dominated by withholding taxes, advance taxes and minimum/presumptive taxes. Over time, assessment has been replaced by deduction. Tax administration has increasingly become advance tax collection machinery. Recovery from current and arrears demand after assessment etc. is around 5%!

Table 1: Income Tax Collection (Gross/Net) by Mode (Rupees in billion)

Source: FBR Year Books

The trend is unmistakable. An overwhelming share of direct tax collection is now generated through withholding and advance collection mechanisms rather than traditional assessment.

Taxed Before Becoming a Taxpayer

Millions of citizens pay taxes through withoutholding mechanism despite never filing returns. Consider the range of transactions subject to withholding or advance taxes:

• Electricity bills.
• Mobile phone usage.
• Banking transactions.
• Cash withdrawals.
• Motor vehicle registration.
• Property transactions.
• Telephone and internet services.
• Foreign travel.

The average citizen may never receive a notice from Federal Board of Revenue (FBR). Yet that citizen, as a mobile user, is forced to pay advance adjustable income tax repeatedly throughout the year. The issue therefore is not whether citizens are taxed. The issue is whether they are recognised (what to speak of resected) as taxpayers.

A person whose taxes (both direct and indirect) are collected through utility bills and mobile phone usage is still contributing to public revenue. To describe such individuals as being outside the tax net is economically misleading.

The Myth of the Untaxed Economy

The official narrative assumes that Pakistan’s fiscal challenge stems primarily from non-filers. This explanation is politically convenient because it shifts attention away from structural weaknesses. The reality is more complex. Pakistan’s tax problem is not simply the existence of non-filers. It is the inability or unwillingness to tax economic rents effectively while repeatedly extracting resources from already documented citizens.

Millions of commercial and industrial electricity consumers and mobile service subscribers pay advance taxes under the provisions of the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and provincial sales tax on services. Businesses encounter withholding at nearly every stage of economic activity.

Salaried individuals are taxed before receiving their income. Exporters, contractors and suppliers operate under extensive withholding regimes. The State therefore possesses considerable information about economic activity. Yet the tax base remains narrow. This contradiction reveals a failure of policy rather than a failure of information.

Revenue without Accountability

Withholding taxes offer obvious administrative advantages. They generate predictable cash flows. Collection costs remain low. Compliance appears high. Targets become easier to achieve. Yet these advantages come with significant costs.

Tax authorities become less interested in assessing actual income. Revenue generation receives greater attention than taxpayer rights. The distinction between taxpayer and tax collector begins to blur. Banks, employers, utility companies, telecom operators and businesses effectively become agents of the revenue authority. The burden of administration shifts from the State to society.

The Cost to Growth

The consequences extend beyond tax administration. A withholding-based system creates incentives that discourage documentation. The more visible an individual or enterprise becomes, the greater its exposure to taxation and compliance requirements. Informality therefore acquires economic value. Documentation acquires costs.

This undermines one of the principal objectives of tax policy: encouraging voluntary compliance. A successful tax system should reward documentation. Pakistan often appears to penalise it.

The Digital State and the Citizen

The Finance Bill 2026 introduces additional digital reporting, data integration and electronic monitoring measures. Digitisation itself is not the problem. Modern economies require digital tax administration. The challenge arises when surveillance expands while fundamental weaknesses remain unresolved.

Data collection cannot substitute for policy reform. Algorithms cannot compensate for inequitable tax design. Technology can improve administration. It cannot create legitimacy.

Citizens comply voluntarily when they believe taxation is fair, transparent and linked to public benefits. No software can replace that social contract.

The Forgotten Taxpayer

Perhaps the most neglected aspect of Pakistan’s tax debate is the absence of taxpayer recognition. Governments celebrate increasing numbers of returns. Revenue authorities announce documentation initiatives. International institutions emphasise compliance. Yet little attention is paid to the millions already contributing through withholding and indirect taxes.

The fiscal system increasingly treats citizens as sources of revenue rather than participants in a social contract. This distinction matters.

A tax state focuses on collection. A fiscal state focuses on citizenship. The former asks how much revenue can be extracted. The latter asks how taxation can support prosperity, fairness and public trust.

Beyond Withholdingisation

Pakistan cannot achieve sustainable fiscal stability by multiplying withholding provisions indefinitely. A modern tax system requires:

• Broad-based taxation of economic rents.
• Simplified compliance.
• Transparent assessment procedures.
• Protection of taxpayer rights.
• Lower rates on productive activity.
• Greater reliance on voluntary compliance.

Most importantly, it requires recognising that taxpayers are citizens, not merely sources of revenue.The country’s fiscal crisis is often presented as a shortage of taxpayers. The evidence suggests a different conclusion. Pakistan has millions of taxpayers. What it lacks is a tax system capable of treating them fairly.

The next article examines the newest phase of this transformation: the emergence of the digital leviathan, where technology, data integration and automated compliance increasingly redefine the relationship between the citizen and the State.

[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.