Tax compliance in Pakistan has been dismal for decades, and every increase in tax rates or the imposition of new levies - whether GST, income tax, or withholding tax (WHT) on non-filers - only pushes more economic activity into the shadows. Instead of increasing revenues, these measures have largely expanded the informal sector.

The grey economy has flourished, particularly since 2015, when discriminatory taxes on non-filers - including levies on cash withdrawals - drove a sharp rise in currency circulation. The ratio of currency in circulation to broad money surged from an average of 22% (FY06-15) to 28% (FY16-24), despite improvements in payment infrastructure and digitization incentives.

Over the past few years, exorbitant tax rates on formal businesses and salaried (and non-salaried) individuals have only intensified the incentive to evade taxes. Informality has exploded across multiple sectors, flooding markets with substandard, tax-evading products. A dysfunctional system is taking root—one that punishes compliant individuals and businesses........

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