PAKISTAN’S fiscal debate has settled into a familiar rhythm. The World Bank, IMF, tax consultants and commentators frequently assert that the country suffers from a ‘tax gap’ of seven to nine per cent of GDP — a shortfall between what is collected and what the law, ideally enforced, would yield. The metric implies that this shortfall is a result of cheating taxpayers. It is a powerful narrative that favours the tax collector and policymaker to deflect their mistakes or venality to focus on increased coercion to ensure compliance.

Consultants insist that the gap is a hard, objective, measurable headline number. It is anything but. Different studies measure different things. Some estimate what could be collected if all economic activity were fully captured and perfectly enforced. Others focus on exemptions built into the system. Still others compare Pakistan’s tax-to-GDP ratio with peer countries and conclude there is ‘room’ to collect more. Though these approaches are analytically distinct, public debate often merges them into an erroneous conclusion: citizens are not paying what they owe.

The verdict is mistaken, or at least incomplete. Treating the tax gap as the central problem confuses symptoms with deeper structural issues. A large share of the gap is not evasion but policy. By lumping together evasion, avoidance and policy-driven exclusions, the narrative shifts attention away from a warped tax policy and weak state legitimacy. At best, the gap is a rough indicator of a bad tax policy and administration; at worst, it destroys trust.

A large share of the tax gap is not evasion but policy.

Pakistan possesses a distorted, fragmented tax system........

© Dawn