The hardening state

THE powers of the tax machinery are growing more strident but the recovery of actual revenue is getting harder and harder. The new production monitoring system rolled out by the FBR in the last fiscal might provide some technology-led direction to how these coercive powers can be down-blended with enhanced surveillance to yield something more intrusive but less punitive. But it cannot be the mainstay when thinking about the next generation of revenue measures the state must mobilise in order to escape tha shrinking confines of its resource envelope.

Asking for increased coercive powers for themselves is a standard operating principle for civil servants. In the tax bureaucracy, one can trace this demand back to the mid-1990s, and earlier too perhaps, when the tax authorities first got the powers of arrest. These powers were widened piecemeal through the years and had another layer added on top. This layer was surveillance. To some extent, surveillance powers were always vested with tax officers, but in 2008, they received a significant boost when powers of warrantless access and seizure of material as well as bank accounts were added on. And additionally, real-time access to data feeds from various government departments, including but not limited to Nadra, FIA, utilities, telecommunications and banks.

To a large extent, the enhancement of these powers was normal. The economy was growing in size and scope, technology was advancing, and the need to reach wider and deeper into the mass of economic activity over which the state presided was increasing. The powers of tax officialdom will necessarily evolve when we move from paper ledgers to computers to the internet to AI, and much of the enhancement of these powers was following this route.

But to another extent, it was not normal. Enhanced powers of enforcement and audit are a way to streamline tax administration and make it more effective. It is not a revenue plan. Pegging the next generation of revenues that the state requires urgently to enhanced powers of enforcement and audit is a mistake. And the mistake is made when the government of the day brings no policy vision of its own to the job. When this happens, the initiative naturally passes to the civil servants to come up with the ideas with which to meet the next generation of challenges facing the state.

Pegging the next generation of revenues that the state requires urgently to enhanced powers of enforcement and audit is a mistake.

In his first address to the nation after being elected prime minister, Imran Khan promised deep reform and said he would “start with the FBR”. But after floundering for months afterwards and having to replace his finance minister, sign on to an IMF programme and own a gruelling macroeconomic adjustment, the only “reform” he could offer was a vague promise to separate tax policy from tax administration. And even that diminutive promise was left substantially unfulfilled when they created an office for tax policy reform and staffed it with a handful of individuals, who were left to sit idle for days at a stretch.

It is no different today. It is hard to identify what vision the government has for raising the next generation of revenues. They committed to a path of what they called ‘tax deepening’ last year, which rested entirely on enhancing powers of enforcement, surveillance and audit for tax officialdom. But little was said about tax broadening. Along the way, they could present many successes that these enhanced powers might have helped them score, but they fell so far short of their revenue target committed at the start of the year, despite it being revised downward midstream, that it was near embarrassment.

A revenue plan is not simply a list of all the things one is doing. It has to aim for reaching those incomes and transactions that currently escape the tax net. Over the years as the coercive powers of the tax bureaucracy have grown, they have failed to do this. They brought in powers of arrest in the 1990s. In the early 2000s they acquired powers to compel third-party data from banks, telcos, Nadra and utilities. In 2008, they enhanced these powers to acquire real-time access to these data feeds as well as powers of warrantless search and seizure. In 2013, they brought track and trace technology for specified goods. In 2015, they brought in barcodes. Finance Act 2020 amended Income Tax Section 175A to introduce a standing, real-time data-sharing mandate compelling Nadra (identity records), FIA and the Bureau of Emigration (international travel and entry/exit), provincial land record authorities (property records), Excise & Taxation departments (vehicle registration/ transfer), and all electricity and gas utilities (consumption and billing data, down to the level of who’s sharing a connection) to feed data continuously to FBR systems.

In 2022, they enabled Nadra to not just share data, but also compute “indicative income and tax liability” using AI, “or any other modern device”. In 2025, they enhanced the same section of the Income Tax Ordinance further, requiring banks to cross-match customer data against FBR-supplied algorithms for “high-risk persons” and report back with anomalies. The same Finance Act added Sales Tax Section 38B(5) allowing the commissioner to compel internet service providers, telecom companies, and the Pakistan Telecommunication Authority to hand over a subscriber’s IP-related information for a tax-fraud inquiry — extending the surveillance net to internet activity.

This is an abbreviated list. This trajectory in recent years makes for staggering reading. Yet the ratio of currency in circulation to bank deposits, one handy proxy for measuring the size of informal activity, remains stubbornly high, refusing to bow before these enhanced powers. Perhaps because these powers compel private sector actors to protect themselves accordingly. And the state is still reduced to seeking extraordinary interventions, like demanding a reverse flow of resources from the provinces, in order to square its fiscal equation. The hammer is not always a solution. And not every problem is a nail. Sometimes it takes a little mind, a little trust, and a little creativity to crack a tough nut.

The writer is a business and economy journalist.

khurram.husain@gmail.com

X: @khurramhusain

Published in Dawn, July 9th, 2026 ...