akistan’s perpetual tax crisis, often portrayed as a shortage of revenue, is a myth. In fact, over the last five years, tax expenditure has risen to Rs 3 trillion. Every budget season, the debate revolves around ambitious collection targets, documentation drives, compliance initiatives and new enforcement measures. Rarely, if ever, one talks about reducing the tax expenditure.

Also, a fundamental question - who is responsible under law for formulating tax policy and granting exemptions and waivers – is rarely raised.

The question has assumed particular significance after the establishment of a Tax Policy Office in the Ministry of Finance while the Federal Board of Revenue continues to maintain full-fledged policy members for inland revenue and customs. The result is an institutional arrangement where two policy centres operate simultaneously, one created through an Act of Parliament and the other through an executive action.

This is not a mere technicality. It reflects a deep malaise afflicting Pakistan’s fiscal governance: disregard for legal frameworks, absence of accountability and policy-making increasingly detached from constitutional requirements and economic realities.

The Federal Board of Revenue Act, 2007, was meant to replace an outdated legal framework governing tax administration. The parliament defined the role and functions of the FBR. The preamble of the Act leaves little room for ambiguity. It states that the legislation was enacted because “it is expedient to regulate the matters relating to the fiscal and economic policies; administration, management; imposition, levy and collection of taxes and duties.”

The words “fiscal and economic policies” were not inserted casually. The parliament recognised that taxation is not merely about collection. Tax policy is an integral component of economic governance. Consequently, the statutory framework envisaged an institution responsible not only for administering taxes but also for contributing to the formulation and implementation of fiscal policy.

This legislative intent was further reinforced through the governance structure created under the Act, including the Policy Board under Section 6 of the FBR Act and specialised policy wings within FBR. For years, the policy members remained responsible for analysing tax proposals, evaluating fiscal measures, reviewing economic implications and advising the federal government.

The creation of the Tax Policy Office alters this arrangement. The strongest evidence of the legal problem comes not from critics but from the government itself. Earlier this year, Finance Minister Muhammad Aurangzeb informed the Senate that amendments to the FBR Act 2007 would be required to formally transfer policy functions from the FBR to the Ministry of Finance. The FBR chairman similarly acknowledged that amendments in both the Rules of Business and the FBR Act were necessary.

Pakistan is now maintaining two policy establishments at public expense: a Tax Policy Office within the Ministry of Finance and Members (Policy) in the Inland Revenue and Customs establishments. As responsibilities overlap, accountability becomes blurred and decision-making becomes fragmented.

Such arrangements rarely produce effective governance. When tax measures fail, it is impossible to assign responsibility. The policymakers blame administrators. The administrators blame policymakers. The Ministry of Finance points towards the FBR. The FBR points to policy directives. External advisers point to implementation deficiencies. Everyone participates in decision-making but nobody is accountable for the outcomes.

The consequences extend far beyond institutional design. Pakistan is facing one of the most serious investment crises in its history. Domestic investment remains depressed. Foreign direct investment continues to lag behind regional competitors. Existing businesses increasingly struggle to operate in an environment characterised by uncertainty and regulatory volatility.

Investors do not merely examine tax rates. They assess the quality of institutions that design and administer those taxes. Predictability matters more than promotional slogans. Capital can tolerate moderate taxation. It cannot tolerate arbitrary taxation. Most importantly, it cannot function efficiently when the institutional responsibility for policy remains unclear.

The past decade provides ample evidence of policy inconsistency. Finance Acts have become vehicles for annual revenue extraction rather than instruments of economic strategy. Minimum taxes continue to be imposed on loss-making businesses. Advance taxes proliferate irrespective of actual income.

Withholding provisions multiply every year. Temporary measures become permanent. Tax credits appear and disappear. Entire sectors face abrupt changes in treatment without adequate transition periods. The cumulative effect is destructive.

Businesses devote increasing resources to compliance, litigation and tax planning instead of productive investment. Entrepreneurial energy shifts from innovation towards survival. Foreign investors demand higher returns to compensate for policy uncertainty. Many simply choose alternative destinations. This instability cannot be divorced from the institutional confusion surrounding tax policy.

Largely donor-supported reform agendas and IMF-inspired restructuring have driven the shift towards a separate Tax Policy Office. The objective may have been to create specialised policy capacity. However, institutional reform cannot be sustained when it bypasses the legal framework governing public institutions.

Revenue targets increasingly dominate fiscal decision-making. Institutional integrity has become secondary. The urgency of satisfying programme benchmarks often eclipses concerns regarding legality, accountability and long-term economic consequences.

This approach produces precisely the outcomes visible today: aggressive taxation of documented sectors, persistent expansion of withholding regimes, recurring disputes between taxpayers and authorities and declining investor confidence.

Pakistan does not suffer from a shortage of policy offices. It suffers from a shortage of policy coherence. The solution is straightforward. The government must decide where tax policy authority legally resides. If policy functions are to remain within the FBR, the existing statutory framework should be respected. If policy functions are to be transferred to the Ministry of Finance, the parliament should amend the FBR Act transparently and comprehensively.

The present arrangement achieves neither objective. Economic recovery requires investment. Investment requires confidence. Confidence requires predictability. Predictability begins with respect for law. A state that ignores the statute governing its own revenue machinery sends a troubling message to taxpayers and investors alike. If legal certainty is absent within the government, it becomes difficult to persuade businesses that the rules governing their investments will remain stable.

Pakistan’s tax crisis is not merely a matter of collection targets and fiscal deficits. It is increasingly a crisis of governance. Until institutional responsibilities are grounded firmly in law and policy-making is aligned with economic realities rather than administrative expediency, the country will continue to struggle with low investment, weak growth and declining taxpayer trust.

The issue is not whether Pakistan needs better tax policy. It certainly does. The issue is whether tax policy can be improved while the very institutions responsible for making it operate in a state of legal and administrative confusion.

The writer, an advocate of the Supreme Court and adjunct teacher at Lahore University of Management Sciences, is a member of the Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics.