ISLAMABAD: Concerns are mounting within the country’s top tax machinery that Pakistan’s income tax system is failing to capture the true wealth of its citizens, as approximately half of taxpayers continue to declare nil incomes far below the lavish lifestyles they maintain, Dawn has learned from official sources.

As of June 30, the Federal Board of Revenue (FBR) had received 5.9 million income tax returns for the tax year 2024. Notably, nearly half of these filings came from taxpayers who declared zero income, underscoring a persistent trend of taxpayers declaring nil income.

This pattern is continuing into the current tax year, with early data for 2025 reflecting a similar surge in filings from individuals reporting no taxable earnings. “More than 40 per cent of taxpayers declared nil income in their returns filed up to Sept 27,” a tax official confirmed to Dawn on Saturday.

People are living in palatial houses, enjoying 24/7 air conditioning, riding fancy cars, wearing branded clothes, making multiple international trips, buying branded watches/jewellery and other luxuries. Still, their income tax returns do not reflect their lifestyles. The income declared and tax paid is not reflective of their living standards, as pointed out after an internal analysis of the tax returns filed with the FBR.

Despite opulent living, nearly 50pc of return filers report zero income, revealing a failing system

Officials said that advanced tax jurisdictions have long leveraged familial and community networks to uncover hidden assets — rewarding whistleblowers handsomely while safeguarding their identities.

Pakistan’s current framework offers a maximum reward of Rs5m for informants, but the FBR is now pushing to raise that ceiling dramatically to Rs150m, structured on a graduated scale.

The proposal, officials said, aims to incentivise credible disclosures while aligning Pakistan’s enforcement tools with global best practices. Crucially, FBR officials stress that informant confidentiality must be enshrined in law, warning that any breach would constitute a violation of Section 216 of the Income Tax Ordinance 2001.

According to tax officials, who spoke on condition of anonymity, the changes are necessary because the existing system has failed to capture the true income of many taxpayers. “It is a well-known fact that some individuals are living in palatial houses, driving expensive cars, travelling abroad, and spending on luxuries, yet their declared income and taxes paid do not reflect their lifestyles,” one official noted.

They added that under the universal self-assessment scheme, taxpayers’ declarations are accepted without routine questioning, a practice that is being misused. The success of such a system, the officials said, depends on “robust deterrent audits backed by third-party data and digitised economic structures.”

However, Pakistan’s cash-driven and largely undocumented economy continues to shield undeclared wealth from formal scrutiny. This undocumented economy continues to frustrate efforts to broaden the tax base.

To overcome this challenge, officials suggested looking beyond traditional data sources and tapping into informal social networks to detect hidden income.

These include extended families, in-laws, neighbours, office colleagues, club members, accountants, and even low-paid employees such as drivers and domestic workers.

“These people are aware of cash transactions and lifestyles. If secrecy is guaranteed and proper rewards are assured, they can become valuable sources of information,” one FBR official explained.

The officials said advanced tax systems abroad already rely on whistleblowers and social networks to expose hidden income. Pakistan, they said, must adopt similar methods, but only under a framework that inspires confidence in informants. “The two pillars of such a system are absolute secrecy and credible rewards,” another senior officer said.

They further propose that whistleblower rewards be simplified in line with international best practices, ensuring both ease of claims and swift payments.

They further noted that the current whistleblower reward system is “not fully equipped to harness this potential” and called for urgent amendments. They also suggested that information collected through whistleblowers be used only for the current tax year, giving taxpayers an opportunity to improve compliance without fear of retrospective audits.

“This would send a clear message to citizens to file correct declarations, while also reassuring them that positive behaviour will be encouraged,” an official remarked.

Published in Dawn, September 28th, 2025