Digitalization and Financial Inclusion; A Pathway to Enhanced Tax Revenue Generation in Pakistan

Abstract

This paper examines the role of digitalization in promoting financial inclusion and, by extension, increase tax collection in Pakistan. Although the fiscal systems in Pakistan have undergone extensive reforms, the country is still grappling with a small tax base, low levels of compliance culture in taxpayers, and a low rate of digitalization. Based on the Technology Acceptance Model and the Behavioural Compliance Theory, the study constructs a composite model that explores the mediating factor of financial inclusion in the correlation between digital financial services and tax compliance. The study employs Structural Equation Modelling (SEM) to examine the hypothesized relationships using cross-sectional data on 300 participants who are small business owners, salaried participants, as well as users of digital platforms. The empirical evidence indicates that digitalization has a positive impact on the accessibility of formal financial systems by cutting the cost of transactions, enhancing convenience, and establishing user confidence by being transparent. This greater financial inclusion has an indirect effect of enhancing tax compliance with the favourability of record keeping, traceability and integration into digital payment ecosystems like Raast and mobile wallets. When compared to other developing economies, it was shown that Pakistan has been on a path of digitalization that is characteristic of the first stage of transition, but institutional and regulatory challenges continue to impede the full fiscal digitalization. The paper makes a theoretical contribution by applying TAM to fiscal behaviour and confirming the mediating effect of financial inclusion on the fintech nexus. In practical terms, it provides evidence-based policy insights to help policy makers better digital infrastructure and introduce FBR databases to the financial systems, as well as to ensure that more people become digitally literate as taxpayers. The results highlight the promise of digital transformation as both a way of expanding and diversifying the tax base in Pakistan and developing a more transparent and inclusive fiscal world, which will support the objectives of Vision 2030 and sustainable economic growth.