Pakistan’s Tax Paradox

Pakistan’s tax narrative is riddled with paradoxes, systemic injustice, and institutionalized inefficiency. As the country enters yet another budget season in 2025 under increasing pressure from the IMF, the burden of taxation continues to rest disproportionately on the shoulders of the salaried class while those with wealth, influence, and informal sector dominance operate with near-total immunity.

Since 1947, Pakistan’s tax system has struggled with narrow base, elite capture, and chronic underperformance. At independence, the newly formed state inherited a rudimentary tax apparatus centered around land revenue and customs duties. In the 1950s, Pakistan’s tax-to-GDP ratio hovered around 6%, with agriculture contributing almost 50% to GDP yet facing negligible taxation. By the 1960s under Ayub Khan’s military-industrial policies, the ratio modestly improved to around 8%, driven by customs duties and excise taxes on industrial output. However, this growth was highly regressive, with the burden falling on consumption rather than income or wealth. Through the 1970s and 1980s, successive governments failed to reform structural taxation. The nationalization period under Bhutto saw stagnation in revenue collection as SOEs became loss-making, while the Zia era encouraged undocumented parallel systems, weakening the formal economy. By the late 1980s, Pakistan’s tax-to-GDP ratio was stuck around 9.5%, still lower than India’s 13.8% and Bangladesh’s 10.2%. In 1991, the first structural adjustment program with the IMF called for tax reforms, but implementation remained half-hearted. The 1998 nuclear tests and international sanctions pushed the country to rely more on domestic resource mobilization, yet political instability prevented any serious tax overhaul. From 2000 to 2020, tax-to-GDP fluctuated between 9.5% and 12.6%, never crossing 13%. In contrast, Vietnam rose from 12% in the 1990s to over 18% by 2020. India consistently improved its compliance via GST and PAN integration, while Pakistan remained reliant on withholding and indirect taxes.

According to the Federal Board of Revenue (FBR) data for fiscal year 2023-24, Pakistan collected approximately PKR 7.2 trillion in total tax revenues. Of this, nearly 60% came from indirect taxes such as sales tax, federal excise duties, and customs duties. Sales tax alone contributed over PKR 2.6 trillion, disproportionately impacting low- and middle-income households who spend a greater percentage of their income on consumption. Direct taxes, which ideally reflect a citizen’s ability to pay, made up just 40% of the total. A closer look reveals that the salaried class accounted for over 80% of income tax collected through withholding at source. Out of more than 330 million population, less than 4.9 million filed income tax returns in 2024, and a significant portion of those filers declared incomes below taxable thresholds.

Landowners often declare incomes below the exempt limit, and due to weak digital land records, valuations remain arbitrary and unverifiable.

The agriculture sector, which contributes roughly 18.9% to Pakistan’s GDP and employs more than 37% of the workforce, remains largely outside the federal tax regime. Agricultural income is taxed at the provincial level, but enforcement is minimal and politically manipulated. In Punjab, Sindh, and Khyber Pakhtunkhwa, actual tax collection on declared agricultural income remains under PKR 3 billion annually, a fraction of the sector’s estimated income. Landowners often declare incomes below the exempt limit, and due to weak digital land records, valuations remain arbitrary and unverifiable. Moreover, politically influential individuals have used agricultural income declarations as a shield against federal income tax, especially during asset reconciliations and amnesty schemes.

Retail and wholesale trade, comprising nearly 18% of GDP, contributes less than 1% to total income tax collection. This is largely due to resistance to point-of-sale integration, under-invoicing, and political protection of trader lobbies. In 2023, out of more than 2.5 million commercial electricity meters, only 350,000 traders were registered with the FBR. Efforts to link electricity bills, bank transactions, and property purchases with tax data have repeatedly been watered down due to lobbying pressure. The real estate sector continues to operate under multiple valuation regimes: FBR rates, DC rates, and market rates, with a gap of up to 500% between the lowest and actual market values. This discrepancy not only reduces tax collection but facilitates parking of black money.

Several countries with similar economic structures have successfully reformed their tax systems over the past two decades. Vietnam, for instance, overhauled its tax regime between 2003 and 2015 by digitizing tax filings, linking business registration with tax numbers, and enforcing value-added tax collection. Its tax-to-GDP ratio rose from 12.6% in 2001 to over 18.2% by 2020, with more than 90% of businesses submitting returns electronically by 2022. India’s introduction of the Goods and Services Tax (GST) in 2017 unified 17 indirect tax types under a single digital framework. The integration of Aadhaar (biometric ID) with PAN (tax ID) enabled cross-verification of income and expenditure, widening the tax base to over 85 million registered taxpayers in 2023. Bangladesh introduced the Tax Identification Number (TIN) linked with the national ID and has raised its tax-to-GDP from 8% in 2004 to nearly 12.4% in 2023, outperforming Pakistan.

Pakistan launched its own digital initiatives, including the IRIS system for e-filing and the POS integration system to document retail sales. However, these efforts have seen limited adoption. As of December 2024, fewer than 35,000 retail outlets were integrated with the FBR’s POS system, out of over 2.2 million potential businesses. The IRIS portal continues to face accessibility issues, lacks Urdu interface, and requires complex documentation that deters low-literacy users. Unlike India and Vietnam, Pakistan does not have a centralized economic profile system for individuals, which means that data from NADRA, FBR, land registries, car registration authorities, and banks remain unlinked. This fragmented structure severely hampers risk-based audits, lifestyle checks, and revenue tracking. Multiple studies by the World Bank, IMF, and Pakistan’s own Revenue Mobilization Strategy have estimated the country’s tax potential at around 22-25% of GDP. At current GDP of PKR 95 trillion (as per FY2024 estimates), this translates into a potential of nearly PKR 21 trillion in annual tax revenue. However, only PKR 7.2 trillion was collected in FY24, leaving a gap of nearly PKR 13 trillion due to exemptions, evasion, and inefficiencies. If even 40% of this gap could be bridged through structured reforms, it would yield over PKR 5 trillion – enough to finance national defense, education, and public health combined.

The Federal Board of Revenue, Pakistan’s apex tax collection agency, has long been the subject of domestic criticism and international concern. Despite numerous restructuring attempts, the institution suffers from chronic capacity gaps, procedural inefficiencies, and systemic corruption. Internal performance audits conducted in 2023 revealed that fewer than 4% of the total registered taxpayers were audited, and of those audited, 72% were settled through negotiated assessments rather than litigation or recovery. The FBR’s workforce includes over 21,000 employees, but only 1,300 officers are directly involved in field audits or investigations. In many cases, audit selections are perceived as tools of political retribution or avenues for rent-seeking, rather than for fiscal justice.

Pakistan’s tax policy is heavily influenced by its political economy, wherein legislators themselves often benefit from the exemptions they legislate. In the 2023 Tax Expenditure Report, the Ministry of Finance documented over PKR 2.2 trillion in revenue foregone due to sectoral and individual exemptions. This included over PKR 370 billion in income tax exemptions, PKR 980 billion in sales tax waivers, and nearly PKR 340 billion in customs duty reductions. The bulk of these favored elite interests: real estate developers, sugar millers, exporters with special zero-rating regimes, and even luxury car importers. Efforts to roll back these exemptions – especially under IMF pressure – have routinely failed due to political resistance from coalition partners and provincial lobbyists.

Pakistan has frequently adopted tax reform strategies on paper but failed in execution. The 2016 Revenue Mobilization Plan targeted an increase of 1.5% in tax-to-GDP ratio annually, but actual gains averaged just 0.3%. Donor-funded initiatives such as the Tax Administration Reform Project (TARP) and the Pakistan Raises Revenue (PRR) program under the World Bank brought technical expertise but struggled with local adoption. Many of the reforms – including risk-based audit selection, taxpayer education, and automation of refund processes – were either poorly implemented or actively resisted by internal bureaucratic lobbies. Moreover, frequent changes in FBR leadership (nine chairpersons in ten years) disrupted continuity and weakened institutional memory.

The average Pakistani citizen, particularly within the salaried class, increasingly views taxation not as a civic duty but as an imposed penalty for honesty. With no visible public services, dilapidated infrastructure, and widespread corruption, the moral justification for paying taxes is eroding rapidly. This has created a vicious cycle: low trust in the state reduces voluntary compliance, which in turn increases reliance on indirect taxes, further eroding tax morale. Multiple surveys by Gallup Pakistan and IPSOS between 2021 and 2024 showed that over 68% of respondents felt the tax system was unfair, and 72% believed their taxes were being wasted.

Pakistan’s informal economy is estimated to constitute 35% to 45% of the GDP, with some independent studies placing it even higher. This parallel economy includes undocumented retail, informal labor, shadow real estate transactions, hawala networks, unregistered vehicles, and non-banked income streams. Despite several amnesty schemes, including the 2018 and 2019 declarations, the informal economy continues to thrive. A State Bank study in 2022 revealed that over PKR 6.5 trillion worth of transactions annually occur in cash outside the banking system, making tax enforcement nearly impossible without digitization and documentation.

As the 2025 budget looms and external financing windows narrow, Pakistan stands at a fiscal crossroads. It can either continue the tradition of patchwork measures and indirect levies or confront the structural injustices embedded in its tax regime. This requires more than administrative tweaks; it demands political courage, institutional rebuilding, and a redefinition of the social contract. From making lifestyle audits mandatory to integrating NADRA and land records, from reducing tax exemptions to digitizing agricultural value chains – reform is possible, but only if the elite consent to be governed by the laws they legislate. Pakistan’s tax paradox is not just about numbers; it’s about national survival. The window for correction is narrow, but it still exists. The question is whether we will seize it – or squander it like so many reform moments in our troubled history. One of the most glaring weaknesses in Pakistan’s taxation framework is its reliance on indirect taxation, which now constitutes nearly 60% of total tax revenue. These taxes – on fuel, utilities, telecommunications, and basic consumption – are regressive in nature and disproportionately impact lower and middle-income groups. For example, the petroleum levy alone generated over PKR 870 billion in FY2024, despite being essentially a non-tax revenue that bypasses National Finance Commission distribution. By contrast, income from agricultural sources, which contributes roughly one-fifth of the GDP, yields less than PKR 3 billion in taxes annually across all provinces combined. This asymmetry fuels resentment among salaried taxpayers who are routinely subjected to strict compliance mechanisms, while large swathes of the economy remain untaxed.

While the case for tax reform is overwhelmingly clear, what makes Pakistan’s situation uniquely complex is the entrenched culture of fiscal avoidance among both the elite and politically sensitive segments. For over seven decades, tax policies have been molded not by principles of equity or economic need, but by short-term political considerations and vested interest groups. Feudal landowners, traders, real estate magnates, and high-net-worth individuals have shaped tax policy through influence, often securing generous exemptions, reduced rates, or even amnesty schemes to regularize untaxed wealth. As a result, the system has developed into a patchwork of inconsistent incentives, encouraging evasion while penalizing compliance. In this backdrop, the salaried class emerges not just as a taxpayer, but as a fiscal scapegoat.

Comparative analysis of international tax regimes offers invaluable insights into how peer countries have succeeded in mobilizing revenue while broadening compliance. For instance, India’s tax-to-GDP ratio stood at approximately 17.7% in 2023, driven by integration of the Aadhaar identity system with tax records, aggressive digital filing campaigns, and the nationwide Goods and Services Tax (GST) regime. In contrast, Bangladesh – which shares socioeconomic indicators with Pakistan – implemented a unified Taxpayer Identification Number (TIN) connected to national identity documents and digitized property and bank records. This approach resulted in consistent year-on-year improvements in its tax-to-GDP ratio, which reached 12.4% in 2023, compared to Pakistan’s stagnant 10.2%. Rwanda, a post-conflict African state, also offers a remarkable case study. By implementing a fully digital tax filing and monitoring ecosystem, it raised its tax-to-GDP ratio from 10.3% in 2005 to 16.1% by 2022, with over 95% of its businesses filing online.

Pakistan’s untapped tax potential lies prominently within agriculture, retail, real estate, and the informal service sector. In agriculture, where the GDP contribution exceeds 18%, the actual tax recovery is less than 0.01%. Even modest reforms – such as provincial enforcement of land income taxation above a certain acreage or income threshold – could yield billions annually. Similarly, the retail and wholesale trade sector, which is estimated to generate over PKR 35 trillion in annual revenue, remains largely undocumented. Out of 2.2 million commercial electricity meters, less than 400,000 retail shops are registered with tax authorities, and only 35,000 use POS-linked systems. If this sector were brought to even partial compliance using technology and incentive-based reform, it could conservatively add over PKR 1 trillion to national revenues each year.

Pakistan’s digital economy has witnessed exponential growth in recent years, with IT exports projected to surpass USD 15 billion by 2025. Yet, the country’s taxation infrastructure has failed to keep pace. Online platforms, freelancers, digital influencers, and e-commerce retailers continue to operate in a grey zone, often outside the formal tax regime. The Digital Nation Pakistan Act 2025, recently enacted, aims to regulate this space through the Pakistan Digital Authority, which is now mandated to oversee digital transformation and financial integration. However, challenges persist – notably, the lack of integration between digital wallet transactions, platform commissions, and tax declarations. In most cases, online vendors do not issue tax-compliant receipts, and international platforms operating in Pakistan pay little to no local tax. If regulated effectively, the digital economy could conservatively add PKR 200-300 billion in new annual tax revenue.

Remittances from overseas Pakistanis remain a vital pillar of the economy, with FY2025’s first nine months alone yielding over USD 28 billion. Under existing policies, remittances up to PKR 5 million annually are exempt from tax, provided they flow through official channels. Amounts above this threshold can attract inquiries under anti-money laundering and tax laws, particularly if they are used to finance luxury real estate or other asset acquisitions. While this encourages the use of formal banking channels, it also creates a loophole – allowing wealthy residents to route undeclared income through family abroad to evade local taxes. FBR needs to enhance cross-border compliance mechanisms and consider diaspora asset declarations for high-net-worth individuals with dual residency.

The IMF and World Bank have persistently recommended broad-based tax reforms for Pakistan. The IMF’s latest staff-level agreement emphasizes the removal of tax exemptions, integration of provincial and federal taxation systems, and autonomy for FBR operations. The World Bank’s 2023 Federal Public Expenditure Review highlights the need to phase out special tax regimes and zero-ratings, especially in sectors like export processing, real estate, and sugar. Recommendations include implementing a unified tax portal, digitizing land records, using biometric verification for taxpayer registration, and conducting real-time expense audits. Failure to comply with these recommendations could jeopardize future disbursements under structural adjustment facilities and stall critical debt refinancing arrangements.

To translate analysis into actionable policy, the following comprehensive recommendations are proposed for policymakers, the Ministry of Finance, and the Federal Board of Revenue:

Broaden the Tax Base: Integrate agriculture, retail, and informal services into the formal economy through progressive documentation strategies, starting with digital utility and mobile wallet linkages. Digital Integration: Develop a unified national financial database linking NADRA, FBR, provincial land registries, banks, vehicle registration, and utility records to create digital economic profiles for every adult citizen.

Reform Agricultural Taxation: Provincial governments must enforce land-based and income-based agriculture taxation, with transparent valuation and digitized records, especially for holdings above defined thresholds.

Real Estate Transparency: Harmonize DC rates, FBR rates, and actual market rates with open-access GIS-based land valuation tools, and mandate all real estate transactions through traceable banking channels. Simplify Tax Filing: Introduce simplified annual return forms and auto-populated returns for salaried individuals, small traders, and freelancers. Create Urdu interfaces for digital platforms to ensure accessibility. Mandatory E-Invoicing: Make e-invoicing compulsory for all retail outlets with electricity connections over 5 kW and incentivize digital POS integration with rebate schemes.

Rationalize Tax Exemptions: Gradually phase out sectoral exemptions and zero-rated regimes, replacing them with direct subsidies and targeted incentives where necessary.

Institutional Autonomy: Grant operational and financial autonomy to FBR under parliamentary oversight, with fixed-term appointments and performance-based contracts for top officials. Compliance-Linked Subsidies: Make key state subsidies – such as electricity tariffs, fertilizer, and fuel – conditional on taxpayer registration and annual filing.

Strengthen Audit and Risk Frameworks: Use AI-driven analytics to identify mismatches between lifestyle indicators and declared income, and automate audit selection to minimize discretion and corruption. Engage Diaspora in Tax Net: Introduce voluntary disclosure schemes for overseas Pakistanis with local assets and explore double taxation treaties to promote cross-border tax compliance. Independent Oversight: Form a Tax Reform Commission comprising experts from public, private, and international institutions to monitor reform implementation annually. Pakistan’s tax system stands at a defining crossroads. The status quo is no longer sustainable in the face of economic vulnerability, global scrutiny, and a widening trust deficit among citizens. A transition from coercive, narrow-based taxation to a transparent, equitable, and digital framework is both a necessity and an opportunity. Implementing the proposed reforms will not only enhance revenue generation but also rebuild the social contract between the state and its people – a contract grounded in fairness, contribution, and accountability. The time to act is now, with political courage, institutional resilience, and strategic vision guiding the way toward a stronger, self-reliant Pakistan.

The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982