The Asian Development Bank (ADB) has cautioned Pakistan that merely expanding the tax net is not enough to improve revenues unless backed by an effective strategy focused on compliance and enforcement. In a policy guide released Tuesday, the ADB highlighted the shortcomings of Pakistan’s current tax reforms and urged a balanced, evidence-based approach.
The report stressed that Pakistan’s past experience shows that increasing the number of tax filers without ensuring actual compliance leads to minimal revenue gains and higher administrative costs. Between 2007 and 2019, Pakistan tripled the number of tax filers, especially after enforcement measures in 2014, but the income tax-to-GDP ratio remained stagnant at 3–4%.
The ADB emphasized that new filers often declared little or no taxable income, and withholding taxes and transaction bans increased bureaucratic hurdles without boosting revenue. It added that unless policies aim for broader goals like transparency, financial inclusion, or formalization of the economy, they cannot be justified just on fiscal grounds.
The bank urged policymakers to gather systematic evidence comparing the return on investment between tax net expansion and compliance improvements. It said the tax net should be expanded only when non-revenue benefits, like economic formalization or better data, outweigh the costs to taxpayers and the government.
From 2014 to 2021, Pakistan tripled the size of its formal economy, but tax revenues stayed nearly unchanged from 2007 levels. This, the report concluded, shows that formalization alone does not guarantee higher revenues. ADB warned that without revisiting its tax strategy, Pakistan risks overburdening taxpayers and administrators while failing to meet fiscal stability goals.