Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan is preparing to undergo the first biannual review under the US$7 billion 37-month Extended Fund Facility (EFF) programme with the International Monetary Fund (IMF) team arriving on March 3, 2025. While the review is likely to conclude on a positive note, concerns persist regarding the structural shortcomings in revenue collection.
The primary challenge is not about meeting the targets assigned to the Federal Board of Revenue (FBR), but about the overall miserable failure to expand the tax base, which remains heavily reliant on a very limited segment of the economy. However, concerns loom over tax revenues as well. In the first eight months of the current fiscal year (FY) 2024-25, the shortfall on the part of FBR is widened to around Rs. 606 billion.
Meanwhile, the State Bank of Pakistan (SBP) has successfully achieved its monetary targets, ensured financial stability and reduced immediate pressures on exchange rate adjustments. However, Pakistan faces a daunting task in managing its external financing requirements, a challenge that will likely be a focal point of the IMF’s assessment. The government fiscal and monetary measures, though stabilized key indicators, the persistent shortfall in external funding sources and foreign inflows remains a critical risk that could impact future economic prospects.
Pakistan’s tax-to-GDP ratio has historically lagged member states of Organisation for Economic Co-operation and Development (OECD). According to OECD’s Revenue Statistics 2024, the average tax-to-GDP ratio across OECD countries stood at 33.9% in 2023, reflecting a slight decline from 34.0% in 2022. On the contrary, Pakistan’s tax-to-GDP ratio hovers around 10-12%, much below global benchmarks. The closer look at tax revenue distribution in OECD countries reveals that France had the highest tax-to-GDP ratio at 43.8%, followed by Denmark at 43.4% and Mexico recorded the lowest at 17.7%. Pakistan’s tax performance remains low, even among developing economies, highlighting the need for urgent reforms.
OECD’s Revenue Statistic 2024 shows that between 2022 and 2023, OECD tax-to-GDP ratios exhibited mixed trends. Luxembourg (+2.7 pp), Colombia (+2.6 pp), and Türkiye (+2.5 pp) experienced the highest increases due to higher personal and corporate income tax revenues. On the flip side, Chile (-3.2 pp), Korea (-3.1 pp), and Israel (-3.0 pp) saw the most significant declines, primarily driven by falling revenues from income and goods taxes.
Pakistan’s revenue collection remains highly dependent on indirect taxation, official figure is 51.3% of total revenue of Rs. 9299 billion in FY 2023-24, derived from sales tax, customs duties and federal excise. If we add withholding taxes (60% of total income tax collection), imposed under the Income Tax Ordinance, 2001, in indirect mode, the ratio of indirect taxes in the total tax collection of FBR will be as high as 75%. The lack of direct taxation, particularly from the agricultural, retail and real estate sectors, is a critical area of concern for the IMF, the World Bank and independent experts in Pakistan.
In 2022, the OECD average tax-to-GDP ratio was 34.0%, with Norway (43.4%) and France (45.8%) leading the pack. Mexico (16.8%) and Colombia (19.7%) were at the lower end. Pakistan’s figures have remained largely unchanged, indicating that tax mobilization efforts have not yielded any significant results. The OECD countries witnessed a shift toward increasing corporate income taxes (CIT) and value-added taxes (VAT), while Pakistan’s stagnant tax structure continues to rely heavily on a narrow tax base and withholding taxes.
In OECD countries, taxes on income and profits contribute 36.5% of total tax revenues, with 23.6% coming from personal income tax (PIT) and 12% from corporate income tax (CIT). However, Pakistan’s direct tax contribution, if we exclude withholding taxes in indirect mode, remains below 30%, highlighting a disproportionate reliance on indirect taxation.
Social security contributions in OECD countries account for 24.8% of tax revenue, while in Pakistan, this figure is negligible due to the lack of a formalized system. Property taxes, which form a modest 5.3% of tax revenue in OECD nations, remain underutilized in Pakistan, particularly in the real estate sector. Taxes on goods and services, including VAT, are the primary revenue sources in Pakistan but often lead to regressive economic impacts, disproportionately affecting lower-income groups.
OECD data indicate a balanced revenue distribution among central, state, and local governments. In countries like Germany and Canada, local and state governments collect 30-40% of total tax revenues. Whereas in Pakistan, taxation is heavily centralized, with minimal revenue generation at provincial levels. The decentralization of tax collection could improve efficiency and broaden the tax net.
A deeper analysis of the tax structures in OECD countries reveals a clear shift towards increasing direct taxation. The reliance on corporate and personal income taxes, social security contributions, and value-added tax in these economies has ensured a more equitable tax burden. In Pakistan excessive dependence on indirect taxation disproportionately affects lower-income groups, exacerbating income inequality and slowing economic growth. The lack of a comprehensive tax framework for the informal sector, particularly the retail and real estate industries, further hinders revenue generation. Therefore, without an effective mechanism to tax these sectors, the government will continue struggling to meet its revenue targets.
The tax-to-GDP ratio has been steadily increasing in most OECD countries over the past few decades. The OECD average tax-to-GDP ratio increased from 24.9% in 1965 to 34.0% in 2022. This long-term trend highlights the importance of consistent tax policy adjustments to meet evolving economic and social needs. However, Pakistan’s tax-to-GDP ratio has remained relatively stagnant, indicating that policy reforms have not been effectively implemented. Pakistan can implement strategic tax reforms to enhance revenue collection while ensuring economic stability, by learning from OECD countries.
Pakistan’s taxation issues are not merely about revenue shortfalls but structural challenges contributing enough to meet fiscal needs. The IMF review will likely emphasize the key reforms, expanding the tax base by bringing retailers, traders, and real estate under the tax net. Pakistan, despite promises, has failed to enforce meaningful taxation on these sectors.
The IMF will also emphasize strengthening direct taxation by increasing corporate and personal income tax collection. Currently, Pakistan’s salaried individuals and corporate entities bear the brunt of taxation, while informal sectors escape scrutiny. Property and agricultural taxation must be enforced, as OECD data shows that property taxes contribute over 5% of tax revenues in developed nations.
In Pakistan, landowners and real estate investors contribute disproportionately low. The IMF may push for a reduction in import duties and tariffs, which could encourage trade but challenge domestic revenue targets. Additionally, empowering provincial governments to collect and manage taxes could improve efficiency and ensure a broader revenue base.
Pakistan must adopt a multi-pronged approach to address these issues. Firstly, expanding the tax base through the inclusion of the informal sector, focusing on financial inclusion to register businesses is imperative. By implementing digital payment systems and enforcing documentation requirements will help track untaxed economic activities.
Secondly, a progressive tax policy should be adopted, reducing the over-reliance on indirect taxes and ensuring that higher-income groups and corporations contribute fairly. Thirdly, property taxation must be modernized to prevent underreporting and tax evasion in the real estate sector. Lastly, greater autonomy for provincial governments in tax collection can improve efficiency and reduce the burden on the federal government.
Pakistan’s tax-to-GDP ratio at 9.5% in FY 2024 was alarmingly low compared to global standards, and the failure to broaden the tax base remains a significant challenge. In the first six months of the current fiscal year, tax-to-GDP ratio remained dismal at 4.9% (FBR 4.5%).
The OECD Revenue Statistics 2024 provide critical insights into best practices and potential reforms. Therefore, moving forward, Pakistan must focus on progressive taxation, enforcement of property and agricultural taxes, and decentralization of revenue collection. The burden will continue to fall disproportionately on the already-taxed segments of the economy without decisive action, undermining economic growth and fiscal stability.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, and cyber laws, ML/CFT, IT, intellectual property, arbitration, and international taxation. He studied journalism, English literature, and law. He holds an LLD in tax law with a specialization in transfer pricing.
He was a full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner.
He is the Chief Editor of Taxation. He is the country editor and correspondent of the International Bureau of Fiscal Documentation (IBFD) and a member of the International Fiscal Association (IFA). He is a Visiting Faculty at the Lahore University of Management Sciences (LUMS) and member Advisory Board and a Visiting Senior Fellow of the Pakistan Institute of Development Economics (PIDE).
He has co-authored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (Revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law, Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is the author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, and its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal). He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines, and newspapers at home and abroad.
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime, and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies, and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, and cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career, he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and has also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study-driven scenarios and exams to ensure knowledge transfer.
His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan Rauf’s Research on Labour Laws and Income Tax, and others.
His articles include Revenue Collection: Contemporary Targets vs. Orthodox Approach, It is Time to say goodbye to Our Past, US Double Standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly listed Pakistan, Corruption is No Excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF Secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge,.
The recent publication, coauthored with Huzaima Bukhari, is
Pakistan Tackling FATF: Challenges & Solutions
available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46