Income Tax or Expropriatory Taxation?
Dr. Ikramul Haq
The real test of any modern income tax system is not how much revenue it collects but how fairly and rationally it taxes real income. A closer examination of official data for fiscal year 2024-25 reveals that Pakistan’s income tax system continues to drift away from the fundamental principle of taxation based on ability to pay. Instead, it is increasingly characterised by withholding-based collection, presumptive taxation, minimum taxes, separate block taxation and additional levies such as surcharge and super tax. The cumulative effect is the transformation of income taxation into a system that is not merely distortionary and oppressive but increasingly expropriatory.
As discussed in Part I, both FBR Year Book 2024-25 and Revenue Division Year Book 2024-25 confirm that the overwhelming portion of income tax is collected before audit/assessment. Withholding taxes, advance taxes and payments with returns collectively account for nearly 95 percent of total income tax collection, leaving barely five percent as collection through normal assessment and enforcement. This structure fundamentally undermines the concept of income taxation.
The FBR Year Book 2024-25 presents income tax as the dominant component of direct taxes and reports net income tax collection at Rs. 5712.9 billion, equal to 48.6 percent of total FBR taxes and 98.6 percent of direct taxes. It further says that income tax comprises withholding taxes, voluntary payments, collection on demand and miscellaneous receipts. In that presentation, withholding taxes amounted to Rs. 3371.9 billion, voluntary payments Rs. 2115.4 billion, collection out of demand Rs. 266.7 billion and miscellaneous Rs. 43.2 billion, with refunds and adjustments of Rs. 84.4 billion bringing net income tax to Rs. 5,712.9 billion.
The Revenue Division Year Book 2024-25 tells a slightly different story. It reports direct taxes at Rs. 5791.7 billion after refunds of Rs. 55.5 billion, and breaks “income tax” into four components only: withholding taxes of Rs. 3381.5 billion, advance tax of Rs. 1893.8 billion, payments with returns of Rs. 221.5 billion and collection on demand of Rs. 266.7 billion, taking the total to Rs. 5764 billion. It simultaneously claims that direct taxes constituted 49.3 percent of total FBR collection and that the growth in collection on demand reflects improved enforcement by field offices.
Even before deeper analysis begins, this dual presentation raises questions. One official yearbook reports net income tax at Rs. 5712.9 billion after refunds and adjustments of Rs. 84.4 billion and includes a miscellaneous component of Rs. 43.2 billion. The other presents income tax at Rs. 5764 billion through four components alone and refers only to direct-tax refunds of Rs. 55.5 billion. These are not merely stylistic differences. They show that even within the same fiscal framework, FBR and Revenue Division in Ministry of Finance continue to narrate income tax through different casings, making precise reconciliation difficult for analysts, taxpayers and policymakers.
The larger truth is even more troubling. Regardless of which of the two official presentations is taken as the baseline, the overwhelming bulk of so-called income tax did not arise from normal assessment after determination of taxable income. On the Revenue Division’s own figures, withholding taxes were Rs. 3381.5 billion, advance tax Rs. 1893.8 billion and payments with returns Rs. 221.5 billion. Together these three items came to Rs. 5496.8 billion, or about 95.4 percent of the reported income tax total of Rs. 5764 billion.
Collection on demand was only Rs. 266.7 billion, or roughly 4.6 percent. The FBR Year Book 2024-25 conveys the same reality in slightly different classification: withholding taxes plus voluntary payments alone amounted to Rs. 5487.3 billion, while collection on demand was Rs. 266.7 billion. In other words, almost the entire edifice of income tax collection rested on deduction, collection and advance recovery before or outside audit and/or final assessment.
This is why the language of “direct tax dominance” needs to be treated with caution. A tax does not become truly direct merely because the statute books place it under the Income Tax Ordinance, 2001. If a large part of withholding is passed on through the price mechanism, the legal label and the economic incidence cease to coincide.
The argument has been developed repeatedly in these columns that Pakistan’s apparent success in direct taxation is often statistical rather than substantive: pass-through levies collected through contracts, imports, electricity bills, telephone bills, exports and retail transactions are classified as income tax even when the burden is shifted to final consumers or business users. That critique now stands reinforced by the latest official numbers.
The composition of withholding taxes for fiscal year (FY) 2024-25 makes the matter even clearer. According to the Revenue Division Year Book, the largest withholding head was contracts at Rs. 737.7 billion, followed by salaries at Rs. 605.6 billion, bank interest and securities at Rs. 475.1 billion, imports at Rs. 421.8 billion, dividends at Rs. 162.1 billion, electricity bills at Rs. 144.4 billion, telephone at Rs. 123.4 billion and exports at Rs. 122.3 billion. Taxes on purchase and sale of immovable property, technical fees, income from property, retailers, distributors and commission added further sizeable amounts. The top fifteen heads alone contributed Rs. 3228.6 billion, or 95.5 percent of all withholding taxes.
Several of these heads are plainly transactional or pass-through in character. Tax collected at imports becomes part of cost. Tax collected on electricity bills and telephones is borne far beyond the formal taxpayer universe.
Tax on contracts is often embedded in public and private procurement costs. Tax on exports, though legally part of income tax, burdens liquidity and working capital. Taxes on retailers and distributors are further evidence of a policy preference for collection at the point of transaction instead of determination of actual income.
When such items are clubbed together with salaries, dividends and bank interest, the published share of direct taxes becomes inflated in economic terms even if technically valid under statutory classification.
The salaried class presents a particularly harsh example of this approach. Revenue Division itself records that withholding from salaries jumped from Rs. 391.4 billion in FY 2023-24 to Rs. 605.6 billion in FY 2024-25, a rise of 54.7 percent, which it attributes to changes made through the Finance Act, 2024, including fewer slabs and higher effective burden. That single item accounted for a larger absolute increase than several other major heads combined. This was not broadening of the tax base. It was deeper extraction from the most documented and least mobile segment of the economy.
Equally revealing is the modest role of FBR’s own effort through assessment and recovery. Revenue Division claims that collection on demand rose to Rs. 266.7 billion from Rs. 126.8 billion, and presents this as evidence of improved enforcement. Yet even after that rise, collection on demand remained barely five percent of total income tax.
The FBR Year Book similarly celebrates the 110.3 percent growth in out-of-demand collection, but the absolute number still confirms the deeper problem: the enforcement machinery contributes only a thin layer at the margin, while the system depends overwhelmingly on automatic deductions and pre-paid collections. A revenue authority cannot credibly claim success in income taxation when its own post-assessment effort is so small relative to the headline total.
The opacity becomes sharper when one asks the most basic question in any income-tax system: how many returns were filed, by whom, and how much tax did each major category actually pay? The latest yearbooks remain deficient on that score.
Earlier analyses in these columns have repeatedly pointed out that FBR has stopped providing the kind of return-based and category-wise transparency that is necessary to judge whether growth in income tax reflects genuine widening of the base or merely intensification of advance and withholding extraction. The tax directories issue, raised years ago, was not a side question. It was central to exposing the difference between nominal collection and real tax culture.
However, an equally troubling aspect is the increasing reliance on separate block taxation of real income streams, particularly profit on debt and dividend income. These incomes represent genuine returns on savings and investment. Yet instead of being taxed under progressive slabs based on total income, they are taxed on gross receipts at flat rates.
Profit on debt—euphemistically termed “profit” instead of interest—is taxed on gross receipts without adjusting for inflation, real returns or losses. Dividend income is similarly taxed under separate blocks at flat rates. This creates distortions and inequities.
For example, individuals earning profit on debt up to Rs. 5 million annually are taxed on gross receipts at flat rates irrespective of their overall income position. Individuals earning around Rs. 600,000 from profit on debt face tax liabilities of around R. 120,000, while dividend income at similar levels attracts tax of around Rs. 90,000. Non-filers, including housewives, pensioners and small savers, are taxed at double rates, further aggravating inequity.
Such treatment discourages savings in financial instruments and equity markets. At a time when Pakistan faces severe investment shortages and low domestic savings, taxing savings income harshly sends the wrong signal. Instead of promoting savings and investment, the tax system penalises them.
The distortion becomes even more severe when withholding taxes on contracts, imports and professional services are treated as minimum taxes. Where margins are low, such taxes effectively become taxes on turnover rather than income. In many cases, taxpayers are unable to adjust these taxes against actual income tax liability, resulting in excessive taxation.
The situation becomes particularly harsh for large businesses conducted under partnerships. Where turnover exceeds Rs. 500 million, minimum tax, surcharge and super tax may cumulatively result in effective taxation approaching confiscatory levels. This fundamentally undermines investment incentives and discourages business expansion.
Even salaried individuals are not spared. Where taxable income crosses high thresholds, surcharge and super tax are imposed in addition to progressive tax slabs. The cumulative effect leads to extremely high marginal tax rates. Such taxation undermines incentives for skilled professionals and encourages migration of talent.
This transformation of income taxation into a mixture of presumptive, minimum and separate bloc taxation explains why rising income tax collection does not necessarily reflect improved tax policy. Instead, it reflects intensified extraction from documented sectors. The picture, therefore, is unambiguous. Income tax in Pakistan is still largely a withholding-driven construct.
The official literature may describe it as a paradigm shift from indirect to direct taxation, but the substance remains otherwise. When around 95 percent of the reported income tax comes through withholding, advance tax and payments with returns, and when a substantial portion of withholding itself is transactional and pass-through, the boast of strong direct taxation becomes analytically fragile. What appears as progress in fiscal tables is often merely a more aggressive monetisation of documented transactions.
This matters because the consequences are not merely statistical. Such a system raises the cost of doing business, aggravates inflationary transmission, penalises compliant sectors, distorts liquidity and weakens voluntary tax culture. It creates the illusion that the rich are being taxed directly while much of the burden is in fact shifted across supply chains, utility consumers and formal businesses. It also allows governments to postpone the harder task of building an authentic income-tax system based on comprehensive data, real assessment and fair disclosure.
That is why the central question for Part II is not whether income tax collection increased in FY 2024-25. It unquestionably did. The real question is whether Pakistan moved any closer to a genuine income-based taxation system. On the latest official figures, the answer remains in the negative. The country is still trapped in a withholding state. The next part must, therefore, move from composition to consequences and examine sales tax—the other great pillar of this narrow and distortionary revenue order.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.