Trust Deficit, Tariff & Structural Reform
Dr. Ikramul Haq
The six-part analysis of FBR’s performance for fiscal year 2024-25 reveals that it is not a case of isolated weaknesses, but a vivid reflection of deeply embedded structural disorder in Pakistan’s tax system. Income tax, as it stands today, has been transformed into a withholding-based regime—with few exceptions, it taxes transactions rather than net income. Sales tax has become a narrow, high-rate levy that encourages evasion and destroys documentation. Customs duties distort production and trade through a fragmented and protectionist tariff structure. Federal excise duty reflects policy inconsistency and enforcement failure, most visibly in the cigarette sector.
The above are not separate failures. They are manifestations of a single underlying reality: Pakistan does not suffer from a shortage of taxes but from the absence of a coherent, credible and constitutionally grounded tax system.
The issue begins with credibility. As shown in Part I, even official fiscal reporting lacks consistency. When two yearbooks [Revenue Division Year Book 2025 and FBR Year Book 2024-25] present different narratives of the same fiscal year, the problem is not statistical—it is institutional. A tax agency that cannot present its own data coherently cannot command the confidence of taxpayers, investors or policymakers. This is the essence of the trust deficit in taxation.
This deficit is reinforced by the structure of taxation itself. As Part II demonstrated, nearly 92% income tax collection arises before assessment, through withholding and advance tax. This is not income taxation in the classical sense. It is extraction from documented transactions. It penalises compliance and discourages formalisation.
Part III showed how sales tax fails to compensate for this weakness. Instead of operating as a broad-based value-added tax, it is concentrated in a few sectors, imposed at high rates and collected largely at import stage. The result is evasion, informalisation and breakdown of supply-chain documentation. Once documentation collapses, income tax enforcement becomes impossible, reinforcing reliance on withholding taxation.
Part IV extended this analysis to customs duties, where tariff policy has been subordinated to short-term revenue needs. High and dispersed tariffs increase the cost of production, encourage under-invoicing and promote smuggling. Industrial inputs are taxed heavily, while protectionist policies shield inefficient sectors.
The result is stagnation in exports and weak integration into global value chains. This is precisely the point emphasised by Dr. Manzoor Ahmad, who has consistently argued that Pakistan’s tariff structure discourages industrial upgrading and reduces productivity.
Dr. Manzoor rightly notes that if the National Tariff Policy 2025–30 is implemented in its true spirit, many of these distortions can be mitigated. However, the real danger lies in sector-specific industrial policies driven by vested interests that may dilute or even reverse these reforms. If that happens, Pakistan will once again lose a critical opportunity for structural transformation, he argues.
Global and historical evidence strongly supports [Usman Qadir 2020] this position. Even within Pakistan, periods of tariff rationalisation have been associated with higher export growth, while reversals toward protectionism have coincided with stagnation [Jamil Nasir 2020]. Moreover, World Bank-supported reforms in the early 2000s demonstrated that simplifying tariff structures and improving customs procedures can increase revenue while facilitating trade.
Part V exposed the failure of federal excise duty, particularly in the cigarette sector. Despite higher rates, revenue has stagnated or declined due to illicit trade. Losses of Rs. 200–300 billion annually reflect not just enforcement failure but policy incoherence.
The same pattern is visible in the neglect of constitutionally mandated excise on oil and gas at well-head under Article 161 of the Constitution, which would ensure direct revenue flows to producing provinces. Instead, reliance on centralised instruments such as sales tax and petroleum levy has weakened fiscal federalism and deprived provinces of their rightful share.
The cumulative effect of these distortions is a tax system that is economically inefficient, socially inequitable and constitutionally questionable. It discourages investment, penalises documented sectors and rewards informality. It also creates tensions within the federation by centralising revenue at the expense of provinces. The problem, therefore, is not incremental. It is structural. Addressing it requires a fundamental rethinking of Pakistan’s fiscal architecture.
First, income tax must be restored to its original principle: taxation of real income based on ability to pay. Withholding and presumptive regimes must be gradually reduced, and assessment-based taxation strengthened through data integration and enforcement.
Second, sales tax must be redesigned as a genuine value-added tax. This requires broadening the base, reducing rates and eliminating distortions caused by exemptions and special regimes. Documentation across the supply chain must become the central objective.
Third, customs duties must be rationalised under a coherent tariff policy. The National Tariff Policy 2025–30 provides a framework, but its success depends on resisting sectoral pressures. Tariffs must be simplified, reduced and aligned with industrial policy aimed at export competitiveness rather than protectionism.
Fourth, federal excise duty must be limited to clearly defined objectives. Cigarette taxation must be made predictable and enforceable, with strong measures to curb illicit trade. At the same time, constitutional provisions such as Article 161 of the Constitution must be operationalised to strengthen fiscal federalism.
Fifth, institutional reform is essential. The current fragmented tax administration cannot deliver a modern tax system. A unified National Tax Authority, integrating federal and provincial functions, supported by technology and data integration, is necessary to improve efficiency and transparency. Finally, fiscal federalism must be revisited in a meaningful way.
The current system of revenue sharing under Article 160 of the Constitution, combined with centralised taxation policies, has created imbalances that undermine both efficiency and equity. Provinces must be empowered not only through transfers but also through constitutionally guaranteed revenue streams.
The path forward is neither simple nor politically easy. Vested interests benefit from the existing distortions. High tariffs protect inefficient industries. Withholding taxes provide easy revenue. Informal sectors operate with minimal oversight. Any reform effort will face resistance. Yet the cost of inaction is far greater.
Pakistan’s economy cannot sustain growth under a tax system that penalises production, discourages investment and undermines credibility. Fiscal instability, repeated International Monetary Fund’s programmes and weak economic performance are symptoms of this deeper structural problem. The lesson of fiscal year 2024-25 is therefore clear.
Pakistan does not need more taxes. It needs a tax system that is rational, fair, transparent, growth-inducive and constitutionally sound. Until that transformation takes place, every increase in rates will produce diminishing returns, every reform will remain partial, and every fiscal achievement will remain fragile. The real challenge is not more and more oppressive and destructive taxes. It is rebuilding trust in taxation, which requires structural reform, not incremental adjustment. The complete roadmap for this transformation is available in Toward Broad, Flat, Low Rate & Predictable Taxes.
[Concluded]___________________________________________________________________
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.