FBR’s disastrous “withhodingisation”

Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori

The growing reliance of Federal Board of Revenue (FBR) on withholding-based minimum tax regime (MTR), introduced through Finance Act 2019, combined with net-income tax regime (NTR) has already transformed Pakistan’s fiscal framework from income-based taxation to extraction through non-refundable advance deductions and collections.

The result of this policy shift is proving to be disastrous: optimistic revenue projections made to the International Monetary Fund (IMF), followed by aggressive recoveries and administrative high-handedness to meet those projections.

Instead of structural tax reform, advance extraction, disputed recoveries and withholding-based revenue engineering increasingly drive Pakistan’s fiscal management. This approach may temporarily satisfy IMF conditionalities, but it undermines economic growth, discourage investment, encourages informality, and weakens institutional credibility.

Data of last five years extracted from ‘FBR/Revenue Division Year Books (FY2021–FY2025)’ reveal a devastating structural shift in Pakistan’s tax system. Income tax collection is now overwhelmingly through withholding and advance tax related to next financial year.

Table 1

Income Tax Collection (Gross/Net) by Mode (Rupees in billion)

Percentage Share

The data in Table 1 undisputedly confirm that in the last five fiscal years, on average 95.6 percent of income tax is collected automatically through withholding, advance tax and payment with returns! Tax with returns was though pathetically low at 4%, confirming the significant quantum of NIL and below taxable limit (BTL) returns, just to avoid higher withholding tax as non-filers.

Out of total income tax collection, only 4.6 percent represents own efforts of field formation to raise demand (arrears and current) and collect it from fiscal year 2020-21 to 2024-25. How much of it was reversed by tribunal and courts is not disclosed by FBR in any of its publications. Refunds paid figures are available, but there is no mention of quantum of outstanding refunds!

The analysis of data raises a fundamental question: if 96% taxes are collected automatically and tax base is stagnant, what is the justification of FBR’s 25,000-plus workforce?

The following pattern, emerging in sales tax collection, reaffirms that FBR has miserably failed to register millions of taxpayers, making taxable supplies.

Table 2

Sales Tax Net Collection (Rupees in billion)

Nearly half of sales tax is collected at import stage—automatically—without assessment. Even domestic sales tax is largely collected through utility withholding, import-linked taxation and advance deductions.

Again, automatic revenue generation dominates and own efforts to expand tax base are almost non-existent or largely ineffective.

Annual Performance Report for 2024-25 is yet not issued by the FBR even after lapse of many months, which is quite surprising. The data available as per latest available ‘Annual Performance Report for 2023-24’ show that till June 30, 2024 total sales tax registered persons were as low as 234,193. The active sale tax filers in April 2026 are less than 200,000!

The businesses having commercial and industrial electricity connections, paying sales tax with bills, alone was over six millions in fiscal year 2024-25. In the face of this fact, total sales tax registered person on Active Taxpayers List of 185,501 as on April 7. 2026, was simply shocking.  It exposes the FBR’s efficacy and raises questions about its viability and existence.

Customs duty is mainly collected voluntarily—again requiring minimal assessment. Customs revenue presents an even clearer picture of automatic taxation. Unlike income tax or sales tax, customs duties are collected entirely at import/export stage.

Table 3

Customs Duty Collection Net (Rupees in billion)

Importers pay duties and taxes before clearance of goods, leaving virtually no role for post-assessment enforcement. Over the five-year period from fiscal year 2000-21 to 2024-25, customs collections increased steadily, but the mechanism remained unchanged—transaction-based, automatic and pre-collected. This further reinforces the structural reality that a large portion of federal revenue is generated without assessment-based taxation.

Combining withholding-based income tax, import-stage sales tax and customs duty reveals that over 96 percent of total federal revenue is collected automatically before any meaningful assessment takes place. This means that banks collect a substantial share of taxes, importers pay a large part of the burden in advance, and withholding agents act as the primary instruments of revenue collection, leaving FBR’s direct administrative contribution marginal.

The heavy incidence of customs-stage taxation creates another distortion. Importers face multiple advance levies, including customs duty, regulatory duty, additional customs duty, advance income tax and sales tax at import stage. The cumulative burden increases import cost substantially. Businesses therefore attempt to remain competitive through under-invoicing, wrong declarations and informal imports.

This generates a parallel economy and fuels corruption. When tax incidence rises beyond reasonable levels, under-invoicing becomes economically rational. The result is expansion of informal trade and “speed money” culture at ports/dry ports. Thus, excessive reliance on import-stage taxation not only distorts trade patterns but also undermines documentation efforts.

The structural weakness becomes more evident in IMF negotiations. Pakistan recently committed to collecting Rs. 322 billion from court rulings, mainly in super tax cases, as a prior action agreed with IMF.

Officials indicated that the majority of disputed taxes had already been collected, that late payment surcharge of up to 25 percent was being imposed, and that IMF board approval was expected once the target was met.

Upon approval, Pakistan would receive about US$1 billion under the Extended Fund Facility and US$210 million under the Resilience and Sustainability Facility, bringing total disbursement to approximately $4.5 billion. This reliance on disputed recoveries exposes fragility of revenue planning.

High courts had earlier declared retrospective imposition of super tax provisions ultra vires. The Federal Constitutional Court validated the law on January 27, 2026 through a short order (detailed order is yet not issued even after lapse of over two months). In the meantime, hundreds of review petitions have been filed against the short order in which no reasoning is available.

The question arises: How can default surcharge be imposed for a period when the law imposing super tax was declared ultra vires? Default surcharge presupposes lawful liability. Retrospective surcharge undermines the rule of law, investor confidence and policy predictability. Such recovery measures reflect administrative high-handedness to meet revenue targets.

Businesses report coercive recoveries, threats of attachment, delayed refunds and retrospective demands. These measures damage taxpayer confidence and investment climate. The consequences include liquidity constraints, investment slowdown, expansion delays and an increase in informal economy. Tax policy begins to discourage growth rather than support it.

Pakistan’s fiscal problem is not lack of taxation but structure of taxation. Withholdingisation improves short-term revenue but weakens long-term growth and investment. Disputed recoveries inflate fiscal numbers and reduce credibility. Advance taxation reduces liquidity and discourages documentation.

Pakistan’s tax system has evolved into a withholding-driven extraction mechanism. With 96 percent of taxes collected automatically, administrative capacity remains underutilised. Instead of structural reform, reliance on irrational projections and aggressive recoveries risks undermining economic growth, investment and fiscal credibility. Revenue without reform cannot sustain fiscal stability.

Pakistan needs documentation, lowering of tax rates, voluntary compliance, assessment-based taxation in high-risk cases, rational withholding with expeditious refunds of excess paid, and predictable policy. Without these reforms, withholdingisation will continue to replace taxation—and extraction will replace growth.

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Huzaima Bukhari & Dr. Ikramul Haq, lawyers, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions