Dr. Ikramul Haq
Pakistan’s tax debate continues to revolve around a familiar claim: that most Pakistanis do not pay taxes. Policymakers, donors/lenders and tax administrators frequently repeat this assertion, yet official data available paints a very different picture. Millions of citizens already pay advance income tax—mostly through withholding and advance deductions that is final tax liability, minimum tax or adjustable—while the real problem lies in the failure to build a fair income tax base based on the principle of ability to pay.
The debate has long been distorted by treating withholding reach as tax capacity. Advance tax deductions on mobile phones, electricity bills, banking transactions and imports have created the impression of a broad tax base. In reality, these deductions widely apply to individuals, who do not even meet the minimum taxable income threshold. Pakistan is therefore taxing millions of citizens without properly identifying those who should actually file returns and pay tax.
A rational determination of Pakistan’s income tax base of individuals must begin with demographic and labour market realities. The official 2023 population census recorded Pakistan’s population at 241.5 million. Based on the census portal projections, the population has now crossed 258.76 million. However, not all of this population can reasonably form part of the tax base.
Approximately 35 percent of the population consists of children below the age of 16, while around 4 percent is above 65 years. This leaves roughly 61 percent in the working-age bracket. Yet working-age population is not equivalent to taxable capacity. A large segment of the population remains below the poverty line, and millions earn incomes far below taxable thresholds.
The Labour Force Survey 2024-25 provides the most reliable starting point. According to the latest official data, Pakistan has 79.7 million employed persons. However, this figure must be further filtered to determine the fair income tax base.
The first major exclusion is agriculture. The survey shows that 35.1 percent of employment is in agriculture, amounting to roughly 28 million workers. Agricultural income falls primarily within provincial jurisdiction, and a large portion of agricultural employment involves subsistence-level earnings. Even where taxable agricultural income exists, provincial enforcement remains weak. Therefore, a substantial part of agricultural employment lies outside the federal income tax base.
After excluding agriculture, approximately 51.7 million persons remain in non-agriculture employment. However, this group cannot be treated as the true income tax base either. The labour force survey further reveals that only 18.1 percent of employment lies in the formal non-agriculture sector, while 46.8 percent falls within the informal non-agriculture sector.
Formal non-agriculture employment therefore amounts to approximately 14.4 million persons. This group represents the core income tax filing base, consisting of salaried employees, corporate executives, professionals, contractors and documented businesses.
The wage data further strengthens this conclusion. The survey reports an average monthly wage of Rs. 39,042, which annualises to Rs. 468,504—still below the Rs. 600,000 taxable threshold under the Finance Act 2025 framework. This indicates that a large share of workers, even within formal employment, falls below taxable income levels.
These filters show that Pakistan’s fair income tax base must be divided into two categories.
The first is the filing base—individuals who should reasonably be required to file income tax returns. This includes formal sector employees, professionals, contractors, traders above threshold, rent earners, commission agents, high-income self-employed individuals and persons earning from multiple sources.
When the formal sector workforce of 14.4 million is combined with higher-income individuals in the informal sector and professional categories not captured in wage data, Pakistan’s fair individual filing base comes to approximately 20 to 22 million persons.
This estimate is consistent with earlier analytical notes and is far more realistic than the inflated narratives often presented in policy discussions.
The second category is the positive-liability base—individuals who should actually pay income tax after adjustments. This base is naturally smaller than the filing base because many individuals near the threshold may have low or nil final liability after accounting for expenses, losses, and sectoral income volatility.
Based on labour force data, income thresholds and employment structure, the number of individuals who should actually pay income tax appears to be in the range of 8 to 10 million persons.
This figure must now be compared with official data.
The Active Taxpayers List (ATL) as of 7 April 2026 shows:
- Active individual taxpayers: 5,176,616
- Companies, AOPs and other business entities: 2,438,284
- Total active taxpayers: 7,614,900
Even these numbers are misleading because many registered taxpayers declare nil or negligible income. This suggests that the number of individuals actually paying income tax is far smaller than even the 5.17 million figure.
The gap therefore becomes evident:
- Fair filing base: 20–22 million individuals
- Actual individual taxpayers: 5.17 million
- Gap in filing base: approximately 15–17 million individuals
Similarly:
- Fair positive-liability base: 8–10 million individuals
- Actual taxpayers showing taxable income: likely far below this range
This gap represents Pakistan’s real income tax challenge.
The distortion becomes even more striking when telecom data is examined. Pakistan’s cellular subscriber base crossed 205 million by February 2026, while broadband users exceeded 160 million. Advance income tax is deducted from these users regardless of income level.
Students, unemployed individuals, pensioners and low-income workers all pay advance adjustable income tax of 15% through mobile usage. These individuals cannot reasonably be treated as taxpayers, yet withholding taxes extract revenue from them. This creates a paradox. Pakistan is taxing millions who do not have taxable income, while millions with taxable capacity remain outside the system.
Pakistan’s direct tax-to-GDP ratio reflects this failure. Over the past decade, direct taxes have remained between 3 to 5 percent of GDP, among the lowest globally. Even this figure is inflated because withholding taxes are counted as direct taxes despite functioning as indirect levies.
Meanwhile, large segments of high-income sectors remain under-taxed. Real estate speculation, wholesale and retail trade, professional services, and large agricultural holdings continue to escape effective taxation. The result is a regressive system. Salaried classes and documented businesses face increasing tax burdens, while affluent segments remain lightly taxed.
Pakistan’s fiscal crisis cannot be resolved by increasing withholding taxes or imposing additional levies. Sustainable reform requires building a fair income tax base grounded in ability to pay.
The evidence is now clear. Pakistan’s fair income tax filing base of individuals is around 20–22 million individuals, while 8–10 million persons should actually pay income tax. The current 5.7 million active individulas taxpayers—many with negligible income—demonstrate the magnitude of the gap.
Pakistan is therefore not suffering from lack of taxation. It is suffering from misdirected taxation. Until policy shifts from taxing transactions to taxing income, the country will continue taxing everyone while effectively taxing no one.
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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.