Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s taxation framework has long faced widespread criticism for falling short of global standards, underperforming in revenue collection, and failing to contribute optimally to the country’s fiscal requirements. The narrow tax base, reliance on a limited segment of taxpayers primarily comprising salaried individuals and large corporations, and weak enforcement mechanisms highlight systemic weaknesses in both policy design and execution. Additionally, administrative challenges, poor capacity of tax officials, and a lack of innovation further hinder compliance monitoring and taxpayer facilitation. Adding insult to injury, inconsistent policy measures discourage voluntary compliance and create unfairness in the system, failure to implement broad-based reforms targeting informal sectors and high-income groups limit mobilization of domestic resources.
The Federal Board of Revenue (FBR) has historically relied heavily on withholding taxes and corporate entities as primary revenue sources, rather than broadening tax base or improving equity. This approach has skewed the system, placing undue burden on salaried employees, who are more visible and easier to monitor, by leaving significant segments such as the informal economy and under-taxed high-net-worth individuals.
Injustices inherent in Pakistan’s taxation framework limit revenue mobilization eroding public trust in the system. This argument gets further strength by analyzing FBR data for fiscal year 2023–24, which shows that total tax collection amounted to Rs. 9.2 trillion, of which only 29 percent, or approximately Rs. 2.7 trillion, came from direct tax withholdings. When sales tax collected on petroleum products and domestic electricity consumption is included, this proportion rises to 38.3 percent, highlighting the dominant role of corporate withholding agents in revenue performance.
Salaried individuals contributed Rs. 391 billion under section 149, marking a 41.8 percent increase over the previous year. Currently, salaried individuals face tax rates as high as 35 percent, with an additional surcharge of 9 percent (for tax year 2025 it was 10%). Shift in the tax burden is particularly gloomy when tax slabs over the past few years are examined. In fiscal year 2019–20, the top rate of 35 percent applied only to annual taxable income above Rs. 75 million, whereas subsequent policy changes have lowered this threshold, so that even annual incomes of Rs. 6 million are now taxed at the same top rate.
Tax credits and exemptions for salaried class have been reduced or eliminated, increasing discrimination. Despite repeated concerns raised by professionals and civil society groups regarding this disproportionate tax burden, little corrective action has been taken. Similarly, excessive taxation in an already challenging economic environment, denoted by inflation, currency devaluation, and limited social protection, reduces disposable income and consumption, slows economic growth, and discourages investment. It also drives skilled individuals to seek opportunities abroad, eroding human capital and lowering the morale among compliant taxpayers.
The trend of over-reliance on salaried class has continued into the current fiscal year. During the first quarter of fiscal year 2025–26, FBR collected Rs. 1,635 billion, a 17% increase over the same period in the previous year, with direct tax collection rising by 41%. Similarly, salaried individuals contributed Rs. 138 billion, compared to Rs. 110 billion in the same period of the previous year. Beyond policy design, administrative flaws further constrain revenue performance.
FBR ‘Annual Performance Report 2024’ [“the 2024 Report”] shows that only 234,193 individuals are registered as sales tax filers out of 4,738,595 active taxpayers. This disparity highlights the limited reach of sales tax registration and the urgent need to broaden the tax net, particularly in regions with high income tax compliance but low sales tax participation.
Technological interventions, such as Point-of-Sale integration for Tier-1 retailers, illustrate both the potential and limitations of policy implementation. Retailers are required to link their POS systems to FBR platform for real-time reporting of sales, automatic invoice generation, and improved compliance monitoring. However, as of October 27, 2025, only 1,978 retail points across Pakistan have integrated their systems, reflecting a substantial gap between policy objectives and implementation.
Delays in processing refunds present another structural challenge. FBR 2024 Report indicates that average refund processing times decreased from 598 days in fiscal year 2021 to 448 days in fiscal year 2024, which remains excessive by international standards. Such delays restrict cash flow, compel businesses to incur high-cost financing, and increase the cost of doing business, discouraging formal sector participation and limiting overall tax potential.
From an equity standpoint, it is problematic that the tax burden disproportionately affects salaried individuals while high-income groups, business profits, and informal economic activities remain undertaxed. This disparity undermines fairness and discourages voluntary compliance. Policymakers must adopt a sustainable approach that aligns tax rates with the ability to pay, ensures fairness, and broadens the tax base.
Broadening of the tax net by formalizing informal sectors and incentivizing compliance is essential. Furthermore, adjusting tax slabs according to inflation ensures that taxpayers are not penalized by bracket creep. Targeted measures to appropriately tax high-income earners and large corporations would ensure that fiscal burdens are fairly distributed without discouraging investment. Additionally, streamlining administrative processes, reducing red-tape, and leveraging technology would enhance efficiency and taxpayer satisfaction.
The long-term strategies for fiscal sustainability require strengthening FBR officials’ capacity, modernizing data systems, and deploying analytics for better monitoring and risk-based audits. Transparent policies, consistent enforcement, and regular stakeholder engagement would build trust and encourage voluntary compliance, reducing reliance on coercive measures. A broadened and equitable tax base would increase domestic resource mobilization, reduce dependency on external borrowing, and lower debt-to-GDP ratio.
Increased fiscal space allows for higher public investment in social sectors such as education, healthcare, and infrastructure, improving human capital and social welfare. Predictable and fair taxation policies enhance investor confidence, attracting both domestic and foreign investment, and contribute to job creation, improved purchasing power, and economic growth.
Pakistan’s current taxation framework has the potential to be a robust tool for equitable growth and fiscal stability. Addressing structural issues, improving efficiency of tax administration, broadening tax base, and adopting a fair and progressive approach would enhance revenue collection while minimizing adverse impacts on compliant taxpayers.
A progressive policy approach to taxation, aligned with inflation and economic conditions, would prevent excessive burdens on salaried individuals. Policy consistency, transparency, and clarity are essential to building public trust, reducing tax avoidance, and improving the overall effectiveness of the system. The newly-established Policy wing in Ministry of Finance, comprising officers of FBR, on the contrary has vowed to further strengthen the prevalent target oriented, oppressive and outdated tax system—they have no concern with equitable, growth-oriented tax policy!
Pakistan’s taxation system can be transformed from a narrow, inequitable framework to an inclusive and efficient mechanism that maximizes revenue potential, strengthens social development, and fosters sustainable economic growth. By implementing comprehensive reforms that broaden the tax base, ensure fairness, enhance efficiency, and encourage compliance, Pakistan can reduce its reliance on borrowing, improve social sector spending, attract investment, create jobs, increase purchasing power, and promote equitable economic development.
Pakistan’s long-term prosperity depends on adopting a balanced and strategic approach to taxation, one that aligns fiscal policy with economic realities by promoting fairness, compliance, and public trust. Pakistan has the capacity to achieve its full tax potential, reduce debt-to-GDP ratios, and strengthen the social fabric, ultimately creating a more stable, equitable, and prosperous nation. However, it is not possible under the present revenue machinery that has become a recovery arm of the International Monetary Fund, as was the case for agents (gumashtas) of East India Company during the British raj to extort excessive and confiscatory revenues from locals.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.