Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s economy faces critical challenges, including fiscal issues, declining industrial productivity, and a narrow tax base that impede basic public services. Inflation is hurting purchasing power, high interest rates, rising energy cost are lowering investment, and rising cost of living is fueling public unrest. The tax system, historically designed to create a fairer society and stimulate progress, now perpetuates inequality, frustrating the very people it is meant to serve. Taxation has become less a symbol of civic responsibility and more a reflection of an expropriatory system that demands greater but returns little for millions.
The tax architecture of Pakistan has long been criticized for its disparity between direct and indirect taxation and excessive rates. A significant portion of the revenue continues to come from indirect taxes e.g. sales tax and withholding taxes that burden all citizens regardless of their income levels. However, among compliant taxpayers, it is the salaried class that bears undue burden.
According to data released by the Federal Board of Revenue (FBR) for fiscal year 2024-25, the salaried class contributed Rs. 605.953 billion income tax at source, registering an increase of 54.7%, representing one of the most compliant segments of the economy. Taxed on almost gross amount in cash and heavy valuation of benefits in kind, their contribution is credited to state treasury every month, leaving little room for them to survive—condemned to pay 18% sales tax on after tax salary. On the other hand, large sections of the economy, especially retail, wholesale, and real estate, either continue to enjoy lower taxes or remain outside the tax net or manage to pass burden of taxes at sources on customers.
According to ‘Revenue Division Year Book 2025’, income tax collection at source from salaries for FY 2024-25 at Rs. 606 billion was equal to what was collectively received at source from exporters (Rs. 122 billion), advance tax on sale of retailers, distributor/wholesaler (Rs. 37 billion and Rs. 25 billion respectively), electricity bills (Rs. 144 billion), income from property (Rs. 49 billion) and sellers and buyers of immoveable property (Rs. 118 billion each). This underlines how ujustly the government depends on employees.
According to the latest reports, total number of active taxpayers stands at around 5.6 million with the majority from the salaried class. The asymmetry becomes clearer when compared with the country’s total labour force of over 75 million. It shows that less than 10 percent of working Pakistanis file returns, and only a fraction pay substantial income tax. This highlights both enforcement weakness and structural bias against formal employment.
The issue goes beyond mere numbers, as taxation of salaried workers in Pakistan has reached what economists and tax experts often describe as ‘confiscatory’ levels. They can no longer afford living from after tax income. The marginal tax rate for the middle class, when combined with payroll deductions such as provident fund contributions and compulsory pension withholdings, now exceeds 35 percent.
Such a burden could only be justified in a state that provides essential public benefits, including but not limited to quality education for all, accessible healthcare, reliable infrastructure, and strong social safety nets. However, in Pakistan, these services are either missing or poorly financed. The result is a double jeopardy for the salaried workers paying high taxes but compelled to finance private schooling, expensive healthcare and security from already reduced earnings.
FBR’s latest Year Book shows that out of total tax collection of Rs. 11.7 trillion, in FY 2024-25, income tax contributed Rs 5.76 trillion. Out of income tax, only Rs. 267 billion (4.6% of total income tax collection) was collection on demand (Rs. 171 billion out of current demand and Rs. 95 billion out of arrears). What a reprehensible performance by the entire field formation!
The salaried class, forming a small segment of the overall taxpayer base, carries a disproportionate share of tax burden, subjected to high income taxation and from net income buy goods and services at exorbitant sale tax rate of 18% federal on merchandise and 16% by provinces on services. The government’s failure to widen tax net by grabbing the rich and mighty, and end exemptions of over Rs. 5 trillion results in squeezing those already in the system, especially the salaried employees. This approach may offer short term revenue stability, but it destroys public trust and undermines the broader goal of socioeconomic justice.
The structure of tax brackets further points out this inequity highlighting that for FY 2024-25, individuals earning between Rs. 600,000 and Rs 1.2 million annually face an initial tax rate that may seem moderate on paper, but the real impact is far greater when inflation and cost-of-living adjustments are considered.
The bracket jumps abruptly for incomes above Rs 2 million, creating an effective rate that penalizes productivity and professional development. Absence of meaningful tax relief or inflation adjusted thresholds means that even small salary increases push workers into higher tax brackets without improving their real income, effectively turning the hidden rise in taxes into a penalty on their achievements.
Comparison with untaxed sectors makes this injustice even more visible, as agriculture sector that in totality contributes about 25 percent to GDP, remains outside the federal income tax regime though agricultural income taxation with provinces is only confined to crops. The real estate sector, where speculative gains often exceed formal business profits, pays negligible tax due to undervaluation and loopholes in the capital value tax regime. Similarly, traders, wholesalers and retailers, despite being a major part of the economy, contribute a fraction of what salaried individuals pay. This potholed distribution of tax obligations not only distorts competition but also deepens the sense of alienation among compliant citizens.
The social impact of such a system is significant, because when the burden of public finance falls on a limited segment of society, it erodes the principle of shared responsibility, making it clear that economic justice cannot exist without fair and equitable taxation. Therefore, salaried class, traditionally the most compliant and productive segment, is being pushed toward disengagement, either through emigration or through participation in informal work arrangements that allow them to escape excessive taxation.
The way forward requires both transparent fiscal management and political courage, a need made evident by FBR’s own report showing that out of total tax collection of Rs 11.74 trillion for FY 2024-25, marking a 26.3 percent increase from the previous year, income tax contributed as little as Rs 5.76 trillion, or around 49 percent of total revenue (the ration will be around 25% if we subtract withholding taxes in the nature of indirect taxes), while sales tax added Rs 3.90 trillion, customs duties Rs 1.28 trillion, and federal excise Rs 766.6 billion. Despite this “record collection” (sic), the tax-to-GDP ratio remains stuck near 10.3 percent, one of the lowest in South Asia. This gap reflects not a lack of capacity to collect, but a failure to collect on the basis of “ability to pay”.
A closer look at the structure of revenue highlights the fundamental bias, with nearly 60 percent of total income tax coming through withholding tax, collected in advance rather than through detailed assessments. The salaried class alone contributes over Rs 606 billion, roughly 11 percent of gross income tax receipts, even though it represents less than 8 percent of the labour force. On the contrary, retail and wholesale sectors, together account for over 18 percent of GDP, contribute less than 2 percent of total direct taxes, which is not only inefficient but also unfair.
The macroeconomic impact of this disparity is clear in the growth of personal income taxes from the salaried class, which are rising at an annual rate of around 22 percent, exceeding the growth of all other components of direct taxes even as real wages remain stagnant. Meanwhile, tax collection from corporate and business sectors has grown by only 8 percent. The result is heavy reliance on a small, overtaxed segment of society.
The equity challenge extends to expenditure, as despite collecting record revenue, the federal government spent over 52 percent of it on debt servicing, i.e. nearly Rs 8.8 trillion leaving little room for public investment or welfare. Similarly, health and education together received less than 1.8 percent of GDP, an amount far below regional average. These numbers further expose the futility of squeezing compliant taxpayers while offering little in return. A system that extracts heavily but delivers poorly cannot claim legitimacy.
A moderate and more productive tax regime would focus on expanding the base rather than increasing the burden. According to FBR’s own estimates, broadening, documentation and bringing just 20 percent of the informal economy valued at over Rs 7 trillion annually into the tax net could generate an additional Rs 1.2 trillion in revenue without raising rates. Similarly, plugging underreporting in real estate and trade could yield Rs 400 to 500 billion more. These measures, combined with better enforcement and digital integration, could raise the tax-to-GDP ratio to 15 percent within three years, a target that remains within reach if policy priorities shift.
It is time to make taxation fair, because the salaried class has long carried more than its share of the national burden. The question is not just how much revenue the state can collect, but who is paying and what is it being used for. Additionally, economic revival will not come from forcing compliance where not due, but from a system that feels fair and motivates people to participate willingly. FBR’s latest numbers make this clear that Pakistan has enormous revenue potential, but until the system recognizes integrity and fair sharing of burden, the hapless few will continue to suffer at the expense of non-compliant thriving with criminal connivance of revenue authorities.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, 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. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions