Dr. Ikramul Haq & Abdul Rauf Shakoori
Uraan Pakistan framework, unveiled the other day by the Prime Minister of Pakistan, aiming for macroeconomic stability and sustainable development, places a significant focus on fiscal reforms, particularly increasing tax-to-GDP ratio. Despite these ambitious goals, historical ineptitudes and structural flaws continue to undermine progress, casting doubts on the feasibility of achieving these targets. Pakistan’s tax-to-GDP ratio remains one of the lowest globally, at 9.5% for fiscal year (FY) 2023-24, well below the emerging market average of 15–20%–starkly highlighting systemic challenges in tax collection, enforcement, and policy implementation.
Over the last five years, Pakistan has struggled to exceed a tax-to-GDP ratio of 10%, with an average of 9.6%. This chronic underperformance contrasts with regional peers, many of which have consistently achieved ratios above 15%. The disparity stems from reliance on indirect taxes, which comprised nearly 70% of revenue in FY 2024, and a failure to mobilize direct taxes effectively. Withholding taxes, mostly in indirect mode, were a staggering 60.5% of income tax collections in FY 2024, reflecting systemic inefficiencies in documenting and taxing incomes.
Uraan Pakistan [Take-Off Pakistan] ambitiously targets a tax-to-GDP ratio of 15.5% by FY 2029. However, the historical stagnation raises questions about the viability of such increase. The plan proposes broadening the tax base, particularly by integrating undertaxed sectors such as agriculture, services, and real estate. Yet, these goals hinge on overcoming entrenched obstacles, including political resistance, procedural inefficiencies, and size of the informal economy, having a significant share in GDP.
The informal economy, tax exemptions, and systemic evasion significantly undermine revenue potential. Agriculture, contributing 23.2% to GDP, remains largely untaxed despite employing 37.4% of the workforce. Similarly, real estate and services, with considerable revenue potential, are insufficiently tapped.
The ineffective documentation of above sectors perpetuates reliance on indirect taxes, exacerbating inequality and stifling growth. Compounding these challenges is the inefficiency of Federal Board of Revenue (FBR) that collected only 8.7% of GDP in FY 2024. Issues such as inadequate enforcement, lack of district-level offices, and limited capacity for audit have hampered efforts to improve compliance. For example, in FY 2023 & 2024, tax evasion and procedural inefficiencies cost an estimated Rs. 3 trillion in potential revenue.
Despite the ambitious reforms outlined in Uraan Pakistan, critical challenges persist in terms of implementation and political will. Chronic dependence on indirect taxes, which often burden lower-income households, continues to hinder the progress of equitable fiscal policies. Indirect taxes such as withholding taxes, sales tax and customs duties are regressive in nature and disproportionately affect the most vulnerable segments of society. Without a clear and actionable shift toward direct taxation, such as income tax, Pakistan’s fiscal policy remains unbalanced and deeply flawed, making it difficult for sustainable economic growth.
The political resistance faced in implementing tax reforms remains a crucial barrier. The entrenched interests within powerful sectors, such as agriculture and real estate, continue to block attempts at progressive tax policies. The informal economy, accounting for a large portion of GDP, is another major hurdle that impedes effective tax collection.
With a large number of small businesses and self-employed individuals operating without any formal registration or documentation, lack of transparency and accountability continue to undermine revenue collection efforts. This lack of financial inclusion prevents the economy from becoming fully integrated into the tax system, further perpetuating the cycle of low revenue generation.
While Uraan Pakistan outlines a range of reforms, including automation, data integration, and anti-smuggling strategies, the implementation mechanisms remain unclear. For instance, the proposed National Single Window and Authorized Economic Operator Programme aim at streamlining processes, but their rollout has faced delays and bureaucratic hurdles.
Uraan Pakistan lacks clarity on addressing structural tax disparities. Reliance on regressive taxes not only burdens lower-income groups but also undermines progressive fiscal policies. Despite the stated goal of reducing dependence on indirect taxation, no tangible timeline or strategy has been articulated to shift the revenue balance towards progressive taxation.
Pakistan’s average tax revenue growth of 13.8% lags behind nominal GDP growth, indicating limited elasticity in the tax system. In contrast, regional peers have implemented more dynamic fiscal policies. For example, Bangladesh, with a tax-to-GDP ratio of 12%, has leveraged digital tax systems to enhance compliance and broaden its base.
India has successfully implemented Goods and Services Tax (GST) reforms that have streamlined indirect taxation and reduced evasion. The low tax-to-GDP ratio exacerbates Pakistan’s fiscal vulnerabilities, contributing to a rising debt burden. Public debt surged from 63.7% of GDP in 2018 to 74.8% in 2023, with gross financing needs reaching 23.7% of GDP. The debt-deficit spiral, driven by insufficient revenues and escalating expenditures, leaves little fiscal space for development spending. Consequently, critical areas such as education, health, and infrastructure remain underfunded.
The Uraan Pakistan agenda emphasizes broadening the tax net through measures like automating audits, enforcing property valuations, and integrating informal sectors. While these steps are crucial, their effectiveness depends on overcoming entrenched challenges. Despite their potential, provincial governments generate negligible tax revenue—only 0.72 percent of GDP in FY 2024.
Enhancing provincial tax authorities’ capacity and incentivizing resource mobilization is essential for achieving targets. While automation offers a promising solution, previous initiatives have faced delays and limited adoption. For instance, FBR’s point-of-sale integration remains underutilized, covering only a fraction of eligible retailers. The differential tax system for filters and non-filers has yielded mixed results. Strengthening enforcement while simplifying compliance procedures could significantly improve outcomes.
The Federal Government’s plan outline a gradual increase in the tax-to-GDP ratio, yet the assumptions underpinning these projections appear overly optimistic. The policy targets a 1% annual increase in the ratio, relying on factors such as higher economic growth, reduced evasion, and enhanced documentation.
In the given economic environment, characterized by high interest rates, political instability, and limited administrative capacity, assumptions made seem detached from ground realities. For instance, the policy anticipates a reduction in fiscal deficit from 7.8% of GDP in FY 2023 to 4.2% by 2029. Achieving this requires unprecedented revenue mobilization and expenditure cuts, both of which face significant political and institutional barriers. Furthermore, the projected Rs. 2 trillion increase in annual tax revenue assumes a level of compliance and enforcement that Pakistan has historically struggled to achieve.
To overcome these challenges, Pakistan must adopt a multifaceted approach. Expanding FBR’s reach, improving audit capacity, and reducing litigation backlogs are critical for enhancing revenue collection. Aligning federal and provincial tax policies can address disparities and ensure a more equitable distribution of fiscal responsibilities.
Accelerating adoption of digital systems, such as real-time transaction monitoring, can enhance transparency and reduce evasion. Shifting the tax burden towards direct taxes and rationalizing exemptions will promote fairness and fiscal sustainability. Ensuring transparency, accountability, and coordination across government agencies is essential for effective policy implementation.
Documentation of the economy remains a core issue for broadening the tax base. A large informal sector operates outside the tax system, and this untapped potential represents a massive revenue loss. Therefore, without a formal, comprehensive system to track income and wealth, tax evasion remains rampant. To achieve financial inclusion, Pakistan must prioritize digitizing and formalizing the economy.
By improving documentation, using technology to track transactions, and integrating informal sectors into the formal economy, the government can increase the tax base substantially. Moreover, enhancing financial inclusion through digital platforms and expanding access to banking services would enable the government to better monitor income sources and enforce tax compliance, ensuring that the burden of taxation is fairly distributed across all sectors of society.
Uraan Pakistan aspires to transform the country’s fiscal environment by addressing long-standing challenges in tax policy and administration. However, its success depends on bold and sustained reforms, backed by political will and institutional capacity. Without these, the ambitious targets risk remaining aspirational, leaving Pakistan trapped in a cycle of low growth, inadequate revenues, high deficits, and mounting debt.
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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.