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Pakistan’s taxation framework has been widely criticized for falling short of global standards and underperforming in revenue collection. Reliance on a section of taxpayers, mainly salaried individuals and large corporations, and weak enforcement mechanisms highlight systemic weaknesses in both policy design and implementation. Administrative challenges, poor capacity of tax officials and lack of innovation further hinder compliance monitoring and convenience for taxpayers. Conflicting policy measures discourage voluntary compliance and create unfairness in the system. Failure to implement broad-based reforms targeting the informal sector and high-income groups limits domestic resource mobilization.
The Federal Board of Revenue has historically relied heavily on withholding taxes and corporate entities as primary revenue sources, rather than broadening the tax base or improving equity. This approach has sketched the system, placing an undue burden on salaried workers, who are more visible and easier to monitor, leaving out key segments such as the informal economy and the highly networked.
Inequities in Pakistan’s taxation framework erode revenue mobilization and public confidence in the system. This argument is supported by FBR data for the fiscal year 2023-24, which shows that total tax collection is worth Rs 9.2 trillion, of which 29 percent, or about Rs 2.2.7 trillion, came from direct tax withholding. When sales taxes collected on petroleum products and household electricity consumption are included, the ratio rises to 38.3 percent, highlighting the dominant role of corporate withholding agents in revenue performance.
Salaried persons contributed Rs 391 billion under Section 149, an increase of 41.8% over the previous year. Currently, salaried individuals face tax rates of up to 35 percent, with an additional surcharge of 9 percent (it was 10 percent for tax year 2025). The change in the tax burden is particularly sad when the tax slabs over the last few years are examined. In the financial year 2019-20, the higher rate of 35 percent applies only to annual taxable income above Rs 75 million. Subsequent policy changes have lowered this threshold, so that an annual income of Rs 6 million is still taxed at the same high rate.
Tax credits and exemptions for salaried class have been reduced or eliminated. This has led to increased discrimination. Despite repeated concerns raised by professionals and civil society groups about this disproportionate tax burden, little corrective action has been taken. In an already challenging economic environment characterized by inflation, currency devaluation and limited social protection, excessive taxation reduces disposable income and consumption, slows economic growth and discourages investment. It also forces skilled workers to seek opportunities abroad, depleting human capital and demoralizing compliant taxpayers.
Overdependence on the salaried class continues till the current financial year. During the first quarter of the financial year 2025-26, the FBR collected Rs 1,635 billion, a 17% increase over the same period last year. Direct tax collection increased by 41%. In the same period last year, salaried individuals contributed Rs 138 billion, compared to Rs 110 billion.
The FBR’s Annual Performance Report 2024 (2024 Report) shows that only 234,193 persons are registered as sales tax filers. The number of active taxpayers is 4,738,595. This disparity highlights the limited access to sales tax registration and the urgent need to widen the tax net, particularly in regions with 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 must connect their POS systems to the FBR platform for real-time reporting of sales, automated invoice generation and better compliance monitoring. However, as of October 27, NLY 1,978 retail points across Pakistan have integrated their system, reflecting a substantial gap between policy objectives and implementation.
Processing return delays present another structural challenge. The 2024 report indicated that the average refund processing time decreased from 598 days in FY 2021 to 448 days in FY 2024, which was more than required by international standards. Such delays restrict cash flow, force businesses to obtain more expensive financing and increase the cost of doing business, discourage participation in the formal sector, and limit overall tax efficiency.
Pakistan’s long-term prosperity depends on adopting a balanced strategic approach to taxation, which aligns fiscal policy with economic realities by promoting fairness, compliance and public confidence.
From an equity perspective, it is problematic that the tax burden disproportionately affects the salaried while higher income groups, business profits and informal economic activities remain less taxed. This disparity undermines fairness and discourages voluntary compliance. Policymakers should adopt a sustainable approach that aligns tax rates with ability to pay, ensures fairness and broadens the tax base.
It is important to widen the tax net by formalizing informal sectors and encouraging compliance. Additionally, adjusting the tax slab according to inflation ensures that taxpayers are not penalized by bracket creep. Targeted measures to appropriately tax high-income earners and large corporations can ensure that the financial burden is distributed fairly without discouraging investment. Streamlining administrative processes, reducing red tape and leveraging technology to increase efficiency and taxpayer satisfaction.
Long-term strategies for financial stability require strengthening the capacity of FBR officials, modernizing data systems and deploying analytics for better monitoring and risk-based audits. Transparent policies, consistent enforcement and regular stakeholder engagement build trust and encourage voluntary compliance, reducing reliance on coercive measures. A broad and equitable tax base increases domestic resource mobilization, reduces dependence on external borrowing and lowers the debt-to-GDP ratio.
Increased fiscal space allows for higher public investment in social sectors such as education, health care and infrastructure, improving human capital and social well-being. Predictable and fair tax policies increase investor confidence, which attracts both domestic and foreign investment and contributes to job creation, improving purchasing power and economic growth.
The current taxation framework has the potential to be a powerful tool for equitable growth and fiscal stability. Addressing structural issues, improving the efficiency of tax administration, broadening the tax base and adopting a fair and progressive approach will increase revenue collection while minimizing the negative impact on compliant taxpayers.
A progressive policy approach to taxation, aligned with inflation and economic conditions, prevents excessive burdens on salaried individuals. Policy consistency, transparency and clarity are essential to build public confidence, reduce tax evasion and improve the overall effectiveness of the system. The newly established policy wing in the finance ministry, comprising FBR officers, however, has vowed to further strengthen the prevailing target-based, oppressive and outdated tax system.
The tax system can be transformed from a narrow, inefficient framework to a comprehensive and effective mechanism that maximizes revenue potential, stabilizes social development and promotes sustainable economic growth. By implementing comprehensive reforms that broaden the tax base, ensure fairness, enhance efficiency and encourage compliance, Pakistan can reduce its dependence on borrowing, improve social sector spending, attract investment, create jobs, increase purchasing power and promote equitable economic growth.
Pakistan’s long-term prosperity depends on adopting a balanced strategic approach to taxation, which aligns fiscal policy with economic realities by promoting fairness, compliance and public confidence. Pakistan has the potential to reduce its debt-to-GDP ratio and strengthen the social fabric, ultimately creating a stable, equitable and prosperous nation. However, this is not possible under the revenue machinery that has become the recovery arm of the International Monetary Fund.
Dr. Akramul Haq, author and Supreme Court lawyer, is an adjunct professor at Lahore University of Management Sciences.
Abdul Rauf Shakuri is a corporate lawyer based in the United States of America.
