The issue of low tax compliance in Pakistan has been a persistent concern for every government, regardless of which party is in power. Finance ministers enter office promising to expand the tax base and enforce reforms. But when pressure from powerful lobbies builds, governments usually back down and take the path of least resistance. The result is that real reform never takes root and the same cycle repeats itself.
The FBR publishes an annual review of its performance. Its ‘Revenue Division Yearbook 2023–24’ offers a useful window into the country’s tax collection system. It also highlights the significant work that needs to be done if Pakistan is to increase its tax-to-GDP ratio, currently at about 10 per cent, to the 15 per cent level recommended by the World Bank.
In FY2023–24, the government set a revised tax collection target of Rs9,252 billion. By year-end, the FBR had collected Rs9,299 billion, slightly exceeding the goal and achieving 100.5 per cent of the target. The FBR’s report celebrates this outcome as a success story.
Year-on-year growth in revenues was strong. Compared to the previous year, total tax revenues increased by 29.8 per cent, resulting in an additional Rs2.1 trillion into the government’s coffers. At first glance, these figures suggest impressive progress. But a closer look shows the weaknesses behind the numbers.
The overall collection target was met primarily due to the strong performance of direct taxes. This category alone generated Rs4,530.7 billion against a target of Rs3,721.0 billion, resulting in a surplus of Rs809.7 billion. Direct taxes reached 121.8 per cent of their target.
However, the picture is far less positive when examining indirect taxes: Sales Tax, the largest indirect tax, fell short by Rs520.2 billion, achieving only 85.6 per cent of its target. Customs duty, tied to imports, missed its target by Rs219.9 billion and achieved only 83.4 per cent of what was planned. Lastly, Federal Excise Duty (FED) also underperformed, collecting Rs22.5 billion less than expected, achieving 96.3 per cent of its goal.
On paper, the higher share of direct taxes should be a positive development because direct taxes are progressive and help address income inequality. But the way these revenues were collected raises concerns.
The growth in direct taxes did not come from stronger enforcement or improved tax compliance. Instead, it came largely from automated systems and presumptive methods of taxation. These mechanisms shift the burden to third parties, such as banks, employers, or utility companies, who deduct taxes at source.
The two main sources were withholding tax (WHT) and advance tax: Rs 2,740 billion in FY2023–24 was collected under WHT, representing a 36.5 per cent increase from the previous year. WHT accounted for 60.5 per cent of all income tax revenue. Rs1,530 billion was generated through advance tax, up by 56.9 per cent year-over-year. Advance tax made up 33.8 per cent of income tax revenue.
Together, these two categories contributed 94.3 per cent of total income tax collections. This means the FBR collected most of its revenues without relying on its own enforcement activities such as audits, investigations or assessments.
This heavy dependence on presumptive and advance taxes is the FBR’s Achilles’ heel. It helps meet revenue targets in the short term but erodes the FBR’s institutional capacity over the long term.
The clearest indication of this is the FBR’s performance in ‘Collection on Demand’ (CoD), which assesses its ability to recover taxes through audits and enforcement. In FY2023–24, CoD revenues fell by 21.5 per cent. According to the FBR’s publication, this was due to two factors: ‘Arrear Demand’ (old outstanding dues) dropped by 17 per cent; and ‘Current Demand' (newly assessed dues) fell even more sharply, by 23 per cent.
These numbers suggest that, while the FBR is efficient at collecting taxes outsourced to third parties, its own ability to enforce compliance is weakening. This undermines voluntary compliance and sends a dangerous message: those who evade taxes or under-report their income are less likely to be caught.
The problem is not only administrative but also political. Successive governments have narrowed the tax base by granting exemptions, concessions, and preferential rates. These are confusingly referred to as ‘tax expenditures’, and they create significant distortions in the system.
The FBR’s yearbook quantifies tax expenditures for FY2022–23. The government gave up Rs3,879.2 billion in potential revenue through exemptions and concessions. To put this in context, the FBR’s total tax collection that year was Rs7,163.8 billion. This means for every Rs100 collected, the government forgave Rs54.
What is especially alarming is the rapid growth in tax expenditures between 2018-19 and 2022-23. Starting from Rs1,150 billion in FY2018-19, tax expenditures rose at a compounded annual growth rate of 35.5 per cent to reach Rs3,879.2 billion in FY2022-23.
Such policies directly undermine efforts to broaden the tax base. By giving away more than half of what it collects, the government forces the FBR to extract more revenue from a narrower pool of taxpayers. This results in excessive reliance on withholding taxes, which disproportionately burden the formal sector. The outcome is a vicious cycle since exemptions shrink the tax base, leading the FBR to levy more taxes on the formal sector to compensate for the loss of revenue. This results in a disincentive for businesses from entering the formal sector, further narrowing the tax base.
The cycle keeps Pakistan locked in a low-compliance trap.
The FBR's report details several initiatives under its ‘Broadening of Tax Base’ (BTB) programme, aimed at bringing new individuals and businesses into the tax net. These include leveraging third-party data, establishing district tax offices, and launching the “Tajor Dost Scheme" (sic) to register retailers. The FBR reports an ‘all-time high’ addition of approximately 3.6 million new taxpayer registrations during the year.
However, a closer look at the figures reveals a significant gap between registration and actual compliance. Of the 3.6 million new registrants, only 1.78 million have also filed their returns. This represents a compliance conversion rate of less than 50 per cent.
While adding names to a register is a necessary first step, it is a hollow victory if it does not translate into filed returns and tax payments. This discrepancy suggests that the administrative challenge is not just in identifying potential taxpayers but in ensuring their ongoing compliance, a task for which the FBR's enforcement capacity, as shown by the decline in CoD, appears to be weakening.
The report also mentions the FBR's reliance on coercive measures, such as issuing instructions to telecommunication companies to disable the SIM cards of 506,671 non-filers temporarily. While such measures may yield short-term results, their necessity is an indicator of low voluntary compliance and a lack of trust between the tax authority and the populace, rather than a sign of a healthy and successful tax system.
The FBR’s own report for FY2023–24 tells a mixed story. The revenue target was met and direct taxes grew faster than before. However, this apparent success masks a vulnerability, as the growth stemmed not from improved compliance or stronger enforcement, but from a heavy reliance on withholding and advance taxes.
Pakistan needs more than short-term fixes to meet its 15 per cent tax-to-GDP ratio target. A shift towards structural reform is essential. That means reducing exemptions, broadening the tax base and strengthening the FBR’s enforcement capacity. Only then can Pakistan build a fair, sustainable, and effective tax system capable of supporting its long-term development.
The writer is a group director at the Jang Group. He can be reached at: iqbal.hussainjanggroup.com.pk