A fiscal system in denial

As of May 2025, Pakistan’s tax collection crisis has deepened. The Federal Board of Revenue (FBR) has fallen short of its revised annual target by Rs1.03 trillion – a staggering shortfall in just 11 months, despite record new taxes, advance collections, forced debits from personal bank accounts and the blocking of refunds owed to individuals and companies.

In May alone, the FBR missed its monthly target by Rs205 billion, despite disbursing 5.3 per cent fewer refunds than in the same month last year. Despite aggressive tactics, this dismal outcome raises serious questions about the government’s strategy of extracting revenue primarily from the already overburdened classes and sectors of the economy.

When the FBR reported that Pakistan’s tax collections had more than doubled – from Rs4.334 trillion in FY2019-20 to Rs9.311 trillion in FY2023-24 – it was cited as a sign of strong fiscal performance. Government officials alluded to a 21.1 per cent compound annual growth rate (CAGR), and headlines celebrated a ‘record haul’. In its April 2025 review, the IMF acknowledged Pakistan’s fiscal resilience, including a 2.0 per cent primary surplus in H1 FY2024-25, yet these nominal gains obscure deeper weaknesses.

At the heart of this illusion is inflation. Between FY 2019-20 and FY 2023-24, Pakistan’s Consumer Price Index (CPI) nearly doubled, from 100 to 193. Deflating nominal collections by the inflation index shows real tax revenues inching from Rs4.334 trillion to just Rs4.824 trillion, a slender 2.7 per cent real CAGR. In FY2022-23, when inflation topped 29 per cent, real collections actually declined by 10.1 per cent. In effect, 97 per cent of the FBR’s ‘growth’ over five years was simply the monetary illusion of higher prices, not genuine resource mobilisation.

This inflation-driven rise masks an economy under strain. Households and businesses endure eroding purchasing power even as the state touts headline figures, akin to applauding a bakery for doubling revenue by doubling prices while selling fewer loaves.

The salaried class – just 2.0 per cent of the workforce – paid Rs367.8 billion in income tax in FY2023-24, up 40 per cent nominally. Yet, once deflated, their real contributions grew at a mere 2.6 per cent CAGR over five years. If nominal salaries haven’t kept pace with surging inflation (most likely scenario), real wages have fallen sharply.

The Finance Act 2024’s doubling of the levy on incomes above Rs600,000 extracted an extra Rs70 billion from fixed-income workers. Lacking transparent and current data on salary growth, robust analysis is difficult, but anecdotal evidence suggests salaried incomes did not double over this period, squeezing purchasing power even further.

In the first nine months of FY2024-25, the salaried class paid a record Rs391 billion in income tax, while the FBR’s withholding taxes on property transactions reached Rs169 billion.

Agriculture – 20 per cent of GDP – contributes under 1.0 per cent of FBR receipts. The service sector – nearly 60 per cent of GDP – pays just 29 per cent of tax revenue. Real estate, retail chains and high-net-worth individuals exploit loopholes and transfer pricing, while withholding taxes proliferate – easy to administer but burdensome for businesses and often irrecoverable for consumers. These piecemeal measures fail to broaden the base, instead funnelling burdens onto the salaried middle class.

Non-tax levies like the PDL have ballooned from Rs294 billion in FY2019-20 to Rs1,019 billion in FY2023-24. Once part of divisible tax revenues under the NFC Award, PDL is now classed as non-tax revenue, understating FBR taxes and depriving provinces of their share. Including PDL, total FBR revenues rose from Rs4.334 trillion in FY 2019-20 to Rs10.33 trillion in FY2023-24 (24.3 per cent nominal CAGR), but only Rs5.351 trillion in real terms (5.4 per cent real CAGR).

Every rupee of PDL fuels inflation – higher transport costs push up food and input prices, depressing real incomes and generating further nominal tax gains in a self-reinforcing cycle.

Despite nominal growth, the tax-to-GDP ratio barely moved, from 9.1 per cent in FY2019-20 to 9.7 per cent in FY2023-24 (after adjusting PDL). The IMF warns that ratios below 13 per cent starve developing economies of investment in health, education and infrastructure.

Tax evasion remains rampant: according to one estimate roughly 7.0 per cent of GDP slips through illicit trade and misreporting. Only 4.44 million returns were filed in FY2023-24 – and just 2.4 million taxpayers actually paid. In a 250 million-strong country, two million active taxpayers are a rounding error.

In FY2023-24, Rs8.1 trillion (87 per cent of FBR collections) vanished in debt servicing, crippling public investment. Development budgets are slashed, essential services underfunded and fiscal space gutted. Fitch and the IMF warn of unsustainable debt paths, yet the state clings to nominal triumphs.

This is a structural trap. Celebrating nominal gains while ignoring real stagnation, saddling the salaried few and allowing elites to dodge taxes are conscious policy choices. Until discourse shifts from the size of the number to the quality of the tax system – that is, genuine growth, broad-based compliance and equitable burden-sharing – every ‘record’ collection will remain a house of cards.

The writer is former head of Citigroup’s emerging markets investments and

author of ‘The Gathering Storm’.