akistan’s taxation framework has long faced widespread criticism for falling short of global standards and underperforming in revenue collection. The narrow tax base, reliance on a segment of taxpayers primarily comprising salaried individuals and large corporations and weak enforcement mechanisms highlight systemic weaknesses in both policy design and execution. Administrative challenges, poor capacity of tax officials and lack of innovation further hinder compliance monitoring and taxpayer facilitation. Inconsistent policy measures discourage voluntary compliance and create unfairness in the system. The failure to implement broad-based reforms targeting informal sectors and high-income groups limits mobilisation of domestic resources.

The Federal Board of Revenue has historically relied heavily on withholding taxes and corporate entities as primary revenue sources, rather than broadening tax base or improving equity. This approach has skewed the system, placing undue burden on salaried workers, who are more visible and easier to monitor, by leaving significant segments such as the informal economy and under-taxed high-net-worth individuals.

Injustice inherent in Pakistan’s taxation framework limits revenue mobilisation and erodes public trust in the system. This argument is supported by FBR data for fiscal year 2023-24, which shows that total tax collection amounted to Rs 9.2 trillion, of which 29 percent, or approximately Rs 2.7 trillion, came from direct tax withholdings. When sales tax collected on petroleum products and domestic electricity consumption is included, this proportion rises to 38.3 percent, highlighting the dominant role of corporate withholding agents in revenue performance.

Salaried individuals contributed Rs 391 billion under Section 149, marking a 41.8 percent increase over the previous year. Currently, salaried individuals face tax rates as high as 35 percent, with an additional surcharge of 9 percent (for tax year 2025 it was 10 percent). Shift in the tax burden is particularly gloomy when tax slabs over the past few years are examined. In fiscal year 2019-20, the top rate of 35 percent applied only to annual taxable income above Rs 75 million; subsequent policy changes have lowered this threshold, so that even annual incomes of Rs 6 million are now taxed at the same top rate.

Tax credits and exemptions for salaried class have been reduced or eliminated. This has increased discrimination. Despite repeated concerns raised by professionals and civil society groups regarding this disproportionate tax burden, little corrective action has been taken. Excessive taxation in an already challenging economic environment characterised by inflation, currency devaluation and limited social protection, reduces disposable income and consumption, slows economic growth and discourages investment. It also drives skilled individuals to seek opportunities abroad, eroding human capital and lowering the morale among compliant taxpayers.

The over-reliance on salaried class has continued into the current fiscal year. During the first quarter of fiscal year 2025-26, the FBR collected Rs 1,635 billion, a 17 percent increase over the same period in the previous year. Direct tax collection rose by 41 percent. Salaried individuals contributed Rs 138 billion, compared to Rs 110 billion in the same period the previous year.

FBR’s Annual Performance Report 2024 (the 2024 Report) shows that only 234,193 individuals are registered as sales tax filers. The number of active taxpayers is 4,738,595. This disparity highlights the limited reach of sales tax registration and the urgent need to broaden the tax net, particularly in regions with high 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 are required to link their POS systems to FBR platform for real-time reporting of sales, automatic invoice generation and improved compliance monitoring. However, as of October 27, nly 1,978 retail points across Pakistan have integrated their systems, reflecting a substantial gap between policy objectives and implementation.

Delays in processing refunds present another structural challenge. The 2024 Report indicates that average refund processing time decreased from 598 days in fiscal year 2021 to 448 days in fiscal year 2024, which was excessive by international standards. Such delays restrict cash flow, compel businesses to incur high-cost financing and increase the cost of doing business, discouraging formal sector participation and limiting overall tax potential.

Pakistan’s long-term prosperity depends on adopting a balanced strategic approach to taxation, one that aligns fiscal policy with economic realities by promoting fairness, compliance and public trust. 

From an equity standpoint, it is problematic that the tax burden disproportionately affects salaried individuals while high-income groups, business profits and informal economic activities remain under-taxed. This disparity undermines fairness and discourages voluntary compliance. Policymakers must adopt a sustainable approach that aligns tax rates with the ability to pay, ensures fairness and broadens the tax base.

Broadening of the tax net by formalising informal sectors and incentivising compliance is essential. Furthermore, adjusting tax slabs according to inflation ensures that taxpayers are not penalised by bracket creep. Targeted measures to appropriately tax high-income earners and large corporations can ensure that fiscal burdens are fairly distributed without discouraging investment. Streamlining administrative processes, reducing red-tape and leveraging technology enhance efficiency and taxpayer satisfaction.

Long-term strategies for fiscal sustainability require strengthening FBR officials’ capacity, modernising 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 broadened and equitable tax base increases domestic resource mobilisation, reduces dependence on external borrowing and lowers debt-to-GDP ratio.

Increased fiscal space allows for higher public investment in social sectors such as education, healthcare and infrastructure, improving human capital and social welfare. Predictable and fair tax policies enhance investor confidence, attracting both domestic and foreign investment and contribute to job creation, improved purchasing power and economic growth.

The current taxation framework has the potential to be a robust tool for equitable growth and fiscal stability. Addressing structural issues, improving efficiency of tax administration, broadening tax base and adopting a fair and progressive approach will enhance revenue collection while minimising adverse impacts on compliant taxpayers.

A progressive policy approach to taxation, aligned with inflation and economic conditions, will prevent excessive burdens on salaried individuals. Policy consistency, transparency and clarity are essential to building public trust, reducing tax avoidance and improving the overall effectiveness of the system. The newly-established Policy Wing in the Ministry of Finance, comprising FBR officers, however, has vowed to further strengthen the prevalent target oriented, oppressive and outdated tax system.

The tax system can be transformed from a narrow, inequitable framework to an inclusive and efficient mechanism that maximises revenue potential, strengthens social development and fosters sustainable economic growth. By implementing comprehensive reforms that broaden the tax base, ensure fairness, enhance efficiency and encourage compliance, Pakistan can reduce its reliance on borrowing, improve social sector spending, attract investment, create jobs, increase purchasing power and promote equitable economic development.

Pakistan’s long-term prosperity depends on adopting a balanced strategic approach to taxation, one that aligns fiscal policy with economic realities by promoting fairness, compliance and public trust. Pakistan has the capacity to reduce its debt-to-GDP ratio and strengthen the social fabric, ultimately creating a more stable, equitable and prosperous nation. However, this is not possible under the revenue machinery that has become a recovery arm of the International Monetary Fund.

Dr Ikramul Haq, writer and advocate of the Supreme Court, is an adjunct teacher at Lahore University of Management Sciences.

Abdul Rauf Shakoori is a corporate lawyer based in the USA.