Pakistan’s tax system faces deep structural issues despite increase in filers and tax-to-GDP ratio: report

Pakistan’s tax system continues to face deep-rooted issues despite an increase in the number of tax filers and a rise in the tax-to-GDP ratio. The Federal Board of Revenue (FBR) reported that the total number of income tax returns filed for the fiscal year 2024-25 has reached 5.9 million, reflecting a 17.6% increase compared to the previous year. 

However, nearly one-third of these returns report zero taxable income, raising concerns about the effectiveness of the country’s tax collection efforts.

While the overall tax-to-GDP ratio has improved, reaching 15.7% for FY 2024-25, experts point out that many of the filings are of little value due to the high number of zero returns. 

This situation highlights a focus on quantity rather than quality in tax collection, as a significant portion of the tax base remains unproductive. A growing number of taxpayers are filing zero returns simply to maintain their status on the FBR’s Active Taxpayer List (ATL) or to avoid penalties, without contributing meaningfully to the national revenue.

The salaried class continues to bear the brunt, contributing significantly to the total tax revenue. In FY 2025, this group paid Rs555 billion in income taxes, which is nearly double the combined amount collected from the retail and real estate sectors. The reliance on the salaried class for tax revenue points to the challenges of broadening the tax base, particularly with the continued presence of a large informal economy that remains largely untaxed.

Pakistan’s direct tax collection has seen an improvement in recent months, with a 12% growth recorded in the first quarter of FY 2026. However, most of this increase has been driven by withholding and advance taxes, not through the formal documentation of business income. 

The country’s tax system remains narrow due to policy inconsistencies, tax exemptions, and the dominance of indirect taxes, which disproportionately affect lower-income groups while sparing wealthier individuals and businesses.

Efforts to bring the informal economy into the tax system, such as the integration of Point-of-Sale (PoS) systems for retailers, have not yet yielded substantial results. The pace of documentation remains slow, and enforcement mechanisms are still weak. Despite these efforts, the mismatch between declared incomes and visible wealth continues to be a significant issue, which has been acknowledged by authorities.

With the FBR facing a shortfall of Rs270 billion in the first quarter of FY 2026, the focus needs to shift from increasing the number of tax filers to ensuring real compliance across all sectors. 

Experts argue that a more effective approach would involve strengthening audit systems, reducing tax exemptions, and enhancing enforcement to bring in tax revenue from all parts of the economy. Until these structural reforms are implemented, the country’s tax system will likely continue to be inefficient and inequitable.