Surge in direct taxes boosts Pakistan’s tax-to-GDP ratio to 10.3% in 2024-25

The Federal Board of Revenue (FBR) has reported an increase in the tax-to-GDP ratio, reaching 10.3% for the fiscal year 2024-25, up from an average of 8.7% over the past five years. The increase is largely attributed to a sharp rise in direct taxes, which now account for 5.1% of GDP, with sales tax contributing 3.4%.

According to the FBR’s report, the authority recovered Rs874 billion through enforcement actions in 2024-25, compared to Rs105 billion in the previous year—an eight-fold increase. This growth is attributed to a combination of targeted interventions and structural reforms within the tax system.

The FBR has set an ambitious target to achieve an 18% tax-to-GDP ratio by 2027-28. Notable interventions in key sectors, such as sugar and cement, contributed to the increase in tax revenue. 

For instance, Rs25 billion was recovered from the sugar sector and Rs12.8 billion from the cement sector in the first half of FY 2024-25, thanks to real-time production monitoring.

Additionally, the FBR’s efforts to improve retail sector compliance saw more than 40,000 point-of-sale (POS) installations, covering 38% of Tier-1 retailers. Legal settlements and expedited dispute resolution resulted in Rs255 billion in revenue.

A key initiative, the faceless assessment system in Customs, strengthened neutrality and led to higher tax collections per goods declaration (GD). For example, at Dry Port Lahore (East), tax revenue per GD increased by 40% YoY from Rs25 million in April-June 2023 to Rs35 million in the same period of 2024.

The introduction of a peer-reviewed performance system for officers has also helped improve efficiency, rewarding high-performing officers and reducing discretion and leakages in the system. These measures, along with increased voluntary compliance, have contributed to a 26.3% rise in FBR tax revenues in 2024-25, further improving the tax-to-GDP ratio.

Over the past decade, the composition of taxes has shifted, with indirect taxes’ share in the tax-to-GDP ratio declining from 5.8% to 5.2%, while direct taxes have increased from 3.7% to 5.1%. The FBR anticipates continued growth in tax revenues and an improved tax-to-GDP ratio in the years ahead.