reating the TPO [Tax Policy Office] will enable the FBR to concentrate on detailed revenue analysis. At the same time, the TPO will specialise in tax policy analysis by staff with specialist tax policy skills, with the FBR remaining involved in discussions around tax policy making so that revenue administration aspects are fully considered. We will equip the TPO with robust analytical capabilities, including expertise in data modeling and data analytics, revenue forecasting and assessments of tax expenditure reviews.”—IMF Country Report No. 24/310, October 2024

Pakistan is facing a daunting fiscal challenge. The Federal Board of Revenue has been tasked with collecting Rs 12.97 trillion for the year 2024-2025 (FY2025). The ambitious target requires a historic high increase of 40 percent over the previous year’s collection of Rs 9.311 trillion. For the first quarter (July-September 2024), the Board missed the target by Rs 87 billion.

The budgetary framework for the fiscal year is centred around enhanced revenue mobilisation and prudent expenditure management to achieve fiscal sustainability. In the light of these objectives, the federal finance minister recently expressed a desire to raise Pakistan’s tax to GDP ratio to over 13 percent. However, the achievement of such a target hinges on critical reforms.

To broaden the tax base, the government must first eliminate preferential treatments and exemptions that currently benefit specific sectors of the economy. Industries such as real estate, agriculture and large-scale manufacturing have often been under-taxed or beyond the tax net. The minister has acknowledged that there is little hope of sustainable revenue growth without taxing these segments. The current reliance on a saturated tax base, comprising primarily the salaried class and manufacturing sector, has reached its limits.

The need for a fair and improved tax system is imperative. A more equitable tax structure will complement economic efficiency, generate additional revenue and create financial space for essential investments in human capital, infrastructure and social services. The FY2025 budget, approved by the parliament, includes measures aimed at reforming general sales taxes, personal income tax and corporate income tax laws, while also increasing the tax incidence on exporters and developers.

In order to support these revenue measures, the government must implement institutional and structural reforms alongside FBR. Moreover, the government should focus on enhancing collaboration and effectiveness among federal and provincial tax authorities for better governance and coordination. Additionally, attention should bepaid to improving tax administration and compliance, important elements in maximising revenue collection.

The recent Country Report (No 24/311) of the International Monetary Fund sheds light on several macroeconomic distortions and policy-related restrictions that have contributed to Pakistan’s underperformance in tax collection. A notable concern is the inefficiency in the tax collection system, which results in a significant portion of due taxes not reaching the revenue authority. This shortfall compromises the government’s efforts to improve the debt-to-GDP ratio.

Pakistan’s tax revenue collection is pathetically low relative to its level of development. The value added tax and personal income tax collections are below the average for emerging markets. In 2020, VAT collection efficiency in Pakistan was a mere 0.23, indicating that the system captures less than a quarter of its potential tax base. Doubling this efficiency could significantly enhance VAT revenue. At 16 percent, PIT collection efficiency is similarly low, suggesting that there is considerable room for improvement in this area as well.

The FY2025 budget says the government expects improved revenue administration and compliance, along with an expanded tax net, to generate Rs 250 billion. This includes expected revenue from the newly launched scheme for retailers. Additionally, through various policy measures—such as setting minimum import values for specific items, converting withholding tax into minimum tax, introducing a regime to prevent fraudulent invoices and re-evaluating property valuation tables—the government anticipates generating Rs 157 billion.

The revenue target is a critical component of fiscal management policy and requires strict adherence and timely achievement. Under the ongoing extended fund facility (EFF) programme of the IMF, Pakistan has agreed to undertake contingency measures if the three-month rolling average revenue collection falls short of the projected target by 1 percent. These measures may include increasing advanced income tax on imports, raising withholding tax rates and raising federal excise duty on sugary drinks.

Implementation of these reforms and measures is essential. It is equally important for Pakistan to focus on international cooperation and information sharing to strengthen its tax framework. Engaging with global tax initiatives can help combat tax evasion and improve compliance, thereby increasing overall revenue collection. Information-sharing agreements with other countries can facilitate discovery of hidden assets and ensure that all income is adequately taxed.

In this context, it is useful to compare Pakistan’s efforts with countries that have successfully achieved higher tax-to-GDP ratios. Countries like Denmark and Sweden have robust tax systems supported by comprehensive policies, high compliance rates and effective enforcement mechanisms. These nations have demonstrated that a well-designed tax system can yield substantial revenues while maintaining economic fairness and efficiency.

According to World Population Review statistics for tax-to-GDP ratio, Nauru leads the world with a tax-to-GDP ratio of 48.2 percent. Denmark follows with a ratio of 35.5 percent. The next highest ratios are seen in Seychelles at 31.5 percent, Lesotho at 30.8 percent and Kiribati at 30.1 percent.

Among the top ten countries with the highest tax ratios, three are in Europe (Denmark, the UK and Sweden), three in Africa (Seychelles, Lesotho and Namibia), and three in the Pacific region (Nauru, Kiribati and New Zealand), with Barbados representing the Caribbean. These countries achieve their high tax-to-GDP ratios through robust tax collection measures that fund essential services such as healthcare and social programmes, particularly in Europe, where the focus on social welfare is evident.

By implementing these models, Pakistan can adopt best practices tailored to its unique economic context. The emphasis should be on creating a tax system that is not only efficient but also equitable, ensuring that all citizens and sectors contribute fairly to the national revenue. This approach will require sustained political will and commitment to implementing necessary reforms.

Ultimately, the path forward for Pakistan lies in a multi-faceted approach that prioritises broadening the tax base, enhancing compliance and adopting digital solutions to improve tax administration. Digitalisation of tax processes can streamline compliance, reduce corruption and improve transparency. Investing in technology will allow for better monitoring of tax collection and easier filing for taxpayers, making the entire system more efficient.

Documentation of the economy is also crucial for increasing transparency and accountability in tax collection. By formalising more economic activities, Pakistan can ensure that more transactions are captured in the tax system, thereby broadening the tax base.

Pakistan is at a decisive point in its fiscal strategy, facing the challenge of achieving ambitious revenue targets while ensuring fairness and efficiency in its tax system. The focus on broadening the tax base, enhancing compliance, digitising tax processes and fostering international cooperation will be essential for improving revenue collection. By learning from countries with higher tax-to-GDP ratios and adopting comprehensive strategies, Pakistan can pave the way for a more sustainable and equitable economic future.

Dr Ikramul Haq, writer and an 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.