akistan’s taxation system has long attracted criticism. It is riddled with inefficiencies and anomalies that hinder economic progress and fair resource distribution. When compared to nations with high tax-to-GDP ratios globally and within Asia, the gaps in Pakistan’s fiscal policies become glaringly apparent. These glitches impact businesses and individuals.

Pakistan’s current tax-to-GDP ratio of 9.2 percent, is significantly below the global average [how much?] and 34 percent of the Organisation for Economic Cooperation and Development countries. Among Asian economies, it pales in comparison with regional leaders such as Japan (34.1 percent), Korea (32.0 percent) and Mongolia (24.6 percent). This disparity highlights Pakistan’s structural inadequacies and lack of comprehensive tax reforms. The Federal Board of Revenue has frequently failed to meet its collection targets, amplifying fiscal deficits and necessitating frequent adjustments in tax policies.

In the fiscal year 2023-24, the FBR collected Rs 9,306 billion, marginally surpassing the revised target but falling short of the original target by Rs 109 billion. Despite achieving a 30 percent increase compared to the previous year, the ambitious target of Rs 12,970 billion for FY 2024-25 appears daunting. The revenue shortfall of Rs 344 billion in the first five months of FY 2024-25 exemplifies the challenges in meeting these targets. Frequent mini budgets to address revenue gaps disrupt economic stability and erode public confidence in the government’s fiscal policies.

The regressive nature of Pakistan’s tax regime disproportionately burdens the salaried class and small businesses. Recent amendments, such as the removal of tax benefits for export sectors and increased levies on salaried individuals, have strained disposable incomes and impeded business growth. These measures, aimed at broadening the tax base, fail to address the underlying issue of tax evasion and the informal economy, which constitutes a significant portion of Pakistan’s GDP.

Countries with high tax-to-GDP ratios have progressive tax systems that ensure equitable distribution of resources. For instance, Denmark and Sweden, with tax-to-GDP ratios exceeding 40 percent, leverage robust social security contributions and efficient tax collection mechanisms to fund comprehensive welfare programmes.

Asian economies like Japan and Korea prioritise corporate taxes and social contributions, accounting for 21.3 percent and 32 percent of their tax revenues, respectively. These nations have successfully aligned tax policies with economic growth strategies, fostering a conducive environment for businesses while ensuring social equity.

Frequent changes in tax policies create an unpredictable business environment, deterring investment. For instance, the Tax Laws (Amendment) Act 2024, tabled in National Assembly on December 18, 2024 proposes restrictive measures such as barring non-compliant persons from operating bank accounts. While aimed at curbing tax evasion, such measures impose undue compliance burdens on businesses, particularly small and medium enterprises (SMEs).

This reactive approach provides a stark contrast with proactive reforms in countries like Singapore that have streamlined tax administration and incentivised compliance through digital platforms and transparent processes. In Pakistan, some of the people appointed to head tax agencies lack advanced technical knowhow.

On the human development front, Pakistan’s taxation system fails to translate revenues into tangible benefits for citizens. The lack of investment in health, education, and infrastructure exacerbates socioeconomic disparities. In comparison, countries with high tax-to-GDP ratios effectively utilise tax revenues to enhance public services and improve living standards. For instance, Norway and Finland channel substantial portions of their tax revenues into education and healthcare, achieving high human development indices.

The agricultural sector in Pakistan, which contributes 24 percent to the GDP, remains largely untaxed, perpetuating a fiscal imbalance. Recent initiatives by some provincial governments to impose income tax on agricultural earnings, such as amendments to Punjab’s Agricultural Income Tax Act 1997, are steps in the right direction. However, they still fall short of the agreement with the International Monetary Fund.

Sindh, Khyber Pakhtunkhwa and Balochistan have yet to amend their agricultural income tax laws to conform with the federal personal and corporate income tax rules in accordance with the National Fiscal Pact signed as per IMF condition.

Comprehensive laws, effective implementation and equitable enforcement are crucial in this regard. Countries like New Zealand have successfully integrated agricultural income into the tax net, ensuring fair contributions from all sectors of economy. The other sectors requiring urgent reform from a taxation perspective are retail and real estate.

Inefficiencies, incompetence and corruption in the FBR hinder effective tax collection. The absence of a comprehensive tax database and reliance on manual processes exacerbate revenue leaks. Advanced economies employ technology-driven solutions, such as electronic invoicing and data analytics, to enhance compliance and minimise evasion. Estonia’s e-tax system, for instance, has revolutionised tax administration, achieving near-perfect compliance rates.

Social security contributions, a critical component of tax revenue in developed nations, account for only 7.6 percent of Pakistan’s tax revenue, compared to 23.7 percent in OECD countries. This highlights the need for reforms in Pakistan’s social security framework to expand coverage and ensure sustainable funding for welfare programmes. Lessons can be drawn from Germany and Japan, where mandatory contributions by employers and employees underpin robust social protection systems.

Pakistan’s reliance on indirect taxes (even under the garb of direct taxation through numerous withholding provisions), which constitute over 60 percent of total tax revenue, disproportionately affects low-income groups. Direct taxes account for a larger share of revenue in developed economies, promoting equity. For example, personal income taxes represent 23.7 percent of total tax revenue in OECD countries, compared to 15.9 percent in Asia-Pacific and an even less in Pakistan. Shifting the focus from indirect to direct taxation is essential to achieve equity.

Fluctuating commodity prices and economic shocks, such as the Covid-19 pandemic, have further strained Pakistan’s taxation system. While countries like Fiji and the Maldives leveraged rebounds in tourism and commodity prices to raise their tax-to-GDP ratios, Pakistan’s dependency on external borrowing to bridge fiscal deficits underscores the need for structural reforms. The recent decline in tax-to-GDP ratios in Sri Lanka and Bhutan, attributed to policy missteps and economic crises, serves as a cautionary tale.

To address these challenges, Pakistan must adopt a multi-pronged approach to reform its taxation system. First, broadening the tax base by integrating the informal economy and eliminating/ reducing exemptions is imperative. Second, investing in technology and capacity building within the FBR can enhance efficiency and transparency. Third, fostering a culture of voluntary compliance through incentives and public awareness campaigns can improve revenue collection. Fourth, aligning tax policies with economic objectives, such as promoting exports and attracting investments, can drive sustainable growth.

The focus on achieving ambitious revenue targets should be complemented by equitable tax policies and efficient utilisation of resources. The introduction of digital tax platforms and simplification of procedures can ease compliance burdens and attract more investments. By learning from regional peers like Vietnam and Indonesia, which have implemented tax reforms to boost revenue and economic growth, Pakistan can chart a path towards fiscal sustainability.

Pakistan’s taxation system requires urgent and comprehensive reforms to address its anomalies and align it with global best practices. By adopting a proactive and inclusive approach, the government can enhance revenue collection, promote equity and achieve economic stability. Lessons from countries with high tax-to-GDP ratios and efficient tax systems provide valuable insights for Pakistan to build a robust and equitable fiscal framework. All this is well documented in a study titled, Towards Broad, Flat, Low-rate and Predictable Taxes (Prime, 2024) and book, Tax Reform in Pakistan: Historic & Critical Review (PIDE, 2020).

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.