ISLAMABAD: The Asian Develop­ment Bank (ADB) has cautioned that blindly pursuing tax base expansion in Pakistan is unlikely to yield sustainable fiscal outcomes without a strategic focus on enforcement and meaningful compliance.

In a policy guide published on Tuesday, the ADB stated that Pakistan’s experience demonstrates that efforts to expand the tax base without ensuring compliance among existing taxpayers yield minimal revenue gains and increased administrative costs. Policymakers must gather systematic evidence to compare returns on investment between widening the tax base and improving compliance, the report noted.

The guide emphasised that expanding the tax net should only be pursued when the non-revenue benefits — such as economic formalisation or improved economic data — outweigh compliance costs for taxpayers and the administrative burden on the government. A balanced approach is crucial for fostering long-term fiscal sustainability.

Despite tripling registered filers, revenue has remained stagnant at 3-4pc of GDP for over a decade

Pakistan’s case offers key lessons for other ADB member countries seeking to formalise informal sectors. Aggressive measures to increase tax filings do not necessarily translate into higher revenues or broader economic benefits. Similar outcomes have been observed in Rwanda, South Africa, Uganda, and other developing economies, where the expansion of tax bases failed to produce significant revenue increases.

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In Pakistan, while the number of registered tax filers more than tripled from 2007 to 2019 — particularly after the introduction of aggressive enforcement post-2014 — income tax revenue as a share of GDP has remained stagnant, fluctuating between 3pc and 4pc over the past decade. The ADB said this disconnect raises serious concerns about the efficacy of costly compliance measures.

Many new filers have reported minimal or no taxable income, with the increased withholding taxes and transactional restrictions contributing more to administrative complexity than to actual revenue. The ADB argued that simply adding names to the tax roll does not ensure effective revenue generation.

The report further stated that unless the government’s objective includes broader social benefits — such as improved transparency or formalisation — these policies are difficult to justify. In the absence of tangible revenue gains or measurable non-revenue benefits, such as enhanced financial documentation or economic inclusion, the current approach appears suboptimal.

Between 2014 and 2021, Pakistan reportedly tripled the size of its formal sector. Yet by 2021, the country was collecting nearly the same amount of tax revenue as it did in 2007 — indicating that formalisation alone is not a sufficient driver of revenue growth.

The ADB concluded that without a strategic reassessment, Pakistan’s current tax policy risks imposing undue burdens on taxpayers and the administration while failing to meet its fiscal sustainability goals.

Published in Dawn, July 9th, 2025