ON one side stand businesses, salaried citizens, traders and ordinary consumers who feel crushed under the weight of taxation. Rates are high, compliance is cumbersome and penalties are harsh. On the other side stand official statistics showing Pakistan’s tax-to-GDP ratio stuck at around nine to 10 per cent for decades. A third side of this triangle is the Federal Board of Revenue, assigned ambitious, often unrealistic, revenue targets, only to be blamed for corruption and incompetence when it falls short. These targets are not only taxing on FBR officials but for the entire economy as well.
Pakistan’s fiscal debate has been shaped by a repeated argument from economists: the country’s fiscal troubles begin with its low tax-to-GDP ratio. Under this intellectual pressure, governments keep raising revenue targets every year without asking whether the tax-to-GDP ratio itself becomes misleading when treated as a policy obsession. Not all GDP is automatically taxable. Several factors make GDP an imperfect denominator for assessing tax performance.
A critical factor is Pakistan’s unequal income distribution. A significant part of national output comes from subsistence farming, micro-enterprises, low-margin retail and informal services. While these activities add to GDP, they do not necessarily create a taxable base. Recent data published in the 2024-2025 Household Integrated Economic Survey and the World Inequality Report 2026 reinforce this point. Our reading of the HIES data suggests that only the top quintile has enough average per-earner income to meet the FBR’s taxable threshold. This means nearly 80pc of the population falls below the minimum taxable limit, placing a hard structural ceiling on the portion of GDP that can be taxed directly.
Another limitation is persistent exemptions that keep much of GDP beyond the FBR’s reach. Agriculture is the clearest example. It is often argued that agriculture is a provincial subject and thus outside the jurisdiction of the FBR. This justification, however, is weak. Private education and healthcare also operate within provincial domains, yet income from these sectors is taxed by the FBR. Why, then, does agricultural income remain protected? The answer lies more in political economy than constitutional design. Retail trade is another political and administrative nightmare for the FBR. While an individual retail unit may yield less revenue than the cost of enforcement, the sector is collectively too large to ignore. Yet traders often remain immune from coercive action because of their political influence.
Indiscriminate taxation weakens legitimacy.
Furthermore, the FBR’s tax collection efforts are often undermined by policy moves by other public institutions. Revenue targets are set on certain assumptions about imports, domestic production and inflation, which can be instantly derailed by policy shifts by the State Bank, such as import curbs or foreign exchange controls. These decisions shrink the very revenue base on which the FBR’s projections depend.
While the FBR has problems of trust, discretion and enforcement, many of its officers work capably under intense pressure. The deeper problem is structural: unrealistic targets, a narrow tax base and a cluttered tax regime make failure almost inevitable. The current taxation landscape is a thicket of levies, duties, surcharges and cascading provincial overlaps, yet reform remains hamstrung by the fear of missing revenue targets. As a consequence, the pressure of high tax collection targets falls disproportionately on already documented sectors, pushing the tax system to the wrong side of the Laffer Curve.
Pakistan needs simplification, not just extraction. More formalised, high-tax economies operate through a social contract of fiscal churn: citizens pay progressive taxes but receive visible support through pensions, healthcare and other public services. In Pakistan, that contract is weak. The state taxes indiscriminately and seeks opportunities to extract revenue wherever it can. Petrol is a clear example. In the absence of decent mass transit, fuel becomes an inelastic good: people must buy it to commute despite high levies.
Indiscriminate taxation weakens legitimacy. As the 2026-27 budget approaches, the government should avoid an extractive approach and move away from assigning inflated revenue targets to the FBR. It should instead set reform targets — fewer taxes, simple procedures — even if there is a risk of temporary reduction in tax-to-GDP ratio.
Pakistan needs a smarter tax regime, one that does not merely collect but supports a fairer and more productive economy.
The writer is an economist.
Published in Dawn, June 1st, 2026