Islamabad – July 23, 2025 — Pakistan’s aggressive push to expand its tax base may be costing more than it’s collecting, warns a hard-hitting new report by the Asian Development Bank (ADB). The findings paint a troubling picture of misplaced priorities, mounting administrative burdens, and a tax system in dire need of simplification and reform.
The ADB’s deep dive into Pakistan’s tax machinery reveals a stark truth: despite a surge in the number of tax filers over the past decade, the country’s income tax-to-GDP ratio has barely budged. In simpler terms, Pakistan is bringing more people into the tax net—but they’re barely paying anything.
🎯 A Lesson for Developing Nations
The ADB cautions other Developing Member Countries (DMCs) against blindly following Pakistan’s example. “Expanding the tax base without addressing compliance and simplification doesn’t work,” the report states. “Pakistan offers a cautionary tale.”
The study groups Pakistan alongside countries like Rwanda, South Africa, and Uganda, where expanded tax filing failed to produce any meaningful bump in revenue. A growing list of tax filers, it turns out, does not automatically translate into a growing pile of tax money.
“The tax system is bloated with noncompliant filers who report zero or negligible income,” the ADB notes.
📉 Tax Filing: Quantity Over Quality?
The raw numbers might look promising on paper. From 2007 to 2021, the number of tax filers more than tripled. But here’s the kicker: a substantial chunk of these new filers either declared no income or dodged meaningful contributions altogether. Real tax revenue, adjusted for GDP, has hovered stubbornly between 3% and 4%—unchanged for over a decade.
So, what’s gone wrong?
According to the ADB, Pakistan’s tax authorities have focused too heavily on swelling the ranks of filers instead of strengthening compliance among existing taxpayers. Without addressing the roots of noncompliance, the system has simply expanded in size—not strength.
💰 The Rich Pay, The Rest File and Forget
Another shocking revelation: Pakistan’s income tax is overwhelmingly paid by the top 1% of earners. Figures show that the top 0.1%, 1%, and 10% of income earners bear the bulk of the country’s tax burden. Meanwhile, lower income percentiles contribute little to nothing, raising serious concerns about vertical equity and sustainability.
This skewed burden, the ADB says, not only undermines fairness but discourages larger firms from playing fair, especially when they see smaller players escaping scrutiny.
🚨 Expanding the Net, Shrinking the Results
From 2014 onwards, Pakistan introduced aggressive and punitive measures to pressure nonfilers into compliance:
• Higher withholding tax rates for nonfilers
• Bans on nonfilers buying property or vehicles
• Mandatory proof of tax filing for professional licenses and contracts
• Restrictions on opening bank accounts and stock market investments
• A potential ban on international travel for chronic nonfilers
Yet, despite the crackdown, actual revenue from new taxpayers has remained negligible. The ADB’s data shows a dramatic increase in tax filers post-2014, but revenue growth stayed flat. In fact, most of the real income tax continues to flow from long-term, existing taxpayers.
⚠ Compliance Is Costly—And Ineffective
So, what’s the cost of this “more is more” strategy? ADB warns that:
• Tax authorities face rising administrative costs trying to process millions of returns with little or no revenue attached.
• Taxpayers face higher compliance costs, spending time and money filing meaningless or minimal returns.
• The informal sector remains untouched, with many evading detection or registering only to fulfill formality.
In the words of the report:
“Pakistan’s current approach has created a bureaucratic burden without the financial reward.”
🧩 Informality: The Unsolved Puzzle
Pakistan’s massive informal sector is another persistent obstacle. The report highlights that informal employment—especially among women—has steadily increased since 2006. This signals the failure of the formalization push and underscores the need for gender-sensitive reforms.
Meanwhile, countries like Viet Nam have successfully reduced female informal employment. Why not Pakistan? The ADB hints at the answer: the current approach is all stick and no carrot. There are few incentives for small businesses or workers to voluntarily join the formal sector, especially when doing so comes with greater scrutiny, higher costs, and little tangible benefit.
📊 More Data, But Not Better Results
Proponents argue that increasing tax filing improves economic data. While it’s true that more filings produce more data, there’s no evidence that this has translated into smarter audits or better policy outcomes in Pakistan. The ADB says if the extra data were useful, we would’ve seen gains by now. We haven’t.
🔁 Rethinking the Strategy
The report delivers a clear message: Pakistan needs to simplify its tax system to encourage genuine participation. Compliance needs to be made less intimidating and more rewarding. Rather than expanding the base with noncontributing filers, resources should be channeled toward:
• Improving compliance among existing filers
• Simplifying return procedures for individuals and businesses
• Creating targeted incentives for formalization
• Launching public awareness campaigns to build trust in the tax system
ADB’s recommendation? A data-driven approach that evaluates the actual return on enforcement investments. In other words, stop blindly chasing more filers and start focusing on what works.
🔍 What’s the Endgame?
So, why persist with a failing strategy? Possibly because more filers look good on political scorecards, even if the fiscal reality tells another story. But if Pakistan wants a sustainable, equitable and effective tax regime, it must rethink its obsession with registration numbers and pivot toward real, meaningful compliance.
The stakes are high. An overburdened formal sector, a disillusioned taxpayer base, and a bloated administration are dragging Pakistan’s tax system down. Without bold and strategic reforms, the country risks turning its entire tax apparatus into a paper tiger—all bark, no bite.
The path forward is clear: simplify the tax process, target compliance, and foster trust. Because when taxes are fair, simple, and transparent, citizens don’t need to be coerced—they choose to comply. And that’s the kind of change Pakistan needs right now.