KARACHI, May 14, 2025 — The World Bank has raised serious concerns about the structure and effectiveness of Pakistan’s tax system, highlighting its limited revenue generation, economic distortions, and disproportionate impact on low-income groups.
In its latest report, the Bank emphasized that the current tax framework not only fails to support inclusive economic growth but also exacerbates poverty and underdevelopment.
According to the report, Pakistan’s tax system collects insufficient revenue, with a tax-to-GDP ratio of only 10.5 percent in FY24. Collections by the Federal Board of Revenue (FBR) account for just 8.6 percent of GDP, significantly below regional and global benchmarks. The report warns that this weak performance is a central obstacle to addressing the country’s chronic fiscal deficits, mounting public debt, and persistent macroeconomic instability.
The World Bank underscores that Pakistan’s fiscal policies—shaped largely by its inadequate revenue system—are more likely to increase poverty than reduce inequality, a trend not typically observed in peer lower-middle-income countries. A critical concern is the tax system’s structural complexity, marked by excessive exemptions, poor enforcement, and a narrow taxpayer base. As of now, only 13.4 million individuals are registered for income tax, and just 396,000 are sales tax filers, despite a much larger informal economy.
A significant portion of the tax burden falls on direct taxation, particularly through withholding and advance taxes. While such mechanisms ensure steady revenue flows, they also contribute to regressive taxation. As a result, Pakistan’s tax system imposes a disproportionate burden on the lower income group, who bear the brunt of consumption taxes and indirect levies.
In response, the government has initiated several tax policy reforms under the ongoing IMF-EFF program. These include reducing exemptions by one-third in the FY25 budget, increasing taxes on highly profitable sectors such as banking and real estate, and introducing a more progressive personal income tax regime. Additionally, federal and provincial authorities have agreed to align taxes on agricultural income with corporate and individual tax standards, aiming to expand the tax base.
Reforming the tax system also involves major administrative overhauls. The FBR has launched a unified sales tax portal for key sectors and introduced digital tools like invoice monitoring and track-and-trace systems for industries such as sugar, fertilizer, and tobacco. New penalties, including SIM card blocking and travel bans for non-filers, aim to boost compliance. These efforts have contributed to an 18 percent real-term increase in revenue so far in FY25.
However, the World Bank stresses that deeper structural changes are essential. Further simplification of the tax system, broader formalization of the economy, and more effective taxation of agriculture and property remain critical to sustainable fiscal development. These measures, alongside the FBR Transformation Plan and upcoming World Bank-supported projects, are vital to ensuring a fairer, more efficient, and growth-oriented tax regime for Pakistan.