Pakistan has once again been identified by the World Bank as having one of the weakest tax buoyancies among Emerging Market and Developing Economies (EMDEs), placing it in the bottom quartile.
This low responsiveness of tax revenues to GDP growth highlights the country’s over-reliance on taxation of slow-growing sectors and under-taxation of dynamic segments of the economy. The latest South Asia Development Update: Taxing Times by the World Bank calls for urgent reforms to broaden the tax base and enhance the effectiveness of Pakistan’s revenue mobilization efforts.
Unlike other South Asian economies such as Bangladesh and India, where tax buoyancy aligns more closely with EMDE averages, Pakistan’s tax system continues to lag. In fact, the World Bank noted that the country’s income tax structure, while appearing progressive on paper, is undermined by widespread exemptions and narrow coverage. Pakistan stands out for having a wide range of income tax rates and thresholds, but the effectiveness of this progressivity is diluted by poor compliance and administrative inefficiencies.
The World Bank report recommended that Pakistan reform its income tax regime to raise effective rates on the highest-income groups and eliminate unjustified exemptions. It also called for taxing the agricultural sector more effectively, noting that agriculture accounted for nearly 20% of GDP growth from 2010 to 2019 in Pakistan, yet it remains significantly under-taxed. In contrast, this figure is less than 10% in the average EMDE. Raising agricultural taxation is seen as a key priority for increasing tax revenues.
Among the EMDEs, Pakistan also faces some of the highest shortfalls in direct tax revenue, with gaps nearly evenly split between corporate and personal income taxes. The World Bank attributes a third of Pakistan’s tax revenue shortfall to structural issues like informality and lack of financial development. Even after accounting for these challenges, Pakistan’s tax collection still trails the average EMDE.
The report further highlighted that Pakistan’s revenue-to-GDP ratio remains among the lowest in South Asia, along with Sri Lanka and Bangladesh. Meanwhile, tax collections in the form of consumption taxes, such as VAT and excise duties, are significantly above the EMDE average, indicating over-reliance on regressive tax instruments.
The bank applauded recent reforms in Pakistan, such as the introduction of electronic VAT filing and computerized risk assessments, which have led to improved fraud detection and reduced refund claims. However, challenges remain in tax compliance, dispute resolution, and the timely filing of returns.
Despite weak private investment and contracting industrial output, Pakistan’s economy showed signs of gradual recovery in fiscal year 2024–25, with GDP growth projected at 2.7%. The rebound has been supported by a strong agricultural harvest, stable exchange rates, and robust remittance inflows. Inflation, which peaked at nearly 40% in mid-2023, has now declined sharply, allowing the central bank to lower policy rates.
The World Bank stressed that for Pakistan to move out of the bottom tier of EMDEs in tax performance, it must pursue deep and sustained reforms. Improving tax buoyancy, diversifying the tax base, enhancing compliance, and moving away from distortionary subsidies are crucial to placing the country on a more sustainable and inclusive growth path.