Every year, as Pakistan approaches the federal budget, a familiar ritual unfolds. Finance ministry officials huddle over spreadsheets, IMF targets loom large, and policymakers scramble to close a revenue gap that, despite years of effort, refuses to close.
Tax rates are adjusted, a few exemptions are withdrawn, and the formal sector is squeezed a little harder.
The OICCI’s recent special report, Pakistan’s Tax Paradox, arrives at exactly the right moment. With budget consultations underway and the government facing both IMF conditionality and public pressure, this is not just academic commentary. It is a timely intervention in a live policy debate, and its findings deserve serious attention from everyone involved in shaping fiscal policy.
Its central diagnosis is stark: Pakistan’s tax system is built on a narrow base and high rates, while tax revenues have remained largely stagnant as a share of GDP despite rising in absolute terms. The state may be collecting more rupees each year, but the structural foundations of the system remain as fragile as ever.
Pakistan’s tax-to-GDP ratio has remained stuck between 9 and 10 percent for more than a decade. Although recent reforms pushed it up to 10.3 percent in FY25, it still falls well short of the 15 percent benchmark often cited by the World Bank and IMF. Even more striking is the gap between actual and potential revenue: the report suggests Pakistan is collecting only about half of what it could.
The most politically sensitive argument presented is about who actually bears the burden. A narrow formal sector continues to carry the tax load, while agriculture, real estate, and retail remain significantly undertaxed. This is one of the country’s deepest and most consequential structural distortions.
The report puts it plainly: Pakistan’s tax system overburdens visible, compliant firms with an effective tax incidence that can approach 50 percent, discouraging formalisation, scale, and corporatisation.
If the instinct in this year’s budget, as in so many previous ones, is once again to raise revenue by squeezing the already compliant sector, the report makes clear that this path leads nowhere good.
It also explains why decades of reform have delivered so little. Policy volatility has been especially damaging. Frequent reliance on mini-budgets and ad hoc Statutory Regulatory Orders has created persistent uncertainty, weakened investor confidence, and embedded an anti-growth bias in the system. The excessive use of SROs has added complexity, encouraged rent-seeking, and further eroded business confidence.
Perhaps the most damaging outcome has been the normalisation of non-compliance. Instead of enforcing entry into the tax net, the state has allowed firms and individuals to remain outside it by paying higher withholding taxes. As a result, withholding tax now functions less as a documentation tool and more as a quasi-indirect levy on formal economic activity, distorting incentives and discouraging scale. The report’s message is clear: withholding taxes should support documentation and base broadening, not serve as the backbone of revenue collection.
The OICCI’s reform roadmap is both practical and well sequenced. For this budget, the priorities are clear: make the Tax Policy Office genuinely operational, publish the rationale for every major tax measure, eliminate Super Tax, reduce the corporate tax rate to 28 percent with a roadmap to 25 percent, and cap withholding taxes at 5 percent for documentation purposes only.
Just as important is the sequencing of reform itself. The system must first be simplified, then digitised, and only after that should rates be rationalised. Digitising a complex and fragmented system does not solve inefficiency; it merely automates it.
The real test of revenue ambition, meanwhile, lies in raising the tax-to-GDP ratio toward 13 percent in the near term and above 15 percent over time by taxing agriculture, retail, and real estate in a meaningful way.
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