The International Monetary Fund has agreed to lower Pakistan’s tax collection target for the ongoing fiscal year from Rs 12.97 trillion to Rs 12.35 trillion, a move that highlights the inability of Federal Board of Revenue (FBR) to meet its commitments under existing economic conditions.
This downward revision is not a result of compassionate leniency but rather an acknowledgment of consistent institutional failures, poor policy implementation, and an unsustainable reliance on the same narrow tax base.
FBR has already recorded a shortfall of Rs 714 billion within just nine months of fiscal year (FY) 2025, a glaring indicator of an institutional machinery that continues to underperform despite repeated structural interventions. In its pursuit of fiscal stability, the government had imposed Rs 1.3 trillion additional taxes in 2024-25 budget that, however, reflects no fundamental improvement in collection mechanisms or tax base expansion.
According to a report, Total income tax collected in the current fiscal year’s July-March period stood at Rs 4.1 trillion, but the composition reveals a profoundly unjust and lopsided situation. Despite being among the most economically constrained segments the salaried class alone contributed Rs 391 billion, accounting for nearly 10 percent (up from 7.5 percent last year)of the total income tax collection. This increase of 56 percent over last fiscal year for the salaried class is not a testament to equity but a declaration of discriminatory policy priorities.
Salaried individuals, taxed directly at source with no scope of deductions or evasions, remain the easiest target for a revenue-hungry predatory state that refuses to bring its powerful informal sector into the tax net. Long known for their defiance of documentation and audit, the traders contributed only Rs 26 billion under withholding tax on purchases during the same period.
The ratio of Rs 10 in taxes from salaried individuals versus merely 60 paisas from traders is both absurd and morally indefensible. The government’s attempt to impose a 2.5 percent withholding tax on traders raised Rs. 13.3 billion, but most of that burden was passed on to end consumers, negating the very objective of direct taxation, equity and documentation.
The tax evasion culture remains unchallenged due to the cozy relationship between parliamentarians and traders’ lobbies, most of whom enjoy political patronage. The Parliament has repeatedly failed to legislate serious reforms in agricultural taxation, real estate valuation, and retail documentation areas that remain grossly undertaxed despite their high revenue potential. The failure is not legislative oversight but a deliberate political compromise, rooted in vote-bank politics and institutional cowardice. The absence of urgency in these matters reveals a Parliament more invested in its political survival than national solvency.
FBR officials, whose mandate is to enforce tax laws, have become facilitators of selective enforcement and policy manipulation. The Income Tax Ordinance, 2001 continues to be abused by tax officials through discretionary notices, arbitrary assessments, and widespread harassment, predominantly targeting those already in the tax net.
Unable to conceal or shift income, the salaried class is penalized for its transparency, while tax officials collaborate with wealthy non-filers to engineer under-reporting and revenue leakages. The revenue authority has not only failed to innovate but has institutionalized inefficiency and corruption as standard operating procedure.
IMF’s downward revision reflects a loss of confidence in FBR’s internal projections, which estimated Rs 11.7 trillion in total collection despite additional taxes and so-called stable macroeconomic indicators.
The justification of this shortfall by citing low GDP growth and reduced inflation is at best disingenuous and at worst a convenient excuse. The root cause lies in its refusal to expand the tax base through prudent and equitable policies and operational discipline.
The parliamentarians have neither pushed for real-time wealth registry systems nor empowered third-party data verification for high-net-worth individuals. The judiciary has likewise played a regressive role by entertaining frivolous stay orders and litigations that undermine enforcement actions.
IMF may accept lower tax targets, but all foreign lenders increasingly demand performance benchmarks tied to revenue and expenditure reforms. The absence of credible domestic revenue generation mechanisms poses a serious threat to continued multilateral support.
The gross injustice embedded in the existing tax system is most visible in how the salaried class is treated. The current tax policy imposes a 38.5 percent effective tax rate including surcharges on those earning Rs 443,000 per month or more. Tax is deducted at source without regard for personal expenses, inflation adjustments, or sectoral parity. The government’s claim of progressivity is hollow when retail, wholesale, agricultural, and informal sector incomes escape taxation altogether.
Data shows that in the first nine months of FY 2025, non-corporate salaried individuals paid Rs 166 billion, corporate employees paid Rs 117 billion, provincial government employees contributed Rs 69 billion, and federal employees paid Rs 39 billion—all significantly higher than collections from vast business segments.
The supposedly alternate options to reduce the burden on salaried taxpayers being considered by FBR are neither codified nor prioritized. Vague statements by FBR’s spokesperson that they are considering adjustments “without compromising progressivity” reeks of bureaucratic delay and lack of political will. The reality is that as long as informal wealth and undocumented income streams remain protected by laws and customs, the salaried class will remain the sacrificial lamb for Pakistan’s fiscal experimentation.
The IMF team, arriving in Pakistan on May 14, 2025 for budget discussions, is likely to scrutinize any attempt to reduce tax rates on salaried individuals unless alternate fiscal means are established. The pressure is expected to remain high, given the IMF’s track record of demanding concrete compensatory measures. The risk is that without structural reform, any fiscal relief for the salaried class will either be offset by indirect taxes or lead to further deficit financing—both outcomes equally harmful.
The broader issue is lack of a coherent tax philosophy in Pakistan. The country collects barely 9.5 percent of GDP in tax revenues, well below the regional average. The system is riddled with exemptions, special regimes, sectoral privileges, and a culture of negotiated settlements. The Parliament continues to ignore tax reform bills that seek wealth taxation, capital gains rationalization, and agricultural income disclosure. FBR remains content with collecting from compliant segments while rewarding evasion with amnesty, tax holidays, and unregulated settlements.
The judiciary’s alleged role in perpetuating tax injustice cannot be overlooked. The legal culture favours obfuscation over transparency, procedural delays over timely enforcement, and privilege over equity.
The parliamentary committees on finance, taxation, and public accounts have failed to interrogate FBR’s performance or hold it accountable for repeated failures. The Finance Ministry continues to set ambitious targets in the budget but shies away from institutional accountability when those targets are missed. Budget speeches offer lofty rhetoric but no roadmap for enforcement, digital audits, or third-party cross-verification. The public is told of record tax collections, but not of the declining tax-to-GDP ratio or the increasing cost of debt servicing.
The solution lies not just in raising rates but in broadening the base of something successive governments have failed to deliver. Enforcement of real-time invoice tracking, retail POS integration, asset declaration laws, and wealth registries should not be optional.
The parliamentarians must legislate stringent audit laws, empower FBR’s internal affairs unit, and make tax compliance a matter of national obligation. FBR officials must be brought under independent oversight, with performance-based promotions and strict penalties for collusion and misconduct.
The current income tax law must be overhauled to remove excessive discretion, contradictory clauses, and politically motivated exemptions. Simplification of tax slabs, elimination of sectoral privileges, and universalization of income declaration should be made part of the next budget. The Finance Bill must reflect a serious intent to tax all incomes irrespective of source through credible, auditable, and enforceable instruments. The political class must stop using tax policy as a tool of favoritism and instead use it as a lever for fiscal justice.
The executive must end the culture of political appeasement towards powerful lobbies and use data analytics, artificial intelligence, and centralized databases to monitor income flows across sectors. The Revenue Division must become a center of tax intelligence rather than a file-pushing department.
The national tax culture cannot be changed through slogans but through systemic, judicial, legislative, and operational alignment. Targeting the salaried and compliant must now end.
The future should belong to a fair, broad-based, transparent tax regime that treats every rupee of income equally. IMF’s revision of tax target may offer temporary relief, but the real crisis is institutional: a nation where the honest are taxed, the wealthy are shielded, and the corrupt are negotiated with.
Copyright Business Recorder, 2025
The writer is MA, LLB, Advocate High Court, Visiting Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), is author of numerous books and articles on Pakistani tax laws. She is editor of Taxation and partner of Huzaima & Ikram. From 1984 to 2003, she was associated with Civil Services of Pakistan
The writer, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996. He has been studying since 1980 the linkages of narcotics trade with terrorism. He is author of many articles on the issue and two books, Pakistan: From Hash to Heroin and its sequel Pakistan: From Drug-trap to Debt-trap
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at [email protected]
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