Comparison with untaxed sectors makes this injustice even more visible, as agriculture sector that in totality contributes about 25 percent to GDP, remains outside the federal income tax regime though agricultural income taxation with provinces is only confined to crops.
The real estate sector, where speculative gains often exceed formal business profits, pays negligible tax due to undervaluation and loopholes in the capital value tax regime. Similarly, traders, wholesalers and retailers, despite being a major part of the economy, contribute a fraction of what salaried individuals pay. This potholed distribution of tax obligations not only distorts competition but also deepens the sense of alienation among compliant citizens.
The social impact of such a system is significant, because when the burden of public finance falls on a limited segment of society, it erodes the principle of shared responsibility, making it clear that economic justice cannot exist without fair and equitable taxation.
The salaried class: stop confiscatory taxation—I
Therefore, salaried class, traditionally the most compliant and productive segment, is being pushed toward disengagement, either through emigration or through participation in informal work arrangements that allow them to escape excessive taxation.
The way forward requires both transparent fiscal management and political courage, a need made evident by FBR’s own report showing that out of total tax collection of Rs 11.74 trillion for FY 2024-25, marking a 26.3 percent increase from the previous year, income tax contributed as little as Rs 5.76 trillion, or around 49 percent of total revenue (the ration will be around 25% if we subtract withholding taxes in the nature of indirect taxes), while sales tax added Rs 3.90 trillion, customs duties Rs 1.28 trillion, and federal excise Rs 766.6 billion.
Despite this “record collection” (sic), the tax-to-GDP ratio remains stuck near 10.3 percent, one of the lowest in South Asia. This gap reflects not a lack of capacity to collect, but a failure to collect on the basis of “ability to pay”.
A closer look at the structure of revenue highlights the fundamental bias, with nearly 60 percent of total income tax coming through withholding tax, collected in advance rather than through detailed assessments.
The salaried class alone contributes over Rs 606 billion, roughly 11 percent of gross income tax receipts, even though it represents less than 8 percent of the labour force. On the contrary, retail and wholesale sectors, together account for over 18 percent of GDP, contribute less than 2 percent of total direct taxes, which is not only inefficient but also unfair.
The macroeconomic impact of this disparity is clear in the growth of personal income taxes from the salaried class, which are rising at an annual rate of around 22 percent, exceeding the growth of all other components of direct taxes even as real wages remain stagnant.
Meanwhile, tax collection from corporate and business sectors has grown by only 8 percent. The result is heavy reliance on a small, overtaxed segment of society.
The equity challenge extends to expenditure, as despite collecting record revenue, the federal government spent over 52 percent of it on debt servicing, i.e. nearly Rs 8.8 trillion, leaving little room for public investment or welfare. Similarly, health and education together received less than 1.8 percent of GDP, an amount far below regional average. These numbers further expose the futility of squeezing compliant taxpayers while offering little in return. A system that extracts heavily but delivers poorly cannot claim legitimacy.
A moderate and more productive tax regime would focus on expanding the base rather than increasing the burden. According to FBR’s own estimates, broadening, documentation and bringing just 20 percent of the informal economy valued at over Rs 7 trillion annually into the tax net could generate an additional Rs 1.2 trillion in revenue without raising rates.
Similarly, plugging under-reporting in real estate and trade could yield Rs 400 to 500 billion more. These measures, combined with better enforcement and digital integration, could raise the tax-to-GDP ratio to 15 percent within three years, a target that remains within reach if policy priorities shift.
It is time to make taxation fair, because the salaried class has long carried more than its share of the national burden. The question is not just how much revenue the state can collect, but who is paying and what is it being used for.
Additionally, economic revival will not come from forcing compliance where not due, but from a system that feels fair and motivates people to participate willingly. FBR’s latest numbers make this clear that Pakistan has enormous revenue potential, but until the system recognizes integrity and fair sharing of burden, the hapless few will continue to suffer at the expense of non-compliant thriving with criminal connivance of revenue authorities.
(Concluded)
Copyright Business Recorder, 2025
The writer is a lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE)
The writer, an 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
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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