Developing economies and their fiscal management stand at a crossroads. Most of the developing world is navigating a complex terrain shaped by global headwinds generated from US trade and tariff wars. To safeguard itself from disruptions, developing countries need to address range of domestic structural constraints and fast track tax reform. There is urgent need for accelerating and diversifying sources of revenues to spur growth and financial inclusion.
Imperative to reform our tax system has never been more urgent. Quick attention and action warranted at political level as we face mounting fiscal pressures
• Given country’s growing population requirements estimated to be 256 million which is likely to 266 million by 2027.
• Investment/GDP ratio that is 13.8 percent with public investment/GDP, critical to spur private investment, is barely 2.9 percent of GDP. Massive investments needed as infrastructure depletion is acute. Funding social protection coverage is equally critical.
• Climate shocks require investment of around US$40 to US$50 billion to finance cost of climate adaptation and mitigation. Cost of climate inaction is estimated to be $250 billion by 2030 and US$1.2 trillion by 2050. Climate shock will lead to a 3 percent decline in GDP well below its steady state with consequent implications for tax revenue.
• Given tax gaps, there has been excessive recourse to domestic and foreign borrowings, both end up being costly given the debt servicing is reaching 46.7 percent of federal budget outlay.
First, getting diagnostics right is critical. Pakistan’s tax-to-GDP ratio has remained persistently low, averaging around 9.8 percent over the past six years, with FY2025 reporting 10.3 percent, however revenue/GDP ratio is over 15 percent. There is scope to enhance tax/GDP ratio to regional average of 15 to 20 percent — IMF and World Bank recommended threshold is 15 percent to for sustained growth and poverty reduction.
Like other regional economies, Pakistan’s low tax/GDP ratio is a reflection of systemic inefficiencies, FBR’s policy and administration inertia, and a social contract that has frayed over time.
Narrow Tax Base: only 5.8 million individuals file tax returns — while population pressures grew exceeding 250 million and likely to reach 266 million by 2027.
High Informality: Estimated at nearly 60 percent of GDP and complexity of documentation.
Regressive Structure: A heavy reliance on sales and excise duties mean that the poor bear a higher relative tax burden than the rich.
Fragmentation between federal and provincial authorities that erodes tax potential and its base. Limited data sharing and coordination results in enhanced compliance costs for taxpayers and undermines enforcement and audit effectiveness.
Distorted Incentives: Exemptions for influential sectors, and weak property valuation mechanisms limit resource raising opportunity.
A major share of taxes is collected at the import stage — on average, around 60 percent of GST during FY19–FY24. Additionally, a sizable portion of direct taxes is collected at the import stage. Compliant businesses adjust this against their income tax liabilities, but informal players simply pass the cost on to consumers. Even within the domestic supply chain, taxes intended to target traders and retailers are eventually transferred to the end consumer.
Second, provincial governments co-opt 26 percent of the federal revenue taxes. Despite Constitutional mandate, provinces do not adequately tax agriculture, property, and services sectors.
The agricultural sector accounting for 20 percent of GDP contributes less than 0.1 percent of the total tax revenue.
Existing land-based taxes are minimal and outdated, and the effective agricultural income tax averages only about US$3 per acre.
Similarly, property and service taxes remain underdeveloped. Strengthening provincial tax capacity is thus essential for sustainable revenue mobilization. There is an urgent need to bring agriculture, real estate, and retail sectors under effective taxation regime.
Third, it’s worth highlighting that six months’ caretaker government put a spotlight on systemic rigidities and developed holistic, bold and evidence-based FBR restructuring proposals. Key pillars of fiscal policy reforms advocated, among others, are the following:
• Separation of tax policy from tax collection and underscored FBR builds the necessary enforcement capability without client harassment which deters taxpayer from joining the tax base.
• Called for FBR to concentrate on domestic tax collection and let the import revenues be managed by Customs Authorities based on FBR determined import tariffs on a broader base.
• Tariffs ought to be comparable with our competitors to facilitate imports to enhance value added and quality of exports.
• Nurturing globally competitive rates and introducing consistent, coordinated andwell-aligned set of policies that incentivize investment and nurture competition.
• Policy needs to allow legitimate profit-making, and encourage scale, efficiency, environmental and social responsibility, and maintain high governance standards.
• Smart technology and AI need to facilitate broadening of tax base and equitable distribution of the tax burden.
Fourth, building on the above Finance Act, 2025 reiterates commitment
• Digitalization: The FBR is modernizing its operations through an enhanced e-filing system, integration of Point of Sale (POS) networks, and the use of data sharing with the National Database and Registration Authority (NADRA). Utility companies and telecom providers are to identify non-filers and potential new taxpayers. These efforts have already contributed to a record 5.9 million tax return filings in FY 2025, an 18 percent increase.
• New Tax Policy Office (TPO), to separate tax policy from collection, is being operationalized and will report to Finance Minister.
• Agriculture, retail, and real estate are being brought in tax net. In case of agriculture for the first time, provisions have been included to gradually bring large commercial farmers (earning over PKR 6 million annually) into the tax net. For real estate stricter documentation and higher advance taxes for non-filers on property transactions aim to formalise the sector and align property valuations more closely with market rates.
• The gap between filers and non-filers has been widened significantly, with non-filers facing double the withholding tax rates on banking transactions, property purchases, and other services to incentivise compliance.
• Revision of income tax slabs, new e-commerce tax regimes, and adjusted capital gains tax rules.
• A continued focus on formalizing the informal economy, and potential introduction of wealth taxes on high-net-worth individuals.
• The tax code is being simplified by eliminating redundant exemptions and consolidating overlapping provisions
Under consideration is introduction of a taxpayer charter that guarantees rights and responsibilities.
Moving forward, tax policy must be aligned with our broader development goals. Fiscal instruments should be used to incentivize education, health, and green investments. Gender-sensitive taxation can empower women entrepreneurs and promote equity. Regional disparities must be addressed through targeted fiscal transfers and incentives for investment in lagging areas.
Resource mobilization needs to be accompanied by prudent public expenditure management through civil service, SOE and pension reforms. Leveraging reforms is urgently needed for strong, inclusive and equitable growth.
In conclusion, greater transparency, ethics and integrity, and effective morality in administration have never been more urgent. Taxation is not merely a technical exercise. It is a reflection of our values, our priorities, and our vision for the future. It is the foundation of a social contract that binds citizens and the state.
Social Contract ought to link tax compliance to improved public service delivery (education, healthcare, infrastructure) so citizens see the benefits of their contributions. Fundamental reforms require bold leadership willing to confront entrenched elite interests that benefit from the status quo.
By implementing these comprehensive and interconnected measures, Pakistan can move towards a fair, efficient, and transparent tax system capable of generating adequate revenue for sustainable growth and development.
Copyright Business Recorder, 2025
The writer is a former Governor of State Bank of Pakistan, Finance Minister and United Nations Under Secretary General