Zafar Iqbal
Pakistan’s tax machinery was already under pressure before the Iran-US conflict reshaped the regional economy. Now, with supply chains disrupted, oil prices volatile, and consumer spending contracting, the Federal Board of Revenue finds itself chasing targets that are moving further away with each passing month. The numbers tell a stark story. By the end of ten months of the current fiscal year, the FBR is running Rs648 billion behind its collection target. That is not a rounding error. That is a structural failure playing out in real time.
The petroleum levy, which the government had counted on as a reliable revenue pillar, is also buckling. The problem runs in two directions simultaneously. On one side, the government has chosen not to pass the full impact of higher global oil prices on to consumers, absorbing part of the shock itself and sacrificing revenue in the process. On the other side, the price that has been passed on has been steep enough to depress fuel consumption. When people drive less, run generators less, and cut discretionary travel, the levy collects less. The government is caught between protecting citizens from price pain and protecting its own fiscal position. It cannot fully do both.
What makes this particularly difficult is that Pakistan had, until recently, been showing genuine signs of economic recovery. GDP growth had crossed four percent in consecutive quarters. Large-scale manufacturing was performing reasonably well. There was cautious optimism that the country was finally finding its footing after years of instability. That momentum has now stalled. Expenditure, however, has not stalled. It keeps rising, widening the gap between what the state earns and what it spends. The IMF’s fiscal benchmarks, including indicative targets tied to tax performance, are becoming harder to justify, let alone meet.
The April trade data sharpened the contradiction. Imports reached USD 6.5 billion, the highest figure in nearly four years. In theory, higher imports should produce higher import-stage tax collection. In practice, it did not. Sales tax and federal excise duty both recorded negative growth in April. The conflict’s impact on tax revenues is being estimated at around Rs40 billion in direct losses, with a Rs15 billion shortfall specifically from the gas import channel. Disruptions to regional trade routes, changes in commodity flows, and uncertainty across supply chains have all left visible marks on revenue collection.
The government’s response has been to lean harder on enforcement. The Prime Minister has directed the FBR to double its enforcement-driven collection in the next fiscal year, targeting Rs778 billion through pressure-based measures. The business community is already feeling the weight of this approach. Trade associations and chambers of commerce report escalating harassment by tax officials. Some describe the experience as extortion dressed up as enforcement. When a revenue authority becomes feared rather than respected, when businesses start treating tax compliance as a negotiation rather than a legal obligation, something fundamental has broken down in the relationship between the state and its productive class.
The FBR’s structural problem goes deeper than enforcement style. Its attention is overwhelmingly concentrated on the top five percent of taxpayers. Retrospective super tax collections have become a favoured tool, particularly as court decisions have recently gone in the tax authority’s favour. But extracting more from the same narrow base, especially through backward-looking penalties, sends a damaging signal to investors and entrepreneurs. Capital does not stay where it feels trapped. Investment-to-GDP in Pakistan is already at a multi-decade low. Chasing retrospective taxes from the businesses that remain does not broaden the tax base. It simply exhausts it faster.
For months, there has been a conversation between the government and the business community about reducing the tax burden on corporations and salaried individuals. A soft commitment was made: taxation would be eased in a staged manner, with the super tax reduced and the multiple layers of dividend taxation within corporate structures simplified. That commitment was made in a different economic environment, one where oil prices were declining and revenue projections appeared manageable. The average oil price had dropped from USD 75 per barrel in the previous fiscal year to around USD 67 in the first eight months of this one. Expectations had formed around USD 60 per barrel, perhaps lower. The plan was to leverage cheaper oil, double the petroleum levy to compensate, and simultaneously cut income taxes to generate goodwill and economic activity.
The war ended that plan. There is no polite way to say it: there is no Plan B. The government’s most viable option is to approach the IMF and seek waivers or target adjustments by invoking Pakistan’s geopolitical relevance in the current regional environment. Pakistan’s role in de-escalation diplomacy, its geographic position, and its involvement in back-channel communications give it some leverage with international partners. Whether that leverage translates into fiscal flexibility at the IMF level remains to be seen. Simultaneously, the government is raising the petroleum levy gradually, attempting to restore it to pre-war levels without triggering another round of public outrage.
What this means for the budget ahead is sobering. The chances of meaningful corporate or salaried tax relief in the next fiscal year have dropped sharply. At best, there may be a marginal reduction in the super tax rate and some trimming of the surcharge. At worst, the FBR introduces new measures, adjusts rates across various categories, and quietly squeezes an already burdened tax base further. That path leads nowhere productive. Every additional layer of taxation on businesses and earning individuals reduces the incentive to invest, expand, or declare income transparently.
Pakistan does not have a simple fiscal problem. It has a governance problem expressed through fiscal numbers. Revenue collection suffers because the economy is narrow, the tax base is shallow, enforcement is arbitrary, and citizens have no felt sense that their taxes return to them as services. Until that changes, no combination of targets, directives, or enforcement drives will close the gap. The arithmetic will keep refusing to cooperate.
