Zafar Iqbal
As Pakistan struggles with a persistent fiscal crisis, economists and analysts are sounding the alarm over the country’s regressive tax system, which continues to burden the poor while shielding the wealthy. The upcoming fiscal reforms proposed under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF), while necessary, risk falling short if not accompanied by a genuine restructuring of tax policy and government spending.
Pakistan’s reliance on indirect taxes — such as sales tax and customs duties — remains one of the most regressive features of its fiscal system. While direct taxes are considered fairer because they are based on income, around 75 to 80 percent of Pakistan’s direct tax collections actually come from withholding taxes—which are applied in a manner similar to indirect taxes, often embedded in everyday transactions like bank withdrawals or mobile top-ups.
This essentially means that even those with low incomes are bearing a disproportionate tax burden. Meanwhile, salaried individuals and middle-income earners are taxed at relatively lower rates, while wealthier individuals and businesses often find ways to evade taxes entirely due to weak enforcement and loopholes.
Without expanding the tax base and ensuring that those who can pay, do pay, the government’s repeated pledge to implement pro-poor reforms is likely to remain just that — a pledge. Taxing the already taxed while allowing untaxed sectors — such as agriculture, retail, and real estate — to escape meaningful scrutiny has become a chronic feature of Pakistan’s economic governance.
In its October 2024 review, the IMF raised critical concerns across three major sectors of the Pakistani economy: agriculture, productivity, and energy.
- Agriculture and Government Interference:
The Fund noted that state-controlled pricing and procurement in agriculture have not only distorted markets but also disincentivized innovation and productivity. Hoarding and artificial price control mechanisms have undermined food security and fiscal balance. The IMF has called for an end to government intervention in setting prices, recommending that market forces be allowed to operate freely to encourage competitiveness and investment. - Productivity Stagnation and Lack of Innovation:
The second issue is the failure to transition labor and capital from low-productivity sectors (especially agriculture) to higher-productivity industries. Despite global trends, Pakistan has seen only a modest reduction in agricultural employment since 1990, a sign of economic stagnation. Factors such as low investment, protectionist trade policies, and lack of competition have also prevented the country from moving into more advanced manufacturing sectors, hindering its ability to diversify exports and increase economic complexity. - Energy Sector Mismanagement:
On the energy front, the Fund acknowledged that Pakistan has taken positive steps in adjusting electricity and gas tariffs to reflect actual costs, a long-standing demand of international lenders. However, it emphasized that real progress requires structural reforms in energy distribution and transmission, including lowering generation costs and cutting system losses, which continue to drive up tariffs for consumers.
While recent reductions in electricity rates are welcome, the drop was largely made possible by not passing on lower global fuel prices to consumers, a short-term fix that is not sustainable. The government hopes these cuts will boost exports, but challenges remain — particularly the 29% tariffs imposed by the U.S., Pakistan’s largest trading partner, and the fact that electricity costs in Pakistan are still nearly double those in regional competitors like Bangladesh and Vietnam.
According to data released by the Pakistan Bureau of Statistics (PBS), households earning between Rs 17,732 and Rs 29,517 per month — well below the current minimum wage of Rs 37,500 — experienced higher levels of inflation than wealthier groups. This group faced an average inflation rate of more than 3.26%, while higher-income households experienced an inflation rate slightly above 2.5%.
This data highlights how inflation continues to hit low-income households the hardest, particularly when the government fails to target subsidies or social safety nets effectively. Even as global commodity prices fall, Pakistan’s most vulnerable citizens are often unable to benefit from reduced prices due to inefficiencies and opaque pricing mechanisms.
The IMF’s recommendations, though strict, underscore a critical truth: Pakistan cannot afford to maintain the status quo. Yet, the government’s approach — including a 21% increase in current expenditure in this year’s budget — suggests a continuation of poor fiscal management rather than a shift toward long-term stability.
Instead of prioritizing reforms to widen the tax net, the authorities are once again leaning toward raising the revenue target by an additional Rs 2–3 trillion, as suggested by the Fund staff. However, without meaningful reform, this simply translates into further burdening the already-taxed segments of society.
Critics argue that serious reforms must start with cutting unnecessary government spending, curbing wasteful subsidies, and tackling elite capture of state resources. Widening the tax base should be pursued gradually but consistently, including bringing powerful lobbies like real estate and large-scale agriculture into the tax net.
Pakistan’s economic problems are deeply structural. A fair, progressive, and transparent tax system is not just a matter of equity — it is essential for fiscal stability, investment attraction, and long-term growth.
The IMF programme, though limiting in terms of fiscal space, offers a rare opportunity to press ahead with tough but necessary changes. But to make these reforms sustainable and politically acceptable, the government must demonstrate seriousness by starting with itself — reducing current expenditure, adopting efficiency in public service delivery, and rooting out corruption from the taxation system.
Until that happens, raising taxes or increasing electricity tariffs will only deepen public discontent — especially among those who already struggle to make ends meet. The time for half-measures is over. Pakistan needs comprehensive economic reform — not just more revenue targets.
