Zafar Iqbal
Every year, as the federal budget approaches, Pakistan enters a ritual so predictable it has become almost theatrical. Finance ministry officials disappear into rooms full of spreadsheets. IMF targets cast their long shadow over every calculation. Policymakers scramble with increasing desperation to close a revenue gap that, despite decades of effort and earnest reform promises, simply refuses to close. Rates go up here, an exemption is withdrawn there, and the formal sector is squeezed a little harder than it was the year before. Then the cycle repeats.
This year, however, something different has arrived to interrupt the ritual. The OICCI’s special report, Pakistan’s Tax Paradox, lands at precisely the moment when budget consultations are underway, IMF conditionality is pressing from one side, and public pressure is pressing from the other. This is not academic commentary arriving after the fact. It is a live intervention in a live debate, and every official involved in shaping fiscal policy would do well to read it carefully.
The central diagnosis the report offers is both stark and familiar to those willing to be honest about Pakistan’s fiscal condition. The tax system rests on a narrow base and punishing rates. Revenue, measured in absolute rupees, has risen over the years. But as a share of GDP, the picture tells a different story entirely. The structural foundations of the system remain as fragile as they have always been, and the state is collecting far less than it should.
Pakistan’s tax-to-GDP ratio has remained locked between nine and ten percent for more than a decade. Recent reforms pushed this figure to 10.3 percent in the last financial year, which represents genuine progress. But the World Bank and IMF have long cited fifteen percent as the threshold below which a state struggles to fund basic services and maintain fiscal stability. Pakistan sits comfortably below it. More damaging still is the gap between actual and potential revenue: the report suggests the country is collecting roughly half of what its economy is capable of generating for the treasury. That is not a marginal shortfall. It is a structural failure of the first order.
The most politically uncomfortable argument the report makes concerns who actually pays. A narrow formal sector continues to carry the entire weight of the system. Agriculture, real estate, and retail remain significantly undertaxed, protected by the political arrangements that have kept them outside the net for generations. This is one of Pakistan’s deepest distortions, and it is one that every budget season acknowledges in passing before quietly setting aside.
The consequences for the formal sector are severe. Compliant firms face an effective tax incidence that can approach fifty percent. At that level of burden, the rational response is not to grow, formalise, or corporatise. It is to stay small, stay informal, or leave. The report states this plainly: the system actively discourages the very economic behaviour that Pakistan most needs to generate sustainable growth and durable revenue. If the instinct this year, as in so many years before, is to raise revenue by pressing harder on those already paying, the report is unambiguous about where that path leads.
The report also explains why decades of reform efforts have produced so little lasting change. Policy volatility has been especially destructive. The frequent use of mini-budgets and ad hoc Statutory Regulatory Orders has created an environment of persistent uncertainty. Investors cannot plan. Businesses cannot commit. The system has embedded an anti-growth bias that undermines the very activity it depends upon. The excessive and often arbitrary use of SROs has added layer upon layer of complexity, opened the door to rent-seeking, and steadily eroded whatever confidence the business community might otherwise have in the state’s intentions.
Perhaps the most damaging long-term outcome has been the normalisation of non-compliance. Rather than enforcing entry into the tax net, the state has over time accepted a settlement: those outside the net may remain outside it, provided they pay higher withholding taxes. The effect has been to transform withholding tax from a documentation tool into something closer to a quasi-indirect levy on formal economic activity. It distorts every incentive and punishes scale. The report’s message on this point is clear and worth repeating: withholding taxes exist to support documentation and broaden the base. They must not function as the backbone of revenue collection. When they do, the system turns against itself.
The reform roadmap the OICCI offers is neither utopian nor vague. It is practical, sequenced, and grounded in the realities of what this budget season can actually deliver. In the immediate term, the priorities are clear. The Tax Policy Office must be made genuinely operational rather than nominal. The government must commit to publishing the rationale behind every major tax measure, a practice that would itself begin to rebuild credibility. Super Tax must be eliminated. The corporate tax rate should come down to twenty-eight percent, with a credible roadmap toward twenty-five percent over time. Withholding taxes should be capped at five percent and limited strictly to documentation purposes.
The sequencing of deeper reform matters just as much as the content. The system must first be simplified. Then it can be meaningfully digitised. Only after that does rate rationalisation become truly effective. Digitising a fragmented, inconsistent system does not solve its problems. It only automates the dysfunction and makes it harder to correct. This sequence is not merely technical preference. It reflects a hard lesson from years of reform initiatives that moved in the wrong order and produced the wrong results.
The real measure of fiscal ambition, however, is not found in any single budget measure. It is found in the willingness to tax agriculture, real estate, and retail in a genuine and sustained way. That is what raising the tax-to-GDP ratio toward thirteen percent in the near term, and above fifteen percent over time, actually requires. Everything else is rearranging the burden on those already carrying it.
Pakistan knows what its tax problem is. The OICCI has described it with precision and offered a way forward. The question, as always, is whether this budget will have the courage to begin.
