PAKISTAN’S tax effort appears to have plateaued. Or so the latest IMF projections stress. After a jump of 1.4 percentage points in the tax-to-GDP ratio to 10.3pc in FY25, largely through additional revenue-enhancing measures that mostly burdened captive taxpayers — the salaried class and compliant businesses — the FBR tax collection as a ratio of the country’s GDP is projected to stagnate for the next five years. The only modest gains, if any, will likely come from provinces, and that too if they decide to effectively tax agriculture income and services. The Fund expects the provincial tax-to-GDP ratio to jump from the current 0.9pc to 1.3pc of GDP in FY27 and further to 1.6pc in FY28 before flattening until FY30. Overall, the country’s tax revenues are projected to flatten at 11.1pc of GDP — much below the 13.3pc mark the government has committed to achieve during the current IMF programme period — all the way through FY30. What the lender is signalling is that the government has ‘exhausted’ its option to raise taxation without fixing the underlying structural problems and better enforcement, or further burdening compliant sectors of the economy, or both.
The government’s growing dependence on non-tax revenue to prop up its fiscal position should be particularly concerning. Though the total government revenues surged to nearly 16pc of GDP in FY25, this increase has not resulted from the expansion of the tax base but from heavy petroleum levy and the State Bank’s profits. The levy has quietly morphed into a permanent quasi-tax on consumption in recent years, disproportionately burdening low-middle-income households. Another worrying fact is that Pakistan’s inequitable tax policy, which is over- reliant on indirect taxes while under-taxing or not taxing certain powerful lobbies, is likely to persist at the expense of economic growth and investment. That Pakistan’s economic growth depends on its ability to boost tax-to-GDP ratio is confirmed by cross-country evidence cited by the Fund: countries that sustainably increase their tax-to-GDP ratio to 15pc have a significantly higher GDP per capita growth compared to countries whose tax ratio stalls around 10pc — precisely where Pakistan has been for a while and appears destined to remain. In sum, faster economic growth will remain a pipe dream until fiscal consolidation is achieved through structural reforms instead of what many call stealth taxation.
