Pakistan's taxation system is a cornerstone of its economic framework, managed primarily by the Federal Board of Revenue (FBR) under the Ministry of Finance. This survey note provides a detailed examination of the current system, its challenges, and the ongoing reforms as of April 2025, offering insights for policymakers, economists, and the general public.



Current Taxation System: Structure and Rates

The taxation system in Pakistan encompasses both direct and indirect taxes, with the FBR overseeing federal collections. The tax year runs from July 1 to June 30, and the system has evolved from British colonial structures, incorporating modern reforms like digital filing.

Direct Taxes:

Income Tax for Individuals: Rates are progressive, based on annual taxable income. For the fiscal year 2024-2025, the slabs are:

Up to PKR 600,000: 0%

PKR 600,001 to 1,200,000: 5% on the amount exceeding PKR 600,000

PKR 1,200,001 to 2,200,000: PKR 30,000 + 15% on the amount exceeding PKR 1,200,000

PKR 2,200,001 to 3,200,000: PKR 180,000 + 25% on the amount exceeding PKR 2,200,000

PKR 3,200,001 to 4,100,000: PKR 430,000 + 30% on the amount exceeding PKR 3,200,000

Above PKR 4,100,000: PKR 700,000 + 35% on the amount exceeding PKR 4,100,000

A surcharge of 10% applies to income tax for taxable incomes exceeding PKR 10 million, as per recent updates (Pakistan Individual Taxes).

Corporate Tax: The standard rate is 29%, with banking companies taxed at 39%. Small companies may qualify for a 20% rate under certain conditions. Additionally, a super tax is imposed:

Up to PKR 100 million: 3%

PKR 101 million to 200 million: 5%

PKR 201 million to 300 million: 7%

Above PKR 300 million: 10% This super tax is applied in addition to the corporate tax, potentially leading to high effective rates for large corporations (Pakistan Corporate Taxes).

Indirect Taxes:

Sales Tax: A value-added tax (VAT) with a standard rate of 17%, applied to goods and services, with exemptions for certain essentials like basic foodstuffs (Pakistani Sales Tax).

These rates reflect efforts to balance revenue needs with economic growth, though compliance remains a challenge.

Challenges in the Taxation System

Despite its structure, Pakistan's taxation system faces significant hurdles, impacting its ability to fund public services and development:

Low Tax-to-GDP Ratio: Pakistan's tax-to-GDP ratio hovers around 9-10%, significantly below regional averages like India's 16% and Bangladesh's 12%. This low ratio, as noted in a 2023 report, limits funding for essential services, with over 20 million lacking clean water and 40% of children under five experiencing stunted growth (Why Pakistan Taxes So Little).

Tax Evasion: A substantial informal sector contributes to widespread evasion, reducing revenue and creating inequities. Only 2.74 million people file personal income tax, representing just 4.1% of the labor force, with 35% of filers paying zero tax due to being below the taxable threshold (Unlocking Pakistan’s Income Tax Potential).

Over-reliance on Indirect Taxes: The system relies heavily on sales tax, which is regressive, disproportionately affecting low-income groups. This reliance, accounting for 6.3% of GDP, exacerbates socioeconomic disparities (Economic Challenges and Taxation Dilemma).Corruption in Tax Administration: A 2002 study found 99% of respondents reported corruption in taxation, undermining fairness and efficiency (Taxation in Pakistan).

Inefficient Tax Administration: The complexity of the system, with over 70 unique taxes administered by 37 agencies, leads to high compliance costs and administrative inefficiencies, discouraging voluntary filing (Common Taxation Issues).

Limited Tax Base: The narrow tax base, with many sectors like agriculture undertaxed, limits revenue potential. Efforts to expand it face resistance due to political and economic factors (Reforming Pakistan’s Tax System).

Reforms Implemented and Proposed

To address these challenges, Pakistan has undertaken various reforms, with recent initiatives gaining momentum:

Broadening the Tax Base: Efforts include digitizing tax filing to identify non-filers, with the 2024 Finance Bill proposing higher rates to encourage compliance. The World Bank’s $400 million program aims to expand the tax net, particularly in retail and agriculture (Pakistan’s New Tax Reforms).

Simplifying the Tax System: Proposals include reducing the number of tax slabs and removing low-yielding withholding taxes to ease compliance, as seen in recent budget speeches (Tax Reforms Missing the Mark).

Digitization and Automation: The Iris system and real-time invoicing for retailers enhance transparency and reduce corruption. All tier-1 retailers must integrate POS systems with FBR, a move to streamline collections (Taxation in Pakistan).

Reducing Reliance on Indirect Taxes: There’s a push towards direct taxes, with increased income tax rates for salaried individuals in the 2024-2025 budget, aiming for a fairer distribution (Pakistan’s 2024 Finance Bill).

Property Tax Reforms: Punjab’s recent updates include self-assessment systems and exemptions for properties up to PKR 5 million, aiming to improve collection efficiency (Property Tax in 2025).

Encouraging Voluntary Compliance: Incentives like tax breaks for foreign investors and exemptions for small industries are designed to boost filing, though their impact varies (Tax Reforms in Pakistan).

Tackling Tax Evasion: Strengthened audits and data sharing between federal and provincial boards, as part of the World Bank program, aim to deter evasion, though implementation challenges persist (Fiscal Reforms Critical for Stability).

Recent Developments and Future Outlook

As of April 2025, the 2024 Finance Bill has introduced significant changes, increasing tax rates for both individuals and corporations to boost revenue. The World Bank’s support continues, with a focus on institutional development and compliance facilitation. Political discourse, especially around the 2024 elections, highlighted taxation as a key economic issue, with parties proposing varied approaches (Tax Reforms and 2024 Elections). However, the effectiveness of these reforms remains debated, with concerns about implementation and public acceptance.

In conclusion, Pakistan’s taxation system is at a critical juncture, with reforms aiming to address deep-rooted challenges. Success will depend on sustained political will, efficient administration, and public trust, essential for enhancing revenue and supporting sustainable economic growth.