Banks top Pakistan’s tax chart, but heavy reliance raises fiscal risks

Pakistan’s banking sector emerged as the single largest contributor to national tax revenues in fiscal year 2024-25, but heavy reliance on the industry poses risks to fiscal stability and economic competitiveness, a senior banking official said.

“In FY25, total tax collection stood at PKR 11.744 trillion against a target of PKR 11.901 trillion, reflecting 26.3% year-on-year growth,” said Ali Akbar Ghanghro, Head of Priority Sectors and Research at the Pakistan Banks Association.

Direct taxes accounted for 49.3% of total collection, or PKR 5.791 trillion, he said. The banking sector contributed PKR 1.127 trillion — 9.6% of total tax revenues — making it the largest single contributing sector. Petroleum contributed PKR 1.121 trillion (9.5%) and power PKR 0.858 trillion (7.3%).

“While banks contributed 9.6% of total revenues, their share in direct taxes alone was about 17.5%, making them by far the largest contributor in this category,” Ghanghro said.

Revenue vulnerability

Ghanghro warned that such reliance makes fiscal revenues highly sensitive to banking profitability.

A sensitivity analysis shows that a 25% reduction in banking sector net income would reduce direct tax collection by 5% and overall tax revenue by 1.9%. A 50% decline in net income would cut direct taxes by 8.4% and total revenues by 3.7%, he said.

“Heavy dependence on a small and shrinking formal economy leaves the state vulnerable because it cannot diversify revenue sources,” Ghanghro said. “Tax policy inevitably creates winners and losers, but an equitable system must also be growth-oriented.”

Tax-to-GDP stagnation

Although nominal tax collection has grown at an average annual rate of 24% over the past five years, Pakistan’s tax-to-GDP ratio has hovered around 9%, he noted.

“This indicates that higher receipts are largely inflation-driven or the result of squeezing the existing base, rather than broadening the tax net,” Ghanghro said.

Pakistan faces recurring fiscal deficits and external debt pressures, while meeting revenue targets and broadening the tax base remain central conditions under its IMF program.

Weak enforcement and poor compliance further constrain revenue collection, he said. The informal economy is estimated at between 35% of GDP by official estimates and as high as 60% by independent sources, leaving sectors such as retail and real estate largely outside the tax net.

Disproportionate burden on banks

Banks face a corporate income tax rate of 39% plus a Super Tax of up to 10%, depending on income levels. According to State Bank of Pakistan data, the effective tax rate on banks rose to 54.1% in FY25 from 51.6% in FY24.

By comparison, non-bank corporates are taxed between 30% and 39%, depending on applicable surcharges.

Regionally, bank tax rates are significantly lower — about 37.5-40% in Bangladesh, roughly 30% in India and Sri Lanka, 22% in Indonesia, 24% in Malaysia, 20% in Vietnam and 25% in Korea. Most of these countries do not impose additional sector-specific surcharges, resulting in a substantially lower effective burden, he said.

“The comparatively high taxation in Pakistan helps explain why foreign investment in the financial sector remains limited,” Ghanghro said.

Impact on investment and inclusion

High corporate taxes discourage foreign direct investment and raise the cost of doing business, he said, noting that multinational firms including Procter & Gamble, Shell, Telenor, Pfizer, Lotte Chemicals, Barclays and HSBC have exited Pakistan over the past decade.

In FY25, net foreign direct investment into Pakistan’s financial sector stood at $713 million, compared with more than $9 billion in India and $1.3 billion in Turkey.

“When foreign investors avoid low after-tax return environments, the government must rely more heavily on domestic banks for borrowing, turning them into captive lenders rather than catalysts for private enterprise,” Ghanghro said.

He added that high tax rates constrain financial inclusion by compressing margins, leading to higher fees and wider interest spreads. With limited capital for digital infrastructure or rural expansion, banks often invest in low-risk government securities instead of lending to small and medium enterprises.

According to World Bank data, only 27% of Pakistani adults had bank accounts in 2024, compared with 90% in India, 70% in Vietnam and 43% in Bangladesh.

Call for reform

Reducing the corporate tax burden is a strategic necessity rather than industry relief, Ghanghro said. Aligning banking sector tax rates 10-15% closer to regional benchmarks could attract foreign capital, encourage greater private-sector lending and accelerate the shift toward a digitized and inclusive financial system.

“A diversified and competitive economy cannot rely excessively on a single formal sector for fiscal sustainability,” he said.