Pakistan’s economy struggles as tax revenue hits record levels

Pakistan’s economy presents a striking paradox. While GDP growth has remained largely stagnant, tax revenue has been rising at an unprecedented pace. Over the past three years, the country’s GDP grew at an average rate of just 1.8%, yet tax collection doubled during the same period.

In the latest episode of On My Radar, Kamran Khan highlighted this anomaly, noting that while Pakistan’s economy is struggling, the Federal Board of Revenue (FBR) has been aggressively collecting taxes from registered businesses, industries, and particularly salaried workers.

For example, tax revenue in 2022 was PKR 6,800 billion, which surged to PKR 13,900 billion last year. The government has now set an ambitious target of PKR 16,900 billion for the current fiscal year.

The key question arises: how did this dramatic increase occur despite weak economic growth? According to reports from Pakistani think tanks such as Economic Policy and Business Development, the growth in tax revenue has not been fueled by economic expansion but by an intensified focus on extracting more from existing taxpayers.

Over the past three years, income tax from businesses rose from PKR 2,200 billion to PKR 5,300 billion (a 131% increase), while income tax from salaried individuals grew from PKR 188 billion to PKR 575 billion (a 206% increase), likely one of the highest rates globally.

Salaried workers, who consistently pay income tax, also contribute 18% sales tax and 16% provincial taxes on their remaining income. Meanwhile, GDP growth remained subdued: -0.2% in 2023, 2.6% in 2024, and roughly 3% in 2025 according to government statistics, though independent analysts estimate growth between 1.5-2%. This stark disparity shows that tax collection has outpaced GDP growth by 7-12 times, reflecting a policy focused on revenue extraction rather than economic expansion.

The government often presents a narrative of “shortfalls” in FBR tax collection to justify additional taxes on already burdened taxpayers. For example, in the first four months of the current fiscal year, reports indicated a PKR 274 billion shortfall, even though citizens were already paying significantly more than in previous years.

Indirect taxes have also surged over the past three years. General Sales Tax (GST) increased from PKR 2,800 billion to PKR 3,980 billion (42% increase), Customs Duties rose from PKR 1,000 billion to PKR 1,320 billion (32% increase), Federal Excise Duty jumped from PKR 457 billion to PKR 774 billion (69% increase), and the Petroleum Development Levy skyrocketed from PKR 135 billion to PKR 1,160 billion (760% increase).

Effectively, Pakistani citizens are paying heavy taxes even on essential commodities such as petrol and diesel, with PKR 94 per liter going in taxes alone. Provincial governments have mirrored this trend, doubling their revenue sources and further increasing the burden on ordinary citizens.

This strategy has had significant socio-economic consequences. Basic urban infrastructure, especially in economic hubs like Karachi, remains underdeveloped, forcing citizens to rely on private services for education, healthcare, and transportation. Meanwhile, high taxation has pushed skilled professionals to seek opportunities abroad, contributing to a growing brain drain.

FBR data indicates that out of 250 million Pakistanis, only 5.9 million are active taxpayers, and 1.7 million filed zero-tax returns, meaning roughly a third of filers reported no taxable income. Last year, PKR 5,760 billion in income tax was collected, but only 4.6% came from field collection; the remainder was collected through withholding taxes and automated systems.

Economists warn that the current tax structure has created a destructive cycle, where the government relies heavily on a small pool of taxpayers while GDP growth stagnates. Investment is declining, business activities are shrinking, and multinational companies - including P&G, Yamaha, Uber, Careem, Shell, Siemens, and Pfizer - are leaving the country, citing an unfriendly tax and governance environment.

Pakistan’s tax regime has succeeded in raising revenue but has done so at the expense of economic growth and investment. The system disproportionately pressures registered taxpayers while allowing the undocumented economy - estimated at $ 400 billion - to thrive unchecked.

Without structural reforms, including broadening the tax base and encouraging economic expansion, these policies could have long-term negative consequences for the country’s economic stability.