Pakistan’s tax-to-GDP ratio has climbed to its highest level in at least 25 years, but the country still trails peer economies as a narrow tax base, weak enforcement and heavy reliance on fuel taxes continue to limit revenue growth, the International Monetary Fund said in a new assessment.
In its latest review of Pakistan’s fiscal performance, the IMF said tax revenues, including provincial taxes and the petroleum development levy, or PDL, reached 12.3% of GDP in fiscal year 2025, the highest ratio since at least 2000.
However, the figure remains below the 25th percentile of comparable economies, highlighting the need for sustained revenue mobilization in a country facing high public debt and rising social and development spending needs.
“Although thanks to the authorities’ efforts, tax revenues to GDP in Pakistan have reached their highest level since at least 2000, they remain considerably below those of peer countries,” the IMF said.
The Washington-based lender noted that Pakistan’s increase in the tax ratio since 2022 exceeded the average three-year improvement among peer economies. Still, it warned that tax collection remains concentrated in a limited number of sectors.
The IMF identified agriculture as the country’s most undertaxed sector. Despite contributing 24.6% of national value added, the sector faces an effective tax rate of just 0.3%.
Agricultural income taxes fall under provincial jurisdiction. While provinces sharply increased agricultural income tax rates in 2025 to align them with other income categories, actual collections remained below expectations because of implementation delays and weak enforcement, the report said.
The IMF also highlighted textiles, real estate and business services as sectors that contribute heavily to economic output while generating comparatively low tax revenues.
By contrast, petroleum products face an effective tax rate of 166%, exposing government revenues to volatility from changes in fuel consumption and global oil prices.
The IMF also pointed to structural weaknesses in Pakistan’s general sales tax system, saying GST efficiency had deteriorated over the past decade.
The GST C-efficiency ratio fell from 27.4% to 22.8%, indicating that only a small portion of the potential tax base is effectively taxed despite the standard GST rate of 18%.
According to the IMF, widespread exemptions on basic goods, concessionary tax treatments, historical zero-rating for export sectors and fragmented sales tax administration after the devolution of GST on services to provinces have weakened the system.
The Fund estimated that increasing GST efficiency to 35%, still below levels in countries such as Turkey, Morocco and Indonesia, could generate an additional PKR 2.1 trillion in revenue, equivalent to 1.8% of GDP based on FY2024-25 estimates.
The IMF urged Pakistani authorities to eliminate sales tax exemptions, improve compliance and strengthen provincial revenue collection systems.
It said the Federal Board of Revenue had implemented several elements of its tax administration transformation plan by March 2026, including deployment of a Compliance Risk Management system to strengthen taxpayer audits, expansion of digital invoicing and enhanced production monitoring.
However, the IMF cautioned that the reforms primarily target existing taxpayers and stressed the need to broaden the tax net by intensifying retailer registration drives and restricting certain high-value transactions to tax filers.
“To ensure even-handed treatment of taxpayers, the FBR will prepare an audit manual and audit policy centralizing the audit case selection process,” the IMF said, adding that revenue gains from recent reforms were expected to materialize more significantly from fiscal year 2027 onward.
The Fund also emphasized the importance of provincial coordination to make agricultural income tax reforms effective. It recommended greater data sharing between provincial authorities and the FBR, automation of agricultural tax procedures and additional human and IT resources for enforcement.
The IMF said its technical teams were providing regular tailored assistance to provinces to address implementation bottlenecks.
Separately, the IMF noted that Pakistan was continuing work on a medium-term tax reform strategy through the newly established Tax Policy Office. The office is expected to be fully staffed by the end of May 2025 and has already begun consultations with stakeholders on reform proposals.
The lender stressed, however, that future tax reforms must be “carefully calibrated, tested, and communicated” to ensure long-term policy stability and alignment with broader fiscal objectives.
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