World Bank flags Pakistan's tax system as unfair and poverty-enhancing

The World Bank has raised concerns about Pakistan's tax system, which collects little revenue, generates economic distortions, and imposes a high burden on the poor.

According to a report of World Bank, recent analysis shows that Pakistan’s fiscal policies have a more pronounced impact on increasing poverty and a less significant effect on reducing inequality than average for lower-middle-income groups.

Poor revenue performance

Weak revenue performance (tax-to-GDP ratio of just 10.5% in FY24, with 8.6% of GDP from FBR collections) has driven recurrent fiscal deficits, debt accumulation, and periods of macroeconomic instability. The lack of fiscal resources undermines service delivery, contributing to Pakistan’s major human capital gaps.

A complex tax system, heavy exemptions (4% of GDP in FY24), and weak compliance and enforcement capacity lead to a narrow revenue base (there are about 13.4 million registered income taxpayers and 0.396 million registered sales taxpayers) and heavy reliance on direct taxation (more than 50% of FBR revenue) and withholding and advanced taxes, the report added.

However, the World Bank report noted that tax policy reforms have been complemented with measures to improve enforcement, including expanding withholding tax, introducing a higher tax rate for late filers, and penalties for non-filers (blocking phone sims, disconnecting utility connections, and barring international travel).

The FBR has rolled out a single portal for sales tax returns to the telecom, oil and gas, and microfinance sectors, with further expansion planned over FY26.

With support under the PRR project, FBR has implemented an invoice monitoring system for the retail sector, and a track and trace system across the sugar, fertilizer and tobacco sectors.

Tax policy and administrative measures have driven a sharp improvement in revenue performance over the fiscal year to date (around 18% in real terms). Continued progress with administrative reform must focus on reducing the cost of compliance, encouraging formalization, controlling smuggling, and establishing infrastructure for effective taxation of agriculture and property, the report said.