EDITORIAL: The World Bank in its evaluation report rated the 700 million-dollar technical assistance titled ‘Public Resources for Inclusive Development – Multiphase Programmatic Approach (PRID-MPA)’ effective 19 June 2025 as moderately satisfactory.
The TA (technical assistance) had several components and therefore it is unclear what the assessment was for the component targeted to increase Pakistan’s tax-to-Gross Domestic Product (GDP) ratio from 10.3 percent in June 2025 (limited to federal Board of Revenue collections) or approximately 12.3 percent while incorporating both federal and provincial tax collections targeted to reach 15 percent by end June 2030. Two observations are critical. First, it is not clear whether the combined collections, federal and provincial, included the collections under petroleum levy, a sales tax parked under other taxes that is not collected by the FBR and therefore not part of the divisible pool under the National Finance Commission award. Additionally, it is not clear whether non-tax revenue was added on to determine tax-to-GDP ratio.
It was confirmed in the Economic Survey for 2024-25 that “total revenue increased by 15.8 percent of GDP in FY 2025, compared with 12.6 percent of GDP in FY 2024. This improvement was driven by both tax and non-tax revenues. Tax revenue rose to 11.2 percent of GDP from 9.6 percent of GDP, while non-tax revenue increased to 4.6 percent of GDP from 3.0 percent of GDP, indicating improved domestic resource mobilization.” And, secondly, the FBR collections as of end June 2026 were estimated at 10.3 percent of GDP, which is an improvement from previous years.
Be that as it may, The GDP growth rate in this country has been constrained by the ongoing International Monetary Fund (IMF) programme, which emphasizes a tight fiscal policy to increase annual revenue and ensure a sustainable budget deficit. This policy includes enforcement measures generated from a sales tax at the factory level on three specific items—namely sugar, cement, and fertilizers—a tax that is passed on in its entirety to consumers. This is not only contributing to a rise in inflation but more disturbingly to a rise in the country’s poverty level, estimated at a high of 44.7 percent as per the World Bank - higher than what is prevalent in Sub-Saharan Africa. Although GDP growth remains constrained due to the Fund’s conditions, a higher growth rate would contribute to an automatic rise in revenue collections. The government has pledged an ambitious revenue target with the Fund staff under the ongoing programme; however, external factors, particularly the ongoing Middle East crisis, have reduced the budgeted reliance on import tariffs.
This reduction has, no doubt, compelled the FBR to enhance revenue through enforcement measures. Fiscal reforms have thus been limited to increasing the ambit of existing taxes—largely indirect ones—rather than increasing collections based on the ability to pay. Collections under the agricultural income tax (a provincial tax under the constitution) remain extremely low due to political considerations, while tax collections on the salaried continue to rise.
Thus, the taxation structure in this country remains skewed towards indirect taxes, whose incidence on the poor is greater than on the rich. There is a need for the government to abandon its practice of crediting withholding taxes levied as sales tax under direct taxes, in spite of the Auditor General of Pakistan’s recommendation against doing so. The need for structural tax reforms remains, and we hope and expect that the FBR will begin to raise collections under direct taxes.
Copyright Business Recorder, 2026