The latest statistics regarding Pakistan’s tax system suggest that progress has been made. As per the Federal Board of Revenue (FBR), it has registered 5.9 million tax filers as of October 2025, a 17.6% increase. Concurrently, the national tax-to-GDP ratio has hit the mark of 15.7%. These figures are encouraging indicators of statistical formalization, but a closer examination reveals significant structural deficits that undermine this statistical win. The focus on the number of filers has distracted us from the more critical metrics such as the quality of the revenue and the equity of its collection.
The foremost challenge to the official narrative is the “zero filers” phenomenon. As per records, around 40 to 43 percent of 5.9 million returns filed indicated zero taxable income. This suggests the growth in filers is not a genuine expansion of the tax base. Instead, it is a function of regulatory mismanagement. Irrespective of the income, people are compelled to file to gain a place on the Active Taxpayer List (ATL). This has become a mandatory requirement to perform even day-to-day economic activities, such as maintaining bank accounts and vehicle transactions, to avoid punitive penalties. Therefore, citizens are filing to achieve formal compliance. This act formalizes the names but has failed to capture the economic activity associated with those names.
This structural issue accompanies a severe and deeply inequitable tax bulge placed on the salaried class. In the 2025 fiscal year, salaried individuals contributed a record-breaking Rs. 556 billion in taxes, a 53% increase from the last year. This amount came directly from the automated precision from pay-checks and is, reportedly, double the amount of tax revenue collected from the retail and real estate sectors combined. Concurrently, they also have the weight of double taxation: they pay in source as well as a huge portion of consumption based taxes such as GST, customs and excise, which adds to the burden significantly. It has placed an unsustainable reliance on the most transparent segment of the economy. The salaried class is already facing significant crunch of inflation, energy tariffs, and uncertain market conditions. Therefore, this inequitable imbalance is far from a viable long-term fiscal strategy.
For the ordinary citizen, this tax policy considerably amounts to increased payroll deductions without correspondingly increased public services. Salaried workers have already contributed Rs. 556 billion in FY2025, a 53 percent increase per/year, and more than twice as much as retail and real estate, but despite all this, essential spheres like public transport, municipal infrastructure, and service-delivery institutions remain underserved and overdue. As citizens observe their contributions increase with the major services at stress, it slowly undermines the belief in the system and turns tax compliance into a mere obligation instead of a purpose.
The operational bloat of the government sharply contrasts with its demand for revenues. Our federal cabinet, with its 51 members with overlapping functions, is one of the world’s largest cabinets. This oversized bureaucratic setup needs sustainment of its administrative expenses, which comes in the form of “regulatory budget” consuming a major chunk of annual fiscal outlay.
The revenue challenges of the state are further compounded by two major structural gaps. One, the informal economy, valued over $500 billion by some, is still outside the tax net. The treasury loses Rs. 1.5 trillion annually in possible revenue from the retail sector alone. Time and again, enforcement mechanisms prove to be insufficient. Second, over $21 billion in annual tax reliefs to various privileged sectors and classes systematically erode the documented tax base. Both of these gaps leave a chronic revenue shortfall, such as the Rs. 270 billion deficits in the first quarter of 2026 fiscal year. This, in turn, perpetuates a reliance on external borrowing.
A sustainable way forward demands a pragmatic approach that simultaneously treats the both, revenue and expenditure, issues.
The national tax strategy must pivot its vigilance towards improving revenue quality. This will translate into relieving the disproportionate burden on the compliant salaried class, while expanding the tax net. This expansion requires two key and immediately fixed non-negotiable actions. One, integrating the undertaxed informal sectors and tying them with national revenue streams. Second, a comprehensive and an equitable re-assessment of the $21 billion in tax benefits to be awarded to specific individuals, corporations, and sectors.
Fiscal responsibility is a two-sided equation. The government loses its credibility to put a heavier tax burden on people while its own expenditures undergo no checks and balances. Pakistan’s total federal expenditure budgeted for the current fiscal year stands at Rs. 17.57 trillion. With debt servicing and losses incurred by security-related issues, there is little left for public and social development works. It has become imperative for the state to rigorously review its own spending, cut non-essential regulatory expenditures, limit government and the cabinet, and reduce operational costs.
A credible way to fiscal discipline requires legislation. The government must come up with legal caps to ensure fiscal responsibility, limit the cabinet size, and merge the redundant ministries and authorities. This would ease the strain on the administrative budget. An independent commission to audit the annual tax expenditures would bring the political will to redirect the resources where and when required.
To achieve sustainable fiscal health, only encouraging statistics are not enough. It demands constructing a meticulously balanced system constituting a wide tax base, equitable shared revenue burden, and state expenditures are in check with the same spirit expected of its citizenry.
Muhammad Saad is a Research Assistant at the Centre for Aerospace & Security Studies (CASS), Islamabad. He can be reached at [email protected]
