Pakistan’s widening fiscal deficit continues to strain economic management, particularly as the country navigates external debt obligations under its IMF programme. Central to these reforms is a sharper focus on tax collection—both in total revenue and in expanding the tax base. While nominal tax receipts have grown at an average annual rate of 24 percent over the past five years, the tax-to-GDP ratio has remained stuck at roughly 9 percent. The numbers signal that revenue growth has largely been driven by inflation and higher extraction from existing taxpayers rather than meaningful expansion of contributors.
The structural weaknesses are longstanding. Enforcement gaps, limited compliance, and a narrow base mean a handful of documented sectors shoulder the bulk of the burden. With the informal economy estimated between 35 percent and 60 percent of GDP, major segments such as retail and real estate remain largely outside the tax net. As a result, the formal financial system has emerged as one of the most dependable revenue anchors for the state.
Banks, by virtue of strict regulation and transparent earnings, are among the easiest sectors to tax. Their profitability is visible, transactions are documented, and operations are deeply embedded in the formal economy. This traceability has translated into a heavy fiscal load. Commercial banks face a 39 percent corporate income tax alongside a Super Tax of up to 10 percent depending on net income. According to data from the State Bank of Pakistan, the effective tax rate on banks reached 54.1 percent in FY25, up from 51.6 percent in FY24.
This stands in contrast to non-bank corporates of similar size, which are taxed between 30 and 39 percent depending on applicable surcharges. Regionally, banking tax regimes are notably lighter. Corporate tax rates for banks hover around 37.5 to 40 percent in Bangladesh, around 30 percent in India and Sri Lanka, 22 percent in Indonesia, 24 percent in Malaysia, 20 percent in Vietnam and 25 percent in South Korea. Most of these markets do not impose additional sector-specific levies comparable to Pakistan’s Super Tax, resulting in lower effective burdens and stronger after-tax returns for investors.
The disparity carries consequences for capital flows. Pakistan has witnessed the exit of multinational firms over the past decade, including Procter & Gamble, Shell, Telenor, Pfizer, Lotte Chemicals, as well as financial institutions such as Barclays and HSBC. In FY25, net foreign direct investment into the financial sector stood at USD 713 million, far below the USD 9 billion plus recorded in India and USD 1.3 billion in Turkey.
When foreign capital hesitates, the government relies more heavily on domestic banks for financing, reinforcing a cycle in which lenders prioritize sovereign securities over private sector credit. Elevated taxation compresses margins, encourages wider spreads and higher service charges, and limits capital available for digital infrastructure or rural expansion. The implications extend to financial inclusion: World Bank data shows only 27 percent of Pakistani adults held formal accounts in 2024, compared with 90 percent in India, 70 percent in Vietnam and 43 percent in Bangladesh.
In FY25, Pakistan collected PKR 11.744 trillion in total taxes against a target of PKR 11.901 trillion. Direct taxes comprised 49.3 percent of the total at PKR 5.791 trillion, reflecting 26.3 percent year-on-year growth. The banking industry was the single largest contributor, paying PKR 1.127 trillion—9.6 percent of total revenue and approximately 17.5 percent of direct taxes. Petroleum followed at PKR 1.121 trillion, and the power sector contributed PKR 0.858 trillion.
Such concentration creates fiscal sensitivity. A 25 percent decline in banking sector net income would cut direct tax collection by 5 percent and total revenues by 1.9 percent. A 50 percent contraction would reduce direct taxes by 8.4 percent and overall receipts by 3.7 percent.
As Pakistan pursues revenue stability and digital transformation, recalibrating corporate tax policy toward regional benchmarks—potentially reducing rates by 10 to 15 percentage points—could reshape incentives. Lower burdens may attract foreign capital, expand private sector lending, and strengthen the digital finance ecosystem rather than reinforcing dependence on a shrinking formal base.
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