Pakistan’s persistently low tax-to-GDP ratio, which has hovered around 10 percent for the past five years, is not merely an issue of weak collection. A new IMF Governance and Corruption Report points to systemic flaws embedded deep within the country’s tax structure, exposing how excessive complexity, discretionary decision-making, and governance shortcomings have contributed to widespread vulnerabilities and chronic underperformance in revenue generation. According to the report, the country’s tax system has evolved into a fragmented structure that encourages disputes, creates uncertainty for businesses, and heightens opportunities for corruption due to its opaque and inconsistent framework.
The IMF highlights that Pakistan’s tax environment has become increasingly convoluted due to years of reactive and short-term policy changes implemented by the Federal Board of Revenue. These changes have introduced various additional taxes such as turnover-based minimum taxes, alternate corporate taxes, withholding taxes across numerous transactions, and sector-specific levies that often overlap. Such a structure frequently results in underpayment or overpayment of taxes, creating inefficiencies and, in some cases, double taxation when refunds are delayed or not issued at all. The Auditor-General’s findings also reinforced concerns by reporting that customs-related exemptions lacked transparency, with some extending beyond legal authorizations.
One of the report’s most concerning observations is the role of Statutory Regulatory Orders (SROs). In 2024 alone, the FBR issued 168 SROs, many of which granted ad hoc exemptions. These exemptions, often undocumented or lacking oversight, create conditions for rent-seeking and undermine the fairness of the tax system. Tax disputes, instead of being resolved through judicial channels, are frequently settled through negotiations with tax officers, further raising corruption risks and fostering unequal treatment between taxpayers.
The IMF also points to vulnerabilities in the tax policy-making process. Because policy formulation currently originates within the FBR, it becomes susceptible to external influence and preferential treatment toward specific firms or sectors. The report notes that tax policy-making has long been reactive, driven primarily by short-term revenue needs or pressure from interest groups rather than long-term national objectives. The lack of accountability mechanisms around tax incentives further complicates this landscape. The Auditor-General found gaps in monitoring non-profit organizations benefiting from tax credits, with many not registered as required.
Another longstanding challenge is the inconsistency between federal and provincial tax structures. The need to harmonize sales taxes on goods and services has been a long-discussed agenda item. Although the National Tax Council, supported by the World Bank, has been working to improve coordination, progress remains slow, leaving taxpayers to navigate overlapping and often contradictory tax frameworks. The absence of a clearly articulated three-to-five-year reform strategy continues to hinder efforts to build a predictable and equitable system.
The IMF’s central recommendation is the establishment of an independent Tax Policy Office housed within the Ministry of Finance. The TPO would be empowered to serve as the primary gatekeeper for all tax policy changes, ensuring that reforms are reviewed independently of the FBR. Cabinet approval for the office has already been granted, and recruitment efforts are under way. The report stresses that the TPO must be more than a symbolic entity and should have full authority over reform evaluations, revenue impact assessments, and long-term tax planning.
The TPO has been tasked with drafting a comprehensive tax simplification strategy by May 2026. This plan should examine rate structures, exemptions, withholding regimes, and the reduction of FBR’s discretionary rule-making. It must also provide a roadmap for harmonizing federal and provincial taxes while producing annual progress reports to ensure transparency and accountability. A key part of this reform involves a more rigorous assessment of tax expenditures, requiring detailed cost-benefit analyses for all major exemptions.
The IMF’s findings reiterate that Pakistan’s tax problems are rooted not only in technical shortcomings but in governance failures that impede meaningful reform. With a tight timeline for operationalizing the TPO by the end of 2025 and publishing a simplification strategy by mid-2026, the coming years will be decisive. Pakistan now faces a defining moment: either commit to structural, transparent, and coherent tax reforms or continue with a system that stifles investment, burdens honest taxpayers, and undermines economic growth.
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