Pakistan’s Regressive Taxation System: Taxing the Poor, Exempting the Rich
By: Mannan Samad
Pakistan’s taxation system has long been criticized for its regressive nature, disproportionately burdening the poor while allowing the wealthy to benefit from exemptions and loopholes. Despite numerous reform efforts and international assistance, the structure remains skewed, exacerbating economic inequality and stifling growth.
A significant portion of Pakistan’s tax revenue comes from indirect taxes, such as the General Sales Tax (GST) and excise duties. These taxes are applied uniformly across all income levels, meaning that low-income individuals pay the same rates as the affluent on essential goods and services. This uniformity leads to a higher effective tax rate on the poor, who spend a larger share of their income on consumption. A World Bank study highlighted that Pakistan’s GST is a major contributor to rising poverty levels, while targeted cash transfer schemes like the Benazir Income Support Programme (BISP) have been effective in reducing inequality.
The reliance on indirect taxation is further compounded by the underperformance of direct taxes. Withholding taxes, often considered direct, are predominantly collected in an indirect manner. In fiscal year 2024, withholding taxes constituted a staggering 60.5% of income tax collection, reflecting systemic inefficiencies in documenting and taxing incomes.
Efforts to broaden the tax base have been met with resistance. Agriculture, contributing 23.2% to GDP and employing 37.4% of the workforce, remains largely untaxed. Similarly, the real estate and services sectors, with considerable revenue potential, are insufficiently tapped. Ineffective documentation and enforcement perpetuate reliance on indirect taxes, exacerbating inequality.
The Federal Board of Revenue (FBR) has faced criticism for its enforcement strategies. Recent plans have focused on punitive actions against tax evaders, such as restrictions on cash usage for non-filers, without addressing the underlying complexities of the tax regime. Experts argue that such measures may not yield sustainable compliance and could further strain the already compliant formal sector.
International comparisons reveal the shortcomings of Pakistan’s tax system. India, for instance, has significantly increased its direct income tax collection by streamlining its tax regime, offering reduced rates, and curbing exemptions. In contrast, Pakistan’s approach has led to a narrow tax base and over-reliance on indirect taxes.
The consequences of this regressive taxation are profound. Public services such as healthcare, education, and infrastructure remain underfunded, forcing the poor to rely on costly private alternatives or to go without. The state’s over-reliance on borrowing to plug fiscal gaps results in a mounting debt burden, crowding out investment in development projects. Moreover, the absence of a fair taxation regime erodes public trust in government institutions, fueling resentment and disillusionment among citizens.
Reforming Pakistan’s tax system requires political will and a commitment to equity. Broadening the tax base, removing unjustified exemptions, improving enforcement, and investing in the capacity of tax authorities are essential steps. Without meaningful reform, the country risks perpetuating a cycle where the poor continue to subsidize the comfort of the rich, and the promise of economic justice remains unfulfilled.
The writer is a contributing columnist based in Turbat
