A new report from the World Bank has once again placed Pakistan in the bottom quartile globally for tax buoyancy among Emerging Market and Developing Economies (EMDEs), underscoring a critical challenge in the country’s fiscal health. The latest “South Asia Development Update: Taxing Times,” released in April 2025, points to the low responsiveness of Pakistan’s tax revenues to its GDP growth, largely attributing it to an over-reliance on taxing slow-growing economic sectors while dynamic segments remain significantly undertaxed.
Comparing Tax Performance with Regional Peers
The World Bank’s analysis reveals a stark contrast between Pakistan’s tax system and those of its South Asian neighbors like Bangladesh and India, where tax buoyancy more closely aligns with the EMDE average. Pakistan’s income tax structure, despite appearing progressive on paper with a wide range of rates and thresholds, is significantly undermined by extensive exemptions and narrow coverage. This dilutes the potential for effective progressivity and hinders revenue generation.
Key Areas Identified for Urgent Reform
The report strongly recommends that Pakistan undertake urgent reforms to broaden its tax base and enhance revenue mobilization. A key recommendation is the reform of the income tax regime to increase effective rates on the highest-income groups and eliminate unjustified exemptions that benefit the privileged.
The agricultural sector is specifically highlighted as needing more effective taxation. Despite contributing nearly 20% of Pakistan’s GDP growth between 2010 and 2019 – a figure significantly higher than the average EMDE’s less than 10% – the sector remains substantially undertaxed. Increasing agricultural taxation is identified as a crucial step towards boosting tax revenues.
Direct Tax Shortfalls and Structural Issues
Pakistan also faces some of the highest shortfalls in direct tax revenue among EMDEs, with the gaps almost equally split between corporate and personal income taxes. The World Bank estimates that one-third of this shortfall is due to structural issues, including the large informal economy and underdeveloped financial sector. However, even after accounting for these factors, Pakistan’s tax collection still lags behind the average EMDE.
Reliance on Consumption Taxes and Compliance Challenges
Compounding the issue, Pakistan’s revenue-to-GDP ratio remains among the lowest in South Asia, alongside Sri Lanka and Bangladesh. The report notes a significant reliance on consumption taxes, such as VAT and excise duties, with collections in these areas being notably above the EMDE average. This indicates a dependence on more regressive tax instruments.
While the World Bank acknowledged recent positive reforms, including the introduction of electronic VAT filing and computerized risk assessments leading to improved fraud detection and reduced refund claims, challenges persist. Issues in tax compliance, the efficiency of dispute resolution, and the timely filing of returns continue to hamper revenue collection efforts.
Economic Recovery and the Path Forward
Despite the persistent tax challenges, Pakistan’s economy has shown signs of gradual recovery in fiscal year 2024–25, with projected GDP growth of 2.7%. This rebound is attributed to a strong agricultural harvest, stable exchange rates, and robust remittance inflows. Inflation has also seen a sharp decline from its peak in mid-2023, allowing the central bank to lower policy rates.
However, the World Bank emphasizes that for Pakistan to move out of the bottom tier of EMDEs in tax performance and achieve sustainable, inclusive growth, deep and sustained reforms are essential. Improving tax buoyancy, diversifying the tax base away from its narrow confines, enhancing compliance, and reducing reliance on distortionary subsidies are critical steps for the country’s long-term economic stability.
