There is a persistent and deeply felt contradiction in Pakistan’s economy, one that shapes everyday life as much as it defines national policy. On paper, the state struggles to raise sufficient revenue, with a tax-to-GDP ratio hovering around 10-11%. Yet, in lived experience, Pakistanis often feel overtaxed, encountering levies at nearly every transaction point in their daily lives.

An average urban Pakistani household, particularly one within the documented or semi-documented economy, routinely interacts with 8 to 12 different taxes, duties, and levies. These include income tax (or withholding at source), general sales tax (GST) on goods and services, petroleum levies embedded in fuel prices, electricity duty and GST on power bills, fixed charges such as the PTV fee, telecom taxes on mobile usage and internet, advance taxes on banking transactions (for certain categories), motor vehicle taxes, and multiple taxes and duties on property transactions including withholding tax, stamp duty, and registration fees. The system is not characterized by a single, visible tax burden; it is defined by layered taxation, where the same income is taxed repeatedly at different stages of use. This is the backdrop against which April acquires its significance.

April, in Pakistan, marks the beginning of the pre-budget phase, a period where consultations, projections, and negotiations take place to determine the broad contours of the upcoming fiscal year. It is, in effect, when the “skeleton” of the budget is formed. By the time the budget is formally announced in June, most of the substantive decisions have already been made. What remains is largely the filling in of details within a constrained fiscal framework. And those constraints are severe.

Debt servicing alone consumes nearly half of federal expenditure. IMF programme conditions, particularly under ongoing Extended Fund Facility arrangements, define the boundaries of fiscal adjustment. External vulnerabilities, such as rising oil prices driven by geopolitical tensions, most recently the escalation in the Middle East in April 2026, further tighten fiscal space by increasing import bills and inflationary pressures.

In this environment, the budget can not be a tool for transformation but instead a mechanism for managing scarcity. The consequence is that rather than addressing structural inefficiencies, the system continues to extract more from the segments that are already visible and compliant.

The Roots of the Problem: An Economy Outside the System

To understand why Pakistan’s tax system behaves this way, one must begin with the nature of its economy. Pakistan’s economy is overwhelmingly informal, with estimates placing the informal sector at around 55-60% of GDP and informal employment accounting for nearly 85-90% of the workforce, which reflects how economic life is organized in the country.

Cash remains the dominant medium of exchange, not simply due to habit, but because it offers flexibility and insulation from a system that is often perceived as complex, intrusive, and unreliable. While initiatives such as Raast have expanded digital payment infrastructure, behavioral adoption remains uneven, particularly outside major urban centers.

More fundamentally, the structure of asset ownership, especially land and property, reinforces informality. In Pakistan, property is rarely just an individual asset. It is embedded in family systems, inherited across generations, often jointly held, and frequently undocumented in ways that do not align with formal regulatory requirements. Land may be divided informally among siblings without formal mutation; valuation may be underreported; ownership disputes may persist for decades. These practices are the norm, not the anomaly.

The result is a persistent disconnect between economic reality and legal documentation. Comparative experience from South Asia highlights what Pakistan is missing. India has, over the past decade, undertaken large-scale digitization of land records under the Digital India Land Records Modernization Programme (DILRMP), integrating registration and revenue systems and reducing ambiguity in ownership. Bangladesh, where land disputes constitute a significant portion of rural litigation, is accelerating digitization precisely to reduce transaction costs and improve governance.

Pakistan has initiated similar reforms in certain provinces, but these remain fragmented. There is no fully integrated system linking land records, taxation, financial flows, and digital identity. In such a context, remaining informal is not necessarily an act of defiance; it is often a rational response to systemic incentives. Formalization increases exposure to taxation and regulatory scrutiny without guaranteeing corresponding benefits such as access to credit, legal protection, or improved service delivery.

A System That Taxes Visibility

This structural informality directly shapes how taxation is distributed. Pakistan’s tax system relies heavily on withholding taxes and indirect taxation, both of which are easier to administer but inherently skewed toward those already within the formal net. Salaried individuals, whose incomes are documented and taxed at source, have become one of the most reliable contributors to revenue. In recent fiscal years, the salaried class has contributed hundreds of billions of rupees in income tax alone. At the same time, tax expenditures, comprising exemptions, concessions, and preferential treatments, exceed Rs 2 trillion annually, reflecting a wide array of policies that reduce the effective tax burden on specific sectors and groups.

This creates a structural imbalance. The salaried class pays income tax upfront, then pays GST on consumption, then pays additional taxes embedded in utilities and services. When purchasing assets, they encounter further layers of taxation through advance tax regimes and transaction costs. In contrast, large segments of the economy, particularly in real estate, wholesale trade, and certain corporate sectors, remain either under-taxed or inconsistently taxed.

The system, in effect, penalizes traceability. Those who can be easily identified, tracked, and taxed are subjected to repeated taxation, while those operating in less visible segments face lower effective burdens. This is not merely an issue of fairness; it has implications for compliance. When taxation is perceived as uneven, it undermines the legitimacy of the system itself.

Reform Debates: Between Simplicity and Equity

Against this backdrop, a range of reform proposals has emerged, reflecting both frustration and aspiration. One such proposal is the reduction, or even elimination, of capital gains tax (CGT). Advocates argue that lower CGT can stimulate investment, particularly in capital markets, by encouraging long-term holdings and reducing speculative churn.

There is merit in this argument within specific contexts. For listed equities, a differentiated CGT structure that rewards long-term investment can contribute to market stability and depth. However, extending a zero-CGT framework broadly, especially to real estate, would likely exacerbate existing distortions.

Pakistan’s real estate sector already functions as a primary store of wealth, often characterized by under-declared values and informal transactions. Eliminating CGT in this sector would not necessarily broaden investment; it would likely reinforce speculative behavior and further entrench informality.

The more nuanced approach lies in differentiation: lower and predictable CGT rates for productive, long-term investments, combined with robust taxation of speculative gains in sectors prone to informality.

A similar tension exists in debates around flat versus progressive income taxation. Institutions such as PIDE have highlighted the potential benefits of simplifying Pakistan’s tax structure, reducing the number of slabs, lowering marginal rates, and eliminating exemptions to create a broader and more transparent base. The appeal of a flat tax, often proposed at around 10%, lies in its simplicity and potential to improve compliance.

However, the question remains whether simplicity alone guarantees fairness. In a context where income distribution is unequal and large segments of high-income activity remain undocumented; a flat tax risks reducing the relative burden on those already advantaged without significantly expanding the base. Pakistan’s reform discourse increasingly recognizes the need for simplified progressivity, a system with fewer slabs and lower rates, but one that maintains a degree of redistribution. The challenge, therefore, is not choosing between simplicity and equity, but designing a system that achieves both.

SMEs: Between Support and Systemic Risk

Following through on the debate of simplifying tax systems, small and medium enterprises (SMEs) represent another critical dimension of the tax debate. SMEs are widely acknowledged as the backbone of employment in Pakistan, yet they operate under significant constraints, high compliance costs, limited access to finance, and regulatory uncertainty. Providing tax relief to SMEs appears both logical and necessary to encourage formalization and growth.

However, blanket exemptions carry risks. Without robust definitions and enforcement mechanisms, larger firms can exploit SME classifications through fragmentation or related-party arrangements, effectively reducing their tax liabilities. While the government believes that certain industries cannot realistically disguise themselves as SMEs, avoidance typically occurs through more subtle mechanisms.

The solution lies in targeted, conditional relief. Simplified tax regimes for genuinely small enterprises, linked to turnover thresholds, digital invoicing, and gradual integration into the formal system, can support growth without creating systemic loopholes. Relief should be tied to documentation.

Budget 2026-27: The Real Question

As Pakistan approaches the 2026-27 budget, the broader fiscal environment remains highly constrained. Debt servicing continues to dominate expenditure. IMF programme conditions shape fiscal priorities. External shocks, most notably the recent escalation in the Middle East, have increased energy costs, inflationary pressures, and external vulnerabilities. These factors collectively limit the scope for ambitious reform. The budget is therefore likely to focus on incremental adjustments, modest changes in tax rates, targeted relief measures, and efforts to meet revenue targets, rather than structural transformation. However, this approach risks perpetuating the very dynamics that constrain the system.

A System in Need of Realignment

The central challenge facing Pakistan is not simply one of revenue mobilization. It is one of systemic alignment. The current system taxes those who are visible, while leaving large segments of economic activity partially outside its reach. It relies on complexity and repetition rather than breadth and fairness. It responds to crises rather than preparing for them. Progress is possible, but it requires consistency and integration. Digital infrastructure, land record modernization, simplified tax regimes, and anticipatory fiscal planning must be pursued not as isolated reforms, but as components of a coherent system.

Ultimately, the question is not how much more Pakistan can tax, but who is being taxed, how often, and why others are not fully part of the system. Until this question is addressed, the contradiction will persist: a country where revenue remains insufficient, even as citizens feel taxed at every turn.

About the Author:

Momina Sahar is Communications Officer at Accountability Lab Pakistan and can be reached at momina@accountabilitylab.org