Inflation, rupee dip lift FBR taxes
Owing to massive inflation-driven increases in nominal collections, sharp currency depreciation, and a greater reliance on indirect taxes, the Federal Board of Revenue (FBR) has achieved its annual revenue growth rise from an average of 18% over the past decade to 24% in the recent five years.
The FBR has demonstrated a remarkable acceleration in tax collection growth over the past five years, surpassing the average pace observed over the preceding decade. Data from the FBR, Ministry of Finance (MOF), and Arif Habib Limited (AHL) Research reveals that annual revenue growth averaged 24% during this period, significantly higher than the 10-year average of 18%.
"The rise in FBR's annual revenue growth, from an average of 18% over the past decade to 24% in the recent five years, reflects a mix of policy adjustments and economic factors," noted AHL. "The higher growth is partly attributed to inflation-driven increases in nominal collections, currency depreciation, and a greater reliance on indirect taxes."
This upward trend illustrates both nominal tax collections and growth rates, with the former rising from Rs3.11 trillion in the base year, fiscal year 2016, to Rs14.13 trillion in the most recent year — reflecting a strong compound growth trajectory. Notably, growth rates peaked at 35% in certain years before moderating, highlighting the recent surge in tax mobilisation.
Several factors have driven this performance. Inflation and currency depreciation played a central role, inflating nominal tax collections, especially on goods and services subject to ad valorem taxes. The weakening rupee also raised the local currency value of import-based taxes, a key revenue source.
On the policy front, the withdrawal of tax exemptions under International Monetary Fund (IMF) programmes expanded the taxable base, while the government's reliance on indirect taxes — such as sales tax and customs duties — further fuelled collection growth, though it raised equity concerns. Administrative reforms, including efforts to document the informal economy, digitise tax filings, and curb evasion, also contributed to improved compliance and revenue outcomes.
Despite this strong showing, questions remain over the sustainability of such growth. Much of the recent gains are rooted in inflationary effects and indirect taxation — factors that may not sustain momentum without deeper structural reforms. Reliance on import-based taxes leaves revenues vulnerable to external shocks or a decline in trade volumes, while over-dependence on indirect taxes disproportionately burdens lower-income groups, underscoring the need for a more balanced and equitable tax policy.
Looking ahead, the FBR's continued progress will depend on its ability to broaden the tax base by formalising untapped sectors, shift towards more stable revenue streams such as direct taxes, and enhance transparency to build public trust and voluntary compliance. While the recent growth trajectory signals a positive departure from past trends, its translation into lasting fiscal strength will ultimately hinge on the government's commitment to comprehensive and sustained reforms amid evolving economic challenges.