Tax filers increase but show no income

Despite recording an increase in the number of tax filers and achieving a notable rise in the tax-to-GDP ratio, Pakistan's taxation system remains riddled with structural weaknesses and chronic underperformance.

While the overall tax-to-GDP ratio may have reached an impressive level of 15.7% for fiscal year 2024-25, nearly 3.2% higher than the previous year, industry experts said that a closer look reveals this apparent success hides deep-rooted issues of tax evasion, zero-return filings, and an overburdened salaried class. According to the Federal Board of Revenue (FBR), the total number of income tax returns filed this year, as of October 31, 2025, stands at around 5.9 million, showing a 17.6% increase. Yet experts said that nearly one-third of these are zero returns, showing no taxable income.

This, they said, is symptomatic of a policy that focuses on quantity over quality. Senior Vice Chairman of the Pakistan Industrial and Traders Association Front (PIAF), Mudassar Masood Chaudhry, said that the FBR's emphasis on increasing return numbers without translating them into meaningful collections is a flawed approach. "The fact that almost one-third of these filers' returns are zero is a major challenge. The government succeeded in formalising names, not the economy."

He added that under recent regulations, being listed in the FBR's Active Taxpayer List (ATL) is mandatory for anyone seeking to remain part of the formal economy. "Many people are filing zero returns simply to keep banking access or avoid penalties rather than actually contributing to the tax pool," Chaudhry said, highlighting a growing disconnect between formal inclusion and real fiscal contribution.

The imbalance is further evident in tax contribution patterns. The salaried class alone paid nearly Rs555 billion in income tax during FY25, almost double the amount collected collectively from retailers and the real estate sector. This reveals how the burden of taxation continues to fall disproportionately on the most transparent income segment, while the country's vast informal economy continues to slip through the cracks. In fact, while Pakistan's direct tax collection has improved, with a 12% growth recorded in the first quarter of FY26, most of this increase comes from withholding and advance taxes rather than from comprehensive assessments of business income.

Experts argue that Pakistan's tax net expansion is cosmetic, lacking the depth needed to sustain long-term growth. Tax policy expert, Ali Niaz Khan, said that expanding the number of filers is not enough. What matters is the depth of taxation, the share of high-net-worth individuals, unregistered businesses, and informal sectors brought under real documentation. "When one-third of returns are zero or token filings, you are only increasing paperwork, not revenue."

He added that the underlying problem lies in the structure of Pakistan's tax system, where policy inconsistencies and widespread exemptions have left the tax base dangerously narrow. According to the Economic Survey of Pakistan 2025, Pakistan grants more than $21 billion in annual tax exemptions. These exemptions, intended to incentivise certain sectors, end up eroding the revenue base they aim to strengthen. Furthermore, the FBR still heavily depends on indirect taxes, such as those on imports and consumption, which disproportionately impact lower-income groups while sparing untaxed wealth segments.

Meanwhile, the country's large informal economy continues to challenge efforts to broaden the base. From small retailers to service providers and property dealers, countless businesses operate outside the tax net. Despite the government's introduction of digital monitoring systems like the Point-of-Sale (PoS) integration for retailers, the pace of documentation remains painfully slow. Enforcement is also weak, and lifestyle audits are limited in scope, even though authorities have acknowledged the glaring mismatch between declared incomes and visible wealth.

The result of these gaps is a continued imbalance in Pakistan's fiscal landscape. The salaried middle class continues to bear the brunt, while the potential of business taxation, property income, and the agricultural sector remains largely untapped. The FBR's recent shortfall in the first quarter of FY26 is around Rs270 billion, which further underscores the challenge.

Experts believe that Pakistan must shift its approach from chasing filing numbers to pursuing real compliance and equity. Stronger audit systems, rationalised tax exemptions, digital transparency, and fair enforcement across all sectors are crucial. Without these structural reforms, the government's celebrated achievements in tax broadening risk being short-lived. "Pakistan doesn't need more tax filers; it needs real taxpayers. Until we fix the imbalance between those who pay and those who evade, our tax system will remain a numbers game with little national benefit," added the PIAF senior vice chairman.