Pakistan’s tax reforms have fallen short, leading to a decline in the tax base and reduced government revenues for welfare programs. As the country gears up for the FY27 budget, past trends suggest little improvement in the situation. According to reports, budgets over the last decade have shown minimal changes, primarily focusing on revenue plans.
Around fifteen years ago, Pakistan abandoned its last serious attempt at tax reform. Since then, successive governments have resorted to various tactics like amnesty schemes and ‘point of sale machines’ to address the issue. However, these efforts have not been effective in documenting the expanding services sector of the economy.
The services sector has emerged as the fastest-growing segment of Pakistan’s economy since the 1980s, constituting nearly 60% of the GDP today. Despite this, it contributes less than 40% to total revenues, while manufacturing accounts for up to 55%. The lack of substantial tax reforms has hindered revenue generation from the growing services sector.
The failure to broaden the tax base has led to Pakistan’s tax-to-GDP ratio remaining stagnant in single digits, prompting the government to heavily rely on fuel taxes and money printing to meet financial obligations. The reliance on short-term measures has constrained the state’s financial resources, resulting in a decade of financial challenges, as highlighted in reports.
