Pakistan's Rs6.6trn 'direct tax' haul is mostly withholding, not income tax
Pakistan's tax authority booked Rs6.577 trillion as income tax in 2025-26, but only 7.1% of it was recovered out of assessed demand. The rest - Rs3.654 trillion in withholding and Rs2.208 trillion in advance payments under Section 147 of the Income Tax Ordinance, 2001 - was collected before anyone determined what a taxpayer actually earned, according to an analysis of 25 years of finance ministry July-June statements.
The headline ratio looks respectable by the country's own history: direct taxes reached 5.19% of GDP in 2025-26, against 5.05% a year earlier, within an FBR collection of Rs13.010 trillion, or 10.3% of GDP. The analysis argues that figure is poor by international standards and, more importantly, mislabelled. Once transaction-linked levies - on imports, contracts, electricity, telephone connections, exports and property - are separated out, the defensible measure of tax on actual net income falls to roughly 3% of GDP, and below 4%. That is an analytical estimate, not an audited official series, the author notes.
The distributional cost is visible in the compliance data. Salaried taxpayers paid Rs629 billion by June 2026, up from Rs391 billion before the current IMF programme, while only 137 additional retailers had joined the designated scheme by 15 October against an annual target of one million. Provincial agricultural income tax receipts stayed meagre. IMF regional director Jihad Azour has called for fairness, neutrality and predictability in the system; the analysis says the test is whether the Fund and the government examine what the FBR actually collects rather than what it calls the collection.
Minimum and presumptive taxes on turnover can bite where there is little profit or a loss, and their legal label does not settle who bears the economic burden - some of it may pass into prices. Advance payments mandated by statute are meanwhile presented as voluntary compliance, and adjustable deductions still tie up working capital when refunds are slow, penalising documented firms twice.
The remedy proposed is transparency before congratulation: publish normal income tax, adjustable withholding, minimum and final taxes, assessed demands and refunds separately; reconcile each deduction against final liability; pay refunds on time; and replace high rates and arbitrary advance deductions with broad, low, predictable taxation, real audit and enforceable taxpayer rights. Success, the argument runs, should be measured by income actually assessed and fairly taxed - not by what is extracted before income is even determined.
