Understanding Taxes in Pakistan

In almost every country in the world, taxes are the major source of revenue for the governments to balance their budgets. In some countries, however, direct taxes, like income tax, are leading sources of tax revenue, while in many others, indirect taxes such as sales tax or value-added tax (VAT) are yielding large amounts of tax revenue. Taxes in Pakistan are collected by the Federal Board of Revenue (FBR) and Provincial Revenue Authorities (PRA).

In Pakistan, the FBR is the premier organization for the collection of federal taxes, including income tax, sales tax, customs duty and federal excise duty. The FBR collected tax revenue of approximately Rs11.735 trillion (around $76.6 billion) during the fiscal year 2024-25, with a significant growth of about 26%, compared to the previous year, making it the highest net addition in a single year for Pakistan's tax revenue. The tax collection target set for the fiscal year 2025-26 is Rs14,131 billion (approximately $49.46 billion), aiming to raise the tax-to-GDP ratio to about 14%.

During the fiscal year 2024-25, the collection of income tax reached approximately Rs5.79 trillion with a surge of 37% year-on-year growth from registered taxpayers, indicating improved compliance. Income tax is collected through amendment of assessments by creating tax demand. There was a 110% increase in tax collection through demand, which is evidence of enhanced enforcement efforts by the tax authorities. Besides, the taxpayers made payments with returns and in the form of advance under section 147 of the Income Tax Ordinance, 2001. Tax collection through advance tax and payments with returns increased 37% of total income tax collection during 2024-25. The major contributor in overall income tax collection is the withholding tax regime. Withholding tax contributed around Rs2.9 trillion to the overall tax revenue, representing a large share of FBR's collections given the total tax revenue was around Rs11.7 trillion. The regime includes tax deductions on various payments, such as salaries, dividends, profits on debt, imports, contracts and services, etc.