Taxing the people — a messy structure

Pakistan’s official tax discourse is mostly structured around a single question: how to collect more revenue. This narrow obsession with short-term revenue targets has produced a deeply distorted tax system that undermines growth, penalises documentation and increasingly shifts the burden onto those who are already visible, compliant and easy to tax. Instead of broadening the tax base through structural reform, successive governments have relied on incremental, often distortionary measures, such as higher rates, additional levies, withholding taxes, and temporary surcharges, to squeeze immediate revenue from the formal economy. Inevitably, the result is a regressive tax structure where compliant firms, salaried individuals and documented businesses shoulder a disproportionate burden while politically protected and informal sectors, including agriculture, retail, real estate and large parts of the services sector, remain lightly taxed despite their substantial contribution to GDP. This imbalance is not accidental. It reflects deeper political economy distortions in which the state taxes what it can easily monitor rather than what it should tax. Weak enforcement capacity, fragmented administration and elite capture have allowed large sectors of the economy to remain under-taxed while the burden on documented taxpayers continues to intensify. Lower, simpler taxes, with broader documentation, could generate stronger long-term revenues The result is a vicious cycle. Higher tax rates encourage informality, while informality narrows the effective tax base further, forcing authorities to extract even more from existing taxpayers. Consequently, revenue extraction has replaced actual tax reform. Pakistan’s sales tax regime has evolved into another example of how poorly designed taxation creates distortions not only for businesses but also for consumers. The ongoing debate around expanding the Third Schedule of the Sales Tax Act 1990 offers an important illustration of this pr