IMF report exposes Pakistan's tax system as corruption-prone

November 21, 2025 (MLN):  Pakistan's tax-to-GDP ratio has remained stubbornly low at around 10% over the past five years, and a new IMF’s Governance and Corruption Report reveals the problem goes far deeper than collection efficiency.

The report exposes a tax system plagued by excessive complexity, corruption vulnerabilities, and ad hoc policy-making that undermines revenue mobilization efforts.

A System Too Complex to Work

The report describes an "excessively complex" tax system that creates uncertainty, invites disputes, and enables corruption.

Years of short-term changes by the Federal Board of Revenue have created a patchwork of additional levies including minimum taxes on turnover, transaction-based taxes, alternate corporate taxes, and various withholding mechanisms.

These often result in significant underpayment or overpayment, and can even lead to double taxation when refunds aren't paid.

The FBR's extensive use of Statutory Regulatory Orders has compounded the problem. In 2024 alone, the FBR issued 168 SROs, many relating to ad hoc exemptions that create opportunities for rent-seeking.

The Auditor-General found that customs exemptions lack transparency, with some falling outside legal limits.

Tax law complexity leads to disputes that are often settled through negotiation with FBR officers rather than judicial review, increasing corruption risks and creating inequities between taxpayers.

Policy-Making Vulnerable to Influence

Most concerning is that the tax policy-making process itself is vulnerable to corruption. Tax policy reform currently originates within the FBR, creating an environment where individuals, firms, or sectors can seek preferential treatment.

Policy-making has been "largely reactionary, mostly responding to short-term revenue needs or sectoral demands" rather than following coherent long-term objectives.

Tax preferences are poorly monitored and likely abused. The Auditor-General identified a lack of monitoring of non-profit organizations entitled to tax credits, with many not registered as required.

While authorities committed to phase out Special Economic Zone tax incentives by 2035, discretionary exemptions can still be granted by the FBR or Cabinet.

The lack of harmonization between federal and provincial taxes adds further complexity. Despite National Tax Council efforts with World Bank assistance, progress on coordinating sales tax between federal goods tax and provincial services tax remains slow.

Underlying all these problems is the absence of a coherent three-to-five year tax reform strategy that would make the system more efficient, equitable, and simpler while increasing revenue.

Key Recommendation Calls for Separate Tax Policy Office

The IMF's primary recommendation is establishing a fully functioning Tax Policy Office (TPO)  within the Ministry of Finance, separate from the FBR. Cabinet has approved the TPO formation, and the Ministry is recruiting key management positions.

The TPO would serve as gatekeeper for all tax policy initiatives, regardless of source. All reform requests would first come to the TPO for independent review and recommendation on impacts to revenue, the economy, and tax administration. The report emphasizes avoiding "form over substance" where a TPO exists on paper but the FBR continues controlling the policy process.

The TPO should develop a tax simplification strategy for publication by May 2026, covering three to five years with clear revenue goals.

The strategy should include plans for reducing rate schedules, special regimes, excessive withholding taxes, rationalizing exemptions, and scaling back FBR rule-making power. It should also address federal-provincial harmonization and include annual implementation progress reports.

A key element is ongoing rationalization of tax exemptions. The authorities' Tax Expenditure Statement should be improved by including cost-benefit assessments of significant tax incentives.

Reform or Stagnation: The Road Ahead

The complexity of tax laws creates an unfavorable business environment that deters foreign investors and undermines economic growth. The IMF report makes clear that technical reforms alone won't suffice without addressing fundamental governance weaknesses.

The timeline is tight: the TPO should be fully functioning by end of 2025, with a simplification strategy published by May 2026. Whether Pakistan can meet these targets will determine if the country can finally escape its low tax collection trap and create a system that is efficient, equitable, and able to support its development goals.

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