Imagine a country where a ₨5.9 trillion tax collection is still not enough to meet the fiscal needs of its 230 million citizens. This is Pakistan — a nation that faces a perennial tax shortfall and must overcome decades of structural inefficiencies, tax evasion, and a large informal economy to achieve long-term fiscal sustainability. Despite being a country with immense growth potential, Pakistan’s tax-to-GDP ratio stands at just 12%, far below global benchmarks and a serious roadblock to achieving its economic aspirations.
In the face of these challenges, digitization emerges as a powerful tool that could reshape the way Pakistan collects taxes, improves compliance, and broadens its tax base. Digital payment systems, e-invoicing, mobile tax filing, and platforms like Raast provide the potential to revolutionize how the government engages with its economy. But as Pakistan stands on the cusp of this transformation, the question remains: can digital reform be the key to closing the massive tax revenue gap, or will it be another missed opportunity in a country plagued by tax shortfalls?
The Tax-to-GDP Dilemma: A Stark Reality
Pakistan’s fiscal challenges are rooted in its low tax-to-GDP ratio. At around 12%, Pakistan’s ratio is shockingly below the OECD average of 34% and the regional Asia-Pacific average of 19.3%. This gap highlights a systemic failure to generate enough revenue to fund essential public services, infrastructure, and social development. For context, developing countries typically aim for a tax-to-GDP ratio of 15–20% to ensure that there are sufficient resources for public investment. Pakistan’s continued reliance on indirect taxes, such as sales tax and excise duties, only exacerbates this issue. These taxes are regressive, disproportionately affecting lower-income households, while the wealthiest segments of society often avoid paying their fair share through loopholes and offshore accounts.
This underperformance in tax collection contributes directly to Pakistan’s budget deficits. Despite collecting ₨5.9 trillion in taxes, the country remains far from reaching its revenue targets. As a result, Pakistan’s fiscal policy is overly dependent on external borrowing, which fuels the national debt and hampers the country’s ability to invest in vital sectors like health, education, and infrastructure. The low tax-to-GDP ratio leaves Pakistan in a position where it must either raise taxes in inefficient ways or depend on external financial aid to make up the difference.
The Informal Economy: The Silent Revenue Drain
A large part of Pakistan’s economic activity operates in the informal sector, which is difficult to tax effectively. This sector includes everything from small businesses and agriculture to labor-intensive industries like construction and domestic work. Estimates suggest that the informal economy accounts for 40% to 50% of Pakistan’s GDP—a significant portion of the economy that largely escapes the reach of the formal tax system.
The informal sector is cash-based and operates outside the regulated frameworks that the Federal Board of Revenue (FBR) relies on to track taxable activity. As a result, Pakistan’s tax authorities are unable to tap into this sizable source of wealth, leading to substantial revenue leakages. Businesses in the informal economy do not issue formal invoices, workers are not registered, and income is often hidden from official financial records, creating a vicious cycle of non-compliance. This informal economy also undercuts the government’s ability to expand its tax base. By keeping economic activity off the books, informal workers and businesses evade taxes, creating an unfair advantage over those who do pay taxes and participate in the formal economy.
Tax Evasion: A Systemic Challenge
Tax evasion is another critical issue that contributes to Pakistan’s fiscal shortfall. The wealthiest sectors of society, including large corporations and high-net-worth individuals, often exploit the informal economy or use offshore accounts to shield their wealth from taxation. A report from the Pakistan Institute of Development Economics (PIDE) suggests that as much as 70% of the country’s tax revenue is generated by just a small portion of the population. This makes Pakistan’s tax system highly inefficient, as the vast majority of businesses and individuals are either underreporting their income or failing to file tax returns altogether. The lack of robust enforcement mechanisms, alongside weak administrative systems, enables widespread non-compliance. Many small businesses avoid formal registration due to bureaucratic hurdles, while larger entities exploit gaps in the system, relying on cash transactions to keep their income off the radar of tax authorities. The use of offshore tax havens and shell companies further exacerbates the problem, allowing the wealthy elite to avoid contributing their fair share.
In this environment, the tax base remains narrow, and public services such as healthcare, education, and public infrastructure continue to suffer from underfunding. The government’s reliance on indirect taxes, which place an undue burden on lower-income households, exacerbates inequality and stymies economic growth.
Leveraging Data Sharing to Tackle Tax Evasion
One of the innovative strategies to curb tax evasion in Pakistan involves data-sharing initiatives between key institutions. According to a recent report by McKinsey & Company, significant progress has been made in using data analytics to identify non-filers and uncover tax evaders. This initiative is part of a broader push to modernize tax administration through digitization and advanced analytics.
The report highlights how various government agencies—including the Federal Board of Revenue (FBR), State Bank of Pakistan (SBP), and commercial banks—are collaborating to share data in real-time. By analyzing transaction data, financial activities, and asset ownership, authorities can pinpoint individuals or businesses who may be underreporting income or failing to file taxes altogether. This strategy represents a game-changing approach to enhancing tax compliance and expanding Pakistan’s narrow tax base.
Furthermore, this initiative also seeks to integrate information from mobile phone transactions, utility bills, and real estate dealings to create a comprehensive profile of taxpayers’ financial activities. With advanced data analytics, the FBR can identify discrepancies in tax filings and flag potential cases of underreporting or fraud. In turn, these efforts can drastically reduce the informal economy and increase the efficiency of Pakistan’s tax system.
As digitization becomes more integrated into Pakistan’s tax administration, data-sharing remains a powerful tool for addressing systemic inefficiencies and fostering greater transparency in the tax system. The move toward more coordinated data-sharing has the potential to increase tax revenue, reduce tax evasion, and ensure that individuals and businesses contribute their fair share to the economy.
Digitization: A Pathway to Reimagine Taxation
Amid these challenges, digitization offers a transformative solution to Pakistan’s long-standing tax problems. The digital payment ecosystem, e-filing, and e-invoicing systems are all crucial components of a modern, efficient tax collection framework. If implemented correctly, these technologies could help broaden Pakistan’s tax base, increase compliance, and reduce tax evasion.
1.Raast: A Game-Changer for Digital Payments
One of the most promising developments in Pakistan’s digital transformation is the Raast payment system. Launched in 2020, Raast is an instant digital payment network that aims to enable easy, traceable transactions between individuals, businesses, and the government. By encouraging the use of digital payments, Raast can provide tax authorities with real-time data on economic transactions, reducing the scope for evasion. As more payments move into the digital realm, it becomes harder for businesses to operate without being tracked by tax authorities. This increased transparency can help identify tax evaders and facilitate better monitoring of financial activity.
2.E-Invoicing: Streamlining Business Transactions
The introduction of e-invoicing is another key reform that can greatly improve Pakistan’s tax collection. By requiring businesses to issue digital invoices, the government can easily track the volume and value of transactions, ensuring that businesses accurately report their income. This will also reduce errors and inefficiencies in the tax filing process, ultimately improving compliance across the business sector.
Additionally, e-invoicing will allow businesses to streamline their tax reporting processes, making it easier for them to comply with tax laws and reducing the administrative burden on both the taxpayer and tax authorities.
3.E-Filing and Real-Time Data Collection
Moving tax filing online is another crucial step in modernizing Pakistan’s tax system. Through e-filing, taxpayers can submit their returns electronically, allowing tax authorities to process returns faster and with greater accuracy. The collection of real-time data will also help improve the targeting of audits and optimize tax collection strategies.
The FBR is already working on digital reforms like mobile apps for tax filing and automated audit systems. These measures, if properly executed, could substantially increase the efficiency of Pakistan’s tax system and reduce manual errors that often lead to misreporting or fraudulent activity.
Global Examples: What Pakistan Can Learn from Others
Several countries have successfully implemented digital tax systems to boost compliance and increase tax revenue. Estonia provides a strong example of how digitization can streamline tax administration. With an e-tax system that enables taxpayers to file returns, sign documents, and manage all their tax affairs online, Estonia has become one of the most efficient tax systems in the world.
Similarly, India’s Goods and Services Tax (GST) system, which requires businesses to submit digital invoices and upload transaction data in real-time, offers a useful blueprint for Pakistan. By digitizing tax filing and invoicing, India has improved tax compliance and expanded its tax base significantly. By adopting similar digital strategies, Pakistan can achieve better tax compliance, increase revenue collection, and bring more businesses into the formal sector.
Building a Sustainable Tax Future
For Pakistan to meet its fiscal needs and achieve long-term growth, comprehensive tax reforms are necessary. Digitization is a crucial tool in this reform process, but it must be part of a broader strategy that includes improving tax policy, strengthening enforcement mechanisms, and addressing gaps in digital literacy.
Pakistan’s Federal Board of Revenue (FBR) must lead this transformation. While the FBR has made strides in digitizing its operations, it must continue to adapt, leveraging new technologies and improving its infrastructure to meet the demands of the digital age.
However, implementing these reforms will not be easy. There are significant barriers to overcome, including the country’s digital infrastructure limitations, especially in rural areas, and the resistance to change from both tax authorities and businesses that prefer the old ways of operating. Public-private partnerships and targeted capacity-building programs will be essential for overcoming these challenges and ensuring the success of digital tax reforms.
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