FBR’s 5.2pc direct-tax illusion

Celebrations at Federal Board of Revenue (FBR) headquarters on July 1, 2026 were unusually theatrical. Finance Minister Muhammad Aurangzeb called the year’s collection a “historic” and “landmark” achievement, attributed it to sustained reforms, and invited officers to give Chairman FBR Rashid Mahmood Langrial and his team a standing ovation. The official press release credited strong revenue performance with helping Pakistan achieve its lowest fiscal deficit and highest primary surplus. The Finance Division’s subsequently released ‘Fiscal Operations for July-June 2025-26’ supplies a less flattering audit. Against gross domestic product (GDP) of Rs. 126. 870 trillion, FBR collected Rs. 13. 010 trillion, or 10. 3 percent of GDP. “Direct taxes” were Rs. 6. 586 trillion, equal to 5. 2 percent of GDP; sales tax Rs. 4. 254 trillion, customs duty Rs. 1. 331 trillion and federal excise duty Rs. 840 billion. Formally, direct taxes slightly exceeded indirect taxes. Economically, this classification is deeply misleading. Begin with the target. The original fiscal year (FY) 2025-26 target was Rs 14. 130 trillion. It was reduced more than once and finally brought down to Rs 12. 957 trillion. Crossing the last, twice-revised benchmark was then advertised as achievement of the annual target. Measured against the original figure, collection fell short by about Rs 1. 12 trillion. Moving the goalpost cannot convert a shortfall into institutional reform. Nor did revenue productivity improve. FBR’s own ‘Year Book 2024-25’ reported Rs 11. 744 trillion and an FBR tax-to-GDP ratio of 10. 3 percent. In FY2025-26, collection rose by about 10. 8 percent to Rs 13. 010 trillion, while the GDP denominator rose at almost the same rate. The ratio remained 10. 3 percent. The additional rupees reflect expansion of nominal values, higher rates and automatic collection points; they do not establish widening of the tax base or better assessment and enforcement. The official admission that direct taxes are only 5. 2 percent of GDP is more damaging than the headline suggests. A tax does not become direct merely because it is collected under the Income Tax Ordinance, 2001. A genuine income tax is imposed on net income according to ability to pay. Minimum taxes on turnover, presumptive/minimum taxes on gross receipts and final or separate-block levies attached to transactions do not satisfy that test. In many cases, their burden is incorporated into cost and passed onto consumers. They are income taxes in the ledger but indirect taxes in economic effect. The latest available mode-wise evidence exposes the scale of this illusion. For FY2024-25, FBR Year Book recorded net income tax of Rs 5. 713 trillion. Withholding taxes were Rs 3. 372 trillion; so-called voluntary payments were Rs 2. 115 trillion, of which advance tax alone was Rs 1. 894 trillion; and collection from current and arrear demand was merely Rs 266. 7 billion. As shown in our earlier article [‘FBR’s disastrous ‘withholdingisation’, Business Recorder, April 10, 2026] 95. 4 percent of income tax came through withholding, advance tax and payment with returns. Only 4. 6 percent represented collection on demand—the visible contribution of assessment and enforcement—before considering how much was subsequently reversed in appeal. Composition matters even more. The same yearbook shows withholding from contracts of Rs 728. 4 billion, salaries Rs 605. 6 billion, bank interest and securities Rs 475. 1 billion, imports Rs 421. 8 billion, electricity bills Rs 144. 4 billion, telephone use Rs 123. 4 billion, exports Rs 123. 8 billion and property purchase and sale Rs. 235. 9 billion. Salary tax is plainly direct. Some taxes on investment income may also be borne directly, although separate-block treatment abandons aggregation and progression. Much of the balance is collected from transactions irrespective of the recipient’s final net income and is adjustable only in theory for millions who cannot afford compliance cost of claiming refunds. Fiscal Operations does not disclose FY2025-26 division between normal income tax and minimum, presumptive and transactional levies. That omission is itself material. Applying the composition disclosed in the latest FBR and Revenue Division yearbooks, and excluding taxes that operate on turnover, gross receipts or transactions rather than net income, reduces the economically defensible income-tax ratio to around 3 percent of GDP. This is an approximation, not official published figures. It is, however, more faithful to incidence than the unqualified 5. 2 percent claim. Correspondingly, the effective indirect burden within FBR’s 10. 3 percent ratio is closer to 7 percent than the officially reported 5. 1 percent. This conclusion is consistent with our detailed six-part examination of FBR’s FY2024-25 performance in another newspaper. Nearly three-fifths of sales tax in FY2024-25 was collected at import stage. Customs duty is pre-collected before clearance. Domestic sales tax is concentrated in electricity, petroleum products, sugar, cement and a few documented sectors. Banks, utility companies, importers and other withholding agents perform the bulk of collection. FBR’s claim to administrative success rests substantially on money that reaches the treasury before any meaningful audit or assessment. The wider fiscal picture reinforces the point. Total non-tax revenue reached Rs 5. 555 trillion, or 4. 4 percent of GDP, including Rs 2. 428 trillion in State Bank profit and Rs 1. 567 trillion in petroleum levy. The latter is an indirect, price-raising extraction kept outside the divisible pool. The celebrated consolidated deficit of 2. 6 percent also depended on a provincial surplus of Rs 1. 450 trillion; the federal deficit itself was Rs 4. 763 trillion. These are important accounting outcomes, not proof that FBR has been transformed. The Minister also praised payment of Rs. 599 billion in refunds. Taxpayers need the stock of outstanding, verified refunds, their age and the time taken to settle them—not merely the amount released, including a last-day payment presented as a record. Article 19A of the Constitution requires disclosure of public-interest data. FBR should publish, tax by tax, gross collection, refunds due and paid, collection under normal, minimum, presumptive and separate-block regimes, payments with returns, assessments sustained after appeal, arrears recovered, and new filers declaring taxable income. Artificial intelligence, scanners and digital dashboards cannot cure a defective tax philosophy. Pakistan needs taxation of real income at broad, low and predictable rates; withdrawal of oppressive minimum and presumptive regimes; sharply rationalised withholding; prompt refunds; faceless, risk-based audit; and firm action against untaxed wealth rather than repeated squeezing of salaried persons and documented businesses. The issue is not whether Rs 13. 010 trillion is the largest nominal collection in rupees. Inflation and a growing nominal economy make new nominal records routine. The test is whether FBR raised the tax-to-GDP ratio as per actual potential, met the original target, expanded voluntary compliance, taxed according to ability to pay and reduced reliance on pass-through levies. FBR’s own figures answer every question in the negative. The standing ovation celebrated an accounting label. The 5. 2 percent direct-tax ratio—and the roughly 3 percent beneath it—records persistent failure. Copyright Business Recorder, 2026

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