Published in Business Recorder on Friday, 20 Feb:
By Ali Akbar Ghanghro
Head Priority Sectors & Research – PBA
Pakistan struggles every year with a widening fiscal deficit which also places pressure on how the country manages its external debt. One of the key conditions of the IMF Programme relates to tax collection both in terms of the total amount collected and the breadth of the tax base, i.e., how much tax is collected and how many individuals and businesses are contributing.
While average tax collection has grown in nominal terms (average annual growth of 24 percent in the last five years), the tax-to-GDP ratio has hovered around 9 percent over the past five years. This indicates that although the economy has expanded, tax collection in real terms has remained largely stagnant. Put simply, higher tax receipts have primarily resulted from inflation-driven price increases and/or squeezing the existing tax base rather than a genuine widening of taxpayers.
Pakistan’s challenges with tax collection and competitiveness are well documented. Weak enforcement and poor compliance limit the state’s ability to meet its revenue targets. Moreover, the narrow tax base means that certain businesses, sectors, and individuals shoulder the majority of the tax burden.
With a shadow or informal economy estimated at 35 percent (official estimates) to 60 percent (independent sources) of total GDP, many entities such as those in retail and real estate remain outside the tax net.
Among the formal sectors, the banking industry bears a disproportionate burden of government tax policy. Banks are one of the most documented and tightly regulated sectors of Pakistan’s economy. Their earnings are fully visible, profits are transparent, and operations are embedded in the formal economy, making them a reliable source of tax revenue for the state.
Because of this formal nature, the banking sector is heavily taxed. Banks face a corporate income tax rate of 39 percent in addition to a Super Tax of up to 10 percent, depending on net income.
According to the State Bank of Pakistan, the effective tax rate on banks reached 54.1 percent in FY25, up from 51.6 percent in FY24. By contrast, non-bank corporates of similar size are taxed between 30–39 percent, depending on applicable Super Tax.
In the region, corporate tax rates for banks are around 37.5–40 percent in Bangladesh, ~30 percent in India and Sri Lanka, 22 percent in Indonesia, 24 percent in Malaysia, 20 percent in Vietnam and 25 percent in South Korea. Unlike Pakistan, most of these countries do not impose additional sector-specific surcharges like a Super Tax which results in the effective tax burden on banks being substantially lower. The comparatively high taxation in Pakistan helps explain why foreign investment in the country’s financial sector remains limited.
While higher taxation provides immediate revenue, it impedes Foreign Direct Investment. International investors prioritize markets with competitive returns and even before the imposition of the Super Tax, Pakistan’s tax and regulatory environment increased the cost of doing business relative to regional peers.
This contributed to the exit of firms such as Procter & Gamble, Shell, Telenor, Pfizer, Lotte Chemicals and financial institutions, including Barclays and HSBC, over the last decade. Consequently, foreign capital flows toward neighbouring markets, depriving Pakistan’s financial sector of the liquidity and expertise necessary for growth. In FY25, net FDI into the financial sector was USD 713 million, compared with USD 9+ billion in India and USD 1.3 billion in Turkey.
When foreign investors shy away due to low after-tax returns, the government must borrow more heavily from local banks creating a cycle where the financial sector becomes a captive lender rather than a catalyst for private enterprise. High corporate taxes act as a direct barrier to financial inclusion, penalizing institutions tasked with bringing the unbanked into the formal economy.
Using formal account ownership as a proxy, the World Bank reports only 27 percent of Pakistani adults are banked in 2024 compared with 90 percent in India, 70 percent in Vietnam and 43 percent in Bangladesh.
High tax rates also squeeze bank margins, forcing higher fees and wider interest spreads, which make basic banking services expensive for low-income users. With less capital to invest in digital infrastructure or rural branches, banks park liquidity in low-risk government securities rather than supporting SME credit.
This reinforces the informal economy, limits entrepreneurship, slows Pakistan’s integration into the global digital economy and restricts access to finance for marginalized populations across regions.
In FY25, Pakistan’s total tax collection amounted to PKR 11.744 trillion, against a target of PKR 11.901 trillion. Direct taxes accounted for 49.3 percent of total collection (PKR 5.791 trillion), with overall tax revenue growing 26.3 percent year-on-year. During this period, the banking sector was the single largest contributor, with its contribution rising 19.1 percent over the previous fiscal year. The top three contributing sectors were:
•Banking: PKR 1.127 trillion (9.6 percent)
•Petroleum: PKR 1.121 trillion (9.5 percent)
•Power: PKR 0.858 trillion (7.3 percent)
While banks contributed approximately 9.6 percent of total tax revenues, their share of direct taxes was around 17.5 percent, making them by far the largest contributor in this category.
This heavy reliance on the banking sector makes tax revenues highly sensitive to the sector’s profitability. A sensitivity analysis indicates:
•A 25 percent reduction in banking sector net income would lower direct tax collection by 5.0 percent and total tax collection by 1.9 percent.
•A 50 percent reduction in net income would reduce direct taxes by 8.4 percent and total tax revenues by 3.7 percent.
Tax policy is a fiscal lever that inevitably picks winners and losers. However, an equitable tax system would be designed to be fair and growth oriented. The banking sector has been a dependable contributor by virtue of being part of a small (and shrinking) formal economy. Heavy reliance on such sectors not only reduces overall economic competitiveness but also leaves the state vulnerable as it cannot diversify the sources of its revenues.
Reducing the corporate tax burden is not merely industry relief but a strategic necessity for national economic stability. Aligning banking sector tax rates 10–15 percent closer to regional benchmarks could attract foreign capital, encourage banks to lend more to the private sector instead of government securities and accelerate the transition to a digitized, inclusive financial system that serves all citizens rather than primarily funding the state’s fiscal needs.
Copyright Business Recorder, 2026