Reform the reformers—I Sordid story of tax reforms in Pakistan  

Pakistan has missed the International Monetary Fund (IMF) condition on federal tax collection by a margin of Rs975 billion, as the Federal Board of Revenue (FBR) only managed to collect Rs13 trillion during the just-ended fiscal year… During the second review talks, the IMF had lowered the target by Rs151 billion, which it kept unchanged during the last review talks despite requests by the FBR to cut it to under Rs13.5 trillion—FBR misses IMF target by Rs975b, The Express Tribune, July 1, 2026

No institution can successfully reform itself when the proposed reforms threaten its own structure, powers, incentives and privileges—Towards broad, flat, low-rate and predictable taxes (Third revised edition 2024), Policy Research Institute of Market Economy (PRIME), Islamabad

This simple proposition explains why Pakistan’s tax administration remains trapped in a cycle of perpetual reform and recurring failure despite more than three decades of restructuring, donor-funded projects and IMF-sponsored programmes.

Every government promises tax reforms. Every international lender finances tax reforms. Every reform project claims to be transformational. Yet the outcome remains remarkably unchanged. The tax base remains narrow, economic activity remains inadequately documented, voluntary compliance remains weak and the burden of taxation continues to fall disproportionately on those already visible to the system. The problem is no longer one of implementation. It is one of design as highlighted in the above-cited book and reflected in the above-mentioned Press report as under:

‘It was the second consecutive year the tax authorities failed to achieve the goal by close to Rs1 trillion or more. In dollar terms, the FBR collected $4 billion less than the assigned target of Rs14.13 trillion set by the IMF and the government of Prime Minister Shehbaz Sharif in June last year. Subsequently, the IMF lowered the target to Rs13.979 trillion and maintained it at this level during the May review talks’.

Over the last three decades, Pakistan has received extensive technical assistance and financial support for tax administration reforms. The World Bank, Asian Development Bank (ADB), International Monetary Fund (IMF), Department for International Development (DFID) that merged with the Foreign & Commonwealth Office (FCO) in 2020 to become the Foreign, Commonwealth & Development Office (FCDO), and other development partners financed projects aimed at modernising tax administration, broadening the tax base and improving compliance.

Tax Administration Reform Project (TARP), Pakistan Raises Revenue Project (PRRP), Raftar and Remit were all presented as milestones on the road to a modern tax system. Yet after spending billions of rupees and receiving millions of dollars in loans and grants, Pakistan’s tax administration has become more intrusive, more complex and more coercive than at any time in its history.

This paradox deserves serious examination. If reform projects were successful, why does the economy remain largely undocumented? If technology has transformed tax administration, why does the tax filers remain so scare? If compliance mechanisms have improved, why are revenue targets becoming increasingly dependent on advance collections, withholding taxes and blocked refunds? If repeated restructuring was the solution, why does every new government announce another restructuring exercise?

The answer lies in a flaw embedded in the reform process itself. For decades, Pakistan has entrusted reform to the very institution that requires reform. The Federal Board of Revenue (FBR) has remained both the subject of reform and the principal architect of reform. This would be akin to asking any bureaucracy to redesign itself in ways that diminish its authority, alter established incentives and redistribute institutional power. No bureaucracy anywhere in the world functions that way. Institutions are designed to preserve themselves. They may accept modernisation. They may embrace technology. They may support procedural improvements. What they rarely do voluntarily is support reforms that fundamentally alter their structure, powers or influence.

Consequently, most reforms emerging from within tax administration follow a predictable pattern. Audit powers expand. Enforcement mechanisms become stronger. Information requirements increase. New compliance obligations are introduced. Reporting obligations multiply. Technology is deployed to monitor taxpayers more effectively.

The underlying structure, however, remains untouched. The tax system continues to rely excessively on withholding taxes. Documentation of economic activity remains inadequate. Tax expenditures benefiting powerful groups remain largely intact. Federal and provincial tax systems continue to operate in fragmented silos. Taxpayer rights remain secondary to revenue collection objectives.

The result is a tax administration increasingly efficient at pursuing documented taxpayers and increasingly ineffective at integrating undocumented economic activity into the formal system. This distinction is critical. Taxation and documentation are not the same thing.

Pakistan’s reform efforts have concentrated on improving the collection of taxes from documented sectors while neglecting the far more difficult task of documenting the economy itself. Technology has enabled more sophisticated scrutiny of existing taxpayers but has not substantially expanded the universe of taxpayers. This is why repeated reform programmes have produced a larger compliance burden without corresponding expansion of the distorted and punctured tax base.

The latest reform initiatives (sic) follow the same trajectory. Faceless audits, algorithm-based risk assessments, artificial intelligence systems and the proposed three-wing structure of FBR are being presented as evidence of transformational change. Yet these initiatives are fundamentally administrative in nature. They assume the existence of reliable, comprehensive and digitised economic data. That assumption does not reflect reality.

A substantial portion of Pakistan’s economy continues to operate through cash transactions and informal arrangements. Even under the Finance Act 2026, large segments of commercial activity remain outside mandatory integration and e-invoicing frameworks. In such circumstances, algorithms merely analyse incomplete information and repeatedly focus on those who are already visible to the system.

Technology cannot identify transactions that are never recorded. Artificial intelligence cannot tax economic activity that remains undocumented. Faceless audits cannot broaden a tax base that has never been properly documented.

The central weakness of Pakistan’s reform model is therefore conceptual. Reformers have treated taxation primarily as a revenue administration problem. In reality, it is a governance problem, an economic problem and a constitutional problem. The challenge is not merely to collect more taxes.

The challenge is to create conditions in which productive economic activity expands, voluntary compliance increases and documentation becomes an integral feature of economic life. This requires reforms extending far beyond FBR. It requires simplification of the tax structure, integration of federal and provincial databases, rationalisation of tax expenditures, expansion of digital payments, protection of taxpayer rights and a long-term strategy for formalising economic activity.

Most importantly, it requires recognition that tax reform cannot be left exclusively to tax administrators. Tax administrators should administer taxes. An independent body representing economists, constitutional experts, and experts in global taxation, technology specialists, accountants, business representatives, provincial stakeholders and parliamentarians should design tax reform. Such a body should operate independently of the institutions it seeks to reform.

Pakistan’s experience over the last thirty years offers a powerful lesson. Successive reform projects have generated new organisational charts, new technologies and new compliance mechanisms. What they have not generated is a tax system capable of supporting sustainable economic growth.

The recently approved Finance Act 2026 and provincial finance laws continue the familiar pattern. New obligations have been imposed. New enforcement mechanisms have been introduced. Revenue targets have increased. Yet the structural reforms required to transform Pakistan into a competitive, investment-friendly and high-growth economy remain absent. As Pakistan moves towards its centenary in 2047, the question is no longer, whether another reform project should be launched. The question is whether policymakers are finally prepared to acknowledge that the existing reform model has failed.

The lesson from three decades of experience is clear: administrative restructuring is not institutional reform, technological upgrades are not structural transformation and enforcement is not documentation. Until these distinctions are understood, Pakistan will continue to witness new reform programmes while the same structural weaknesses persist beneath the surface. The next parts will present a complete roadmap for institutional reforms to revamp the entire tax structure of the country.  [To be continued]

____________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.