THE unwarranted and illegal war imposed on Iran represents an extraordinary exogenous shock for developing countries. Pakistan is particularly vulnerable on this front. It has an outsized import dependency on a wide range of products, from energy to food, and from industrial raw materials to finished goods. Remittances from non-resident Pakistanis keep not just the external account afloat, but also provide a vital lifeline to 30 to 40 million family members at home. Amplifying Pakistan’s exposure to the conflict in the neighbourhood is the fact that the central node for both trade flows and capital flows that the country so heavily depends on is the Gulf region. Compounding our vulnerability even further is the fact that we have virtually no, or limited, buffers in all critical areas of economic security — energy, foreign exchange reserves, food or fiscal space.
The absence of fiscal buffers is illustrated not just by the high levels of public debt and the large share of interest payments in the budget, on the one hand, but also by the still-narrow and weak tax revenue base. Despite the extraordinary increase in tax collection by FBR over the past four years, most of it has come from the same base — corporate taxpayers, imports, salaried individuals and ordinary Pakistanis paying via regressive indirect taxation.
The recent resort by the government to increasing petroleum levies yet again to plug a gaping shortfall in FBR’s tax collection target aptly demonstrates the unresolved taxation dilemma. Due to its failure to broaden the tax base, the government saw it appropriate instead to nearly double the petroleum levy on petrol from Rs84 per litre before the start of the Iran war to Rs161 per litre as of April 3. As a result, the 54 per cent increase in the reference price of crude oil imported by Pakistan ballooned overnight to a 72pc increase paid by Pakistanis at the petrol pump. It is worth noting that the petroleum levy, along with the newly imposed carbon levy, is the visible part of the taxation structure on this essential commodity. The ex-refinery price incorporates the customs duty and general sales tax (GST) levied by the government at the import stage. Combined, at its April 3 peak, the incidence of tax on a litre of petrol had shot up to 41pc.
Ordinary Pakistanis are being made to pay for the state’s failure to tax its elite constituents.
While this decision was reversed quickly after the massive uproar across the country, bringing the tax incidence down to 28pc currently, petroleum taxation still remains excessive by virtue of the fact that it is an important input in virtually all economic activity, and the fact that it is inherently extremely regressive in nature once its indirect effects are accounted for. While petrol and diesel constitute a lower proportion of direct expenditure for poorer households, the cascading effect of price increases on transportation, food and electricity bills means that they end up with a higher net burden relative to income and expenditure.
To put the burden in perspective, an interesting comparison of the international retail price of petrol in various countries versus their per capita income was done recently. It showed that Pakistan had the highest retail price of petrol relative to per capita income in the world after Ethiopia.
Increasing reliance on taxation of petroleum products is demonstrated by the fact that the tax incidence on a litre of petrol was as low as under 10pc in 2022. With projected collection at around Rs1.5 trillion in FY26, this revenue source is now the second-largest base of indirect taxation for the government, providing the equivalent of 16pc of total tax collected by FBR.
In conjunction with the increase in GST coverage and the recent introduction of fixed charges in electricity bills for even lifeline consumers, the heavy reliance on petroleum taxation marks increased regressivity in the tax structure over the past few years.
The inequity of the country’s tax regime, in vertical as well as horizontal terms (i.e., between different income groups as well as across the same income group, or among similar businesses), is mirrored across the tax spectrum. According to FBR, only around 5,000 companies out of approximately 125,000 registered firms are tax compliant, accounting for 90pc of corporate income tax paid. Out of these tax-compliant firms, a narrow base of approximately 300 companies in the five main taxpaying sectors accounts for the bulk of tax paid. The situation with regard to sales tax is even more skewed towards a small base of compliant corporates, most of which are among the dwindling number of multinational corporations left in the country.
The discriminatory effect of policy as well as weak enforcement is most visible in the sectors of the economy that are prone to smuggling, under-invoicing and sales tax evasion. These include cigarettes, tyres, tea, sugar, beverages and smuggled petroleum.
While FBR has stepped up its enforcement activity, notably via its flagship Track-and-Trace System, it has met with less-than-anticipated overall success so far. According to reports, FBR has made inroads in the sugar sector, but sectors such as tobacco continue to evade compliance barring the two multinational companies involved. It is reported that out of approximately 44 firms engaged in cigarette production in the country, the two MNCs, with a market share of less than 50pc, together account for 95pc of tax paid by the entire sector. The consequence of this is that the government loses an estimated Rs300 billion in potential tax collection from one sector alone.
The failure of successive governments to broaden the tax base, under the aegis of consecutive IMF programmes, has meant that the entire edifice of government tax revenue collection is built on just a few revenue spinners. The taxation of petroleum and imports has become an important fiscal anchor despite the adverse implications for businesses as well as less-affluent households in a tax system that is pivoting towards greater regressivity.
The writer has been a member of several past economic advisory councils under different prime ministers.
Published in Dawn, April 18th, 2026
