The government’s reliance on electricity bills as a convenient vehicle for tax collection has exposed one of the most persistent weaknesses of Pakistan’s taxation system. The state finds it easier to collect more from people and businesses already within its reach than to bring those who remain outside the formal tax net into the system.
The Federal Board of Revenue (FBR) has collected nearly Rs1.9 trillion in sales and income taxes through electricity bills over the past four years. The figure may initially appear impressive, particularly at a time when the government is under constant pressure to increase revenues. But it should instead prompt a more uncomfortable question: why has electricity consumption become such an important source of tax collection in a country where millions of potential taxpayers remain outside the formal tax system?
The answer points to a fundamental imbalance in the way taxation is administered. Rather than broadening the tax base, improving documentation and identifying people and businesses that should be paying taxes, the state has increasingly relied on mechanisms that allow it to collect revenue from those it can easily identify.
Electricity consumers are an obvious target. Their consumption is recorded, their bills are generated regularly and payment can be enforced through the threat of disconnection. This makes the electricity bill an extremely efficient collection mechanism from the government’s perspective. But administrative convenience does not necessarily make a tax fair.
The problem becomes even clearer when considered alongside the revelation that between Rs400 billion and Rs500 billion in adjustable income tax withholding goes unclaimed every year. The money is collected but is not subsequently claimed by eligible taxpayers, indicating just how complicated and uneven the existing system has become. The situation creates an unusual arrangement in which people outside the formal tax net can effectively avoid becoming documented taxpayers while still contributing through indirect taxation. At the same time, consumers who may not have a direct income-tax liability can find themselves paying amounts collected through their electricity bills simply because they happen to consume electricity.
The cumulative burden falls particularly heavily on ordinary households. Electricity itself has become increasingly expensive because of tariffs, capacity payments, circular debt-related costs, surcharges, fuel price adjustments and other charges. Adding multiple forms of taxation to an already inflated electricity bill makes the monthly payment increasingly difficult for families and small businesses to absorb.
The FBR chairman recently told a parliamentary panel that the sales tax component of electricity bills includes normal sales tax, extra tax, further tax and tax imposed on electricity supplied to retailers. Income tax is also withheld from industrial and commercial consumers and, in certain cases, domestic consumers. The FBR has also argued that electricity enjoys significant concessions and suggested that there may be room for further taxation. But this raises an important question: how much additional pressure can consumers realistically absorb?
Electricity is not a luxury for most households. It is an essential service. Families need it for lighting, cooling, refrigeration, education and communication, while businesses require it to operate. When taxes are embedded into electricity bills, the state is effectively using access to an essential service as a mechanism for collecting revenue.
One member of the parliamentary panel reportedly described the practice as “tantamount to coercion”. The description may sound harsh, but it captures the central concern. A tax system should first establish who is liable to pay, determine the amount due and then collect it through a transparent process. Using an electricity connection as the point of collection reverses that logic: the state collects first and leaves the consumer to establish whether the amount was actually payable.
This is particularly problematic when the tax is adjustable or refundable. A taxpayer may eventually be entitled to claim an amount back, but the process can be complicated, time-consuming and difficult for ordinary consumers to navigate. For households and small businesses facing cash-flow pressures, even temporarily losing access to money can be a significant burden.
More importantly, this approach does little to solve Pakistan’s underlying tax problem. The country does not primarily suffer from an inability to collect taxes from people who are already documented. Its deeper challenge is the narrowness of the tax base and the large informal economy that remains difficult to document and assess.
The state must therefore distinguish between increasing tax collection and improving taxation. The two are not necessarily the same thing.
A government can raise revenue quickly by increasing withholding rates, adding levies to utility bills or imposing additional charges on existing taxpayers. But such measures can create resentment, distort economic incentives and place a heavier burden on those who are already compliant. They may also discourage businesses and households from remaining within the formal economy if compliance simply results in higher costs.
A sustainable tax system requires a broader base, stronger enforcement and greater trust. Individuals and businesses that have taxable incomes should be identified through modern data systems, cross-checking of financial information and effective documentation. At the same time, those who are not legally liable to pay income tax should not be treated as convenient sources of revenue merely because they receive an electricity bill.
The state must also address the issue of unclaimed adjustable withholding taxes. If hundreds of billions of rupees remain unclaimed every year, the government should determine why taxpayers are unable or unwilling to recover money that is legally due to them. Simplifying the refund and adjustment process could improve confidence in the tax system while reducing the perception that withholding taxes are simply another form of permanent taxation.
Pakistan cannot build a stronger fiscal system by repeatedly squeezing the same group of compliant consumers. The objective should be to bring more people into the tax net, not to make those already inside it pay more.
The collection of nearly Rs1.9 trillion through electricity bills should therefore not be celebrated merely as a revenue achievement. It should be viewed as a warning about the direction of fiscal policy. When an electricity bill becomes one of the easiest ways for the state to collect taxes, the real question is not how much more can be extracted from consumers. It is why the government has not yet built a tax system capable of reaching those who remain outside the net.
Until that question is answered, revenue collection will remain easier than tax reform—and ordinary consumers will continue paying the price.