The Revenue Division’s Year Book for 2024-25, published by the Federal Board of Revenue (FBR), reveals several noteworthy insights into the country’s tax collection trends. The publication covers all major tax categories in detail. According to the Year Book, there has been an encouraging rise in the tax revenue growth rate during 2024-25. The total tax collected is estimated to have increased by 26.1 percent in 2024-25, compared to the relatively low growth rates of 9.1 percent and 9.4 percent recorded in the previous two years.

However, despite this positive momentum, the FBR once again failed to meet the revenue target set in the federal budget for 2024-25. Against the ambitious target of Rs12,970 billion, the actual revenue collected amounted to only Rs11,744 billion—reflecting a shortfall of Rs1,226 billion. Later in the fiscal year, the original target was revised downward to Rs11,901 billion under an agreement with the International Monetary Fund (IMF). Consequently, as indicated in the Year Book, the shortfall now stands at Rs157 billion. This gap is partly explained by a decline in overall tax revenues from POL products—from Rs781 billion in 2023-24 to Rs754 billion in 2024-25—primarily due to a 15 percent reduction in the rupee value of POL imports.

The fundamental mistake was that the original revenue target was excessively ambitious and disconnected from prevailing economic realities, assuming a 39 percent growth over the actual figures achieved in 2023-24. Several factors contributed to the lower-than-expected revenue performance, including a steep decline in the inflation rate from 23 percent in 2023-24 to just 4.5 percent in 2024-25. GDP growth remained below 3 percent, while the rupee value of imports increased by only 5.4 percent. Even so, the federal tax-to-GDP ratio rose from 8.9 percent in 2023-24 to 10.2 percent in 2024-25, indicating an improvement of 1.3 percent.

Category-wise, excise duty grew by 32.8 percent, income tax by 27.9 percent, sales tax by 25.9 percent and customs duty by 16.4 percent. Within the income tax category, the fastest increases were observed in collection on demand, which grew by 110 percent, and payments with returns, which increased by 37 percent. However, both sources combined still account for only 9 percent of total income tax revenues. Withholding and advance taxes grew by 24 percent. Due to higher rates imposed last year, withholding tax on salaries surged by an extraordinary 54.7 percent. In addition, advance tax on sales of retailers and wholesalers rose by a remarkable 133 percent, with the total collection reaching Rs63 billion.

Despite the increase in revenue, it is important to note that the FBR has not succeeded in broadening the tax base. According to FBR officials, many high-income professionals—including doctors, lawyers and architects—do file tax returns but declare incomes far below their actual earnings. Since these individuals do not contribute their fair share of taxes, the burden shifts heavily onto the salaried class, which is subjected to an overall income tax rate of 38.5 percent, including surcharge.

A closer analysis of tax collection further reveals that the FBR has struggled to curb tax evasion in several sectors, such as cigarette manufacturing. Revenues from this industry have fallen by 4 percent recently. Evidence also shows that significant tax leakages are concentrated within the top five percent, particularly the top one percent, yet no effective measures have been introduced so far to plug these leakages.

Increasing tax revenue in the current financial year and beyond remains a major challenge for the FBR. The targeted increase in annual revenues is 20.3 percent, but during the first quarter of the current year, the actual growth achieved was only 12.5 percent, reflecting a shortfall of approximately Rs200 billion. The future performance of the FBR will depend mostly on the expansion of tax bases, which in turn will be influenced by real economic growth, inflation trends, and movements in the nominal exchange rate.

Comprehensive reforms in the FBR are long overdue to improve field-level performance of the tax machinery. At present, the government relies heavily on punitive taxes, which undermine compliance. International experience shows that tax compliance improves when tax rates are rationalized. Despite repeated promises, the government has made little progress in reducing power sector losses, forcing honest bill payers to shoulder the burden of non-payers. Alongside restructuring the FBR, the government should prioritize lowering tax rates, especially for the salaried class.

Rampant corruption continues to plague the tax system, and unless the entrenched nexus between corrupt tax officials and habitual tax evaders is decisively dismantled, meaningful improvement in revenue collection will remain elusive.