Pakistan’s inflation rate reached 10.9% in April 2026, its highest level since July 2024 and, given current fuel-driven price pressures, could move towards 15% in the coming months.
A key driver is the sharp rise in domestic fuel costs. Since late February 2026, petrol prices in Pakistan have increased by approximately 50%, while diesel rose by about 42%. This represents the steepest percentage increase in South Asia over the same period compared with almost no change in India, a ~15–16% rise in Bangladesh, and approximately 25–36% in Sri Lanka. Petrol prices in Pakistan, as well as electricity tariffs, are also the highest in South Asia. Not surprisingly, Pakistan is currently the only country in South Asia with double-digit inflation.
Why? The principal culprit is Pakistan’s highly extractive tax regime.
Pakistan’s fiscal narrative is usually packaged in reassuring aggregates: revenues climbing, the tax-to-GDP ratio inching up, and every budget hailed as a step towards reform. In FY2025, the Federal Board of Revenue collected approximately Rs11.7 trillion in taxes, with revised targets near Rs11.9 trillion. Add the Petroleum Development Levy—economically, a consumption tax in all but name, and total federal extraction climbs to roughly Rs13 trillion.
On paper, this looks like steady progress. But peel back the aggregates and a sharper truth appears: Pakistan is not broadening its tax base. It is squeezing harder on a narrow band of highly visible, easily collected streams—imports, energy use, telecom bills, and formal financial flows—while vast swathes of the economy (retail, agriculture, property, and the informal sector) remain lightly touched or entirely outside the net.
Even this understates the real burden. A massive quasi-fiscal layer hides inside electricity tariffs in the form of capacity payments to power producers, fixed contractual obligations recovered directly from household and industrial bills. Once included, the state’s reach is revealed as not just narrow but deeply embedded in the cost of daily life.
Income Tax Collection Relies on Withholding Taxes
Income Tax Composition (FY2025)
| Component | Share |
| Withholding at source | 59% |
| Advance tax | 33% |
| Assessed returns & enforcement | 8% |
Nearly nine-tenths of income tax is collected through withholding tax and advance tax before income is fully earned. Salaries are taxed at source, contracts at payment, and bank interest at credit. This is less a tax on income than a tax on formal visibility itself.
According to the Pakistan Bureau of Statistics’ Household Integrated Economic Survey (HIES) 2024–25, food alone accounts for 37% of national household spending, housing/water/electricity/gas/fuels for 26%, transport for 6.2%, and communication for 1.8%
Taxing Necessities: Electricity, Fuel, Telecom and Capacity Payments
The second pillar is consumption-linked extraction. Three channels dominate: petroleum, electricity, and telecommunications. Electricity now carries a double burden: conventional GST and surcharges on one layer, and massive embedded capacity payments on the other.
Recent official data put capacity payments at around Rs1.9–2.1 trillion in FY2025 (with some estimates reaching Rs2.0–2.3 trillion), making them one of the largest implicit levies on household and business cash flows. These are textbook rent-seeking: a small circle of well-connected power producers—with excessive debt levels and assured dollar-based returns on equity—locked into take-or-pay contracts that guarantee returns irrespective of actual generation, while the public foots the bill for overcapacity and inefficiency.
Consumption-Linked Burden (FY2025)
| Category | Rs trillion |
| Petroleum taxes and levies | 1.5 – 1.6 |
| Electricity taxes & surcharges | 0.5 – 0.6 |
| Electricity capacity payments (embedded) | 2.0 – 2.3 |
| Telecom & digital taxes | 0.35 – 0.40 |
| TOTAL CONSUMPTION BURDEN | 4.3 – 4.9 |
This is no marginal add-on. It ranks among the largest recurring claims on household incomes outside formal income tax.
In macro terms, this consumption-linked extraction equals roughly 3.8–4.3% of GDP—Pakistan’s economy stood at Rs114.7 trillion in FY2025—and 4.5–6% of private consumption.
But the averages mask the pain. According to the Pakistan Bureau of Statistics’ Household Integrated Economic Survey (HIES) 2024–25, food alone accounts for 37% of national household spending, housing/water/electricity/gas/fuels for 26%, transport for 6.2%, and communication for 1.8%. These are precisely the channels loaded with the consumption extraction.
For middle-income households, where essentials already dominate budgets, the effective burden of energy and phone costs climbs to 8–12% of disposable income. For lower-income families—whose spending is almost entirely on necessities the hit can exceed 30% once fixed electricity charges (including capacity payments that comprised up to 61% of the Rs2.94 trillion power bill), fuel pass-through effects, and telecom levies are factored in. Higher earners, with far more room for discretionary spending, feel it far less. The system is officially flat. In practice, it is sharply regressive.
Essentials, Not Luxuries
These are not taxes on wealth or discretionary spending. They fall on the infrastructure of daily life: electricity that lights homes and powers businesses, fuel that moves goods and people (and inflates food prices), and telecom that has become indispensable for jobs, banking, schooling, and government services.
Capacity payments make the problem worse. Fixed regardless of actual power generated, they convert the power sector’s structural inefficiencies—over-capacity, poor utilisation, and costly contracts—into a nationwide surcharge passed straight to consumers.
The FY2026 budget set an ambitious FBR target of approximately Rs14 trillion—requiring over Rs2 trillion in extra collections in a single year
The same pattern repeats across the board: in petroleum pricing, where oil marketing companies and refineries secure higher margins; in urea and fertiliser costs that burden farmers; in sugar and wheat markets where middlemen and industry lobbies prevail; and in government spending where political families, ministers, and senior bureaucrats extract their share. Every time the lobbies of the powerful clash with the interests of ordinary Pakistanis, the powerful win. In effect, policy failures and the victories of these entrenched interests have been turned into household liabilities.
Imports: The Easy Target
Imports remain the second major pillar, excluding energy.
Import-Based Taxation (FY2025, non-energy)
| Component | Rs trillion |
| Import GST | 1.9 – 2.0 |
| Customs duties | 1.0 – 1.05 |
| Import-stage withholding | 0.7 – 0.8 |
| TOTAL | 3.6 – 3.8 |
Imports (excluding energy) account for nearly 30% of federal revenue. The reason is simple administrative convenience: goods are centralised, documented, and impossible to evade at the ports—unlike the fragmented domestic retail, agriculture, or services sectors.
Sectoral Composition of Federal Revenue (FY2025)
| Sector | Share |
| Imports (non-energy) | 28–30% |
| Consumption-linked extraction | 18–20% |
| Banking & financial sector | 8.5–9.5% |
| Manufacturing | 14–16% |
| Contracts & services | 6% |
| Salaried individuals | 5% |
| Remaining economy | 10–13% |
The pattern is unmistakable. Imports and consumption dominate. Electricity has quietly become a quasi-fiscal tool. And large parts of the domestic economy continue to punch below their economic weight.
Tax Subsidies: The Missing Half of the Fiscal Story
An underemphasised dimension of Pakistan’s fiscal structure is tax expenditures—revenues legally due but foregone through exemptions, zero-rating, preferential rates, and SRO-based concessions. In FY2023–24, these amounted to Rs2,434.73 billion ($8.7 billion), equal to 2.32% of GDP and 26.2% of FBR tax collection. This is not marginal leakage; it is a parallel fiscal architecture embedded in law.
The composition is revealing: sales tax exemptions dominate at Rs1,237.11 billion, followed by customs duty concessions at Rs652.39 billion and income tax expenditures at Rs545.23 billion. Within sales tax, petroleum products alone account for a large share of foregone revenue—around Rs1.25 trillion—reflecting a quasi-fiscal system where fuel taxation is adjusted through zero-rating and offset by administered levies rather than normal VAT incidence.
The beneficiaries are structurally embedded: import-heavy manufacturing, energy generation, logistics, export processing regimes, and input-intensive industry.
The result is a dual fiscal order: high-certainty taxation of consumption, and negotiated fiscal relief for organised capital and politically entrenched sectors.
2026 Budget: More of the Same
The FY2026 budget set an ambitious FBR target of approximately Rs14 trillion—requiring over Rs2 trillion in extra collections in a single year. The chosen tools? Higher withholding rates, expanded transaction taxes, steeper telecom levies, continued heavy petroleum pricing, and tighter import enforcement.
This is not base-broadening. It is intensification along the same well-worn paths.
The Underlying Reality
Pakistan’s tax system is often called “underdeveloped”. The harsher truth is that it is highly sophisticated inside a narrow perimeter—and deliberately weak beyond it to shield the powerful few.
It excels at taxing imports at the ports, fuel at the pumps, electricity through monthly bills, telecom through usage, and formal money through withholding. It struggles to reach retail trade, agriculture, urban property, or the sprawling informal economy.
This is no accident. It is the deliberate outcome of intensified rent-seeking, where powerful lobbies in energy, petroleum, agriculture inputs, and other protected sectors capture policy to extract guaranteed rents without corresponding investment or broad-based growth.
For example, the net profit of Fauji Fertiliser Limited, Pakistan’s largest fertiliser company, rose by almost 2.5 times to Rs73.6 billion in 2025 from Rs29.7 billion in 2023. The net profit of Fatima Fertiliser, the third largest, almost doubled to Rs42 billion in 2025 from Rs23 billion in 2023.
At the same time, the wheat economy has moved in the opposite direction. Farmers faced sharply rising input costs, particularly urea, diesel, and electricity for irrigation, while the government procurement price failed to keep pace with production costs in real terms.
The result has been a compression of farm margins, with many wheat growers effectively selling below cost when adjusted for fertiliser and energy inflation. In several regions, rising fertiliser prices alone absorbed a disproportionate share of the incremental support price, turning nominal price increases into real income stagnation or loss for producers.
Revenues of oligarchs and rent-seekers rise. Real per capita incomes for ordinary Pakistanis do not remain stuck below levels seen more than a decade ago. Pakistanis have not been able to get a break.
Reclassifying the PDL does not change the picture of the real tax burden. Including electricity capacity payments completes it.
Once the incidence on households is laid bare, confirmed by the HIES data showing how essentials crowd out poorer families’ budgets, the verdict is clear: Pakistan’s fiscal system is not expanding with the economy. It is digging deeper into a confined base, efficient, concentrated, and increasingly reliant on the necessities of daily life.
For middle- and lower-income Pakistanis, this means a double-digit implicit tax burden extracted not through annual filings, but through the monthly grind of keeping the lights on, the phone charged, and the kitchen running—while the powerful few continue to win.