Does Pakistan Federation Run on Karachi Taxes? A Review of a Misconception

Tax Distribution in Pakistan: An Imbalanced System

In Pakistan, there is a clear imbalance in tax collection, with indirect taxes outweighing direct taxes. According to data from the Federal Board of Revenue (FBR), the general trend is as follows:

• Indirect Taxes: Approximately 60% of total tax revenue. These include sales tax, customs duty, and excise duty. These taxes are levied on goods and services, placing the burden directly on consumers, whether rich or poor.
• Direct Taxes: Around 40% of total tax revenue. These include income tax, corporate tax, and property tax. These taxes are based on income or assets, making them relatively fairer.

Within direct taxes, another imbalance exists, where the salaried class is the largest contributor to the tax system. This is because taxes for salaried individuals are deducted at source (withholding tax) from their salaries, leaving almost no room for tax evasion.

In contrast, the business class, including traders and industrialists, often avoids taxes despite their income. The main reasons for this include tax evasion, staying outside the tax net, and underreporting income.

According to estimates:

• Salaried Class: Contributes over 50% to direct tax collection in Pakistan.
• Business Class: Pays significantly less tax relative to their total income, often benefiting from tax rebates, exemptions, and undeclared income.

As a result, Punjab contributes the most to Pakistan’s tax revenue. Several key factors explain this:

• Population: Punjab is Pakistan’s most populous province, accounting for approximately 53% of the country’s total population. A larger population leads to higher consumption, which increases the collection of sales tax and other indirect taxes.
• Economic Activity: Punjab has the largest share in Pakistan’s economy. It is not only a hub for agricultural production but also for industrial and commercial activities. The presence of large industries, major cities, and significant markets results in higher tax collection compared to other provinces.
• Major Cities: Cities like Lahore, Faisalabad, Gujranwala, and Sialkot are centers of thriving business activities, contributing significantly to tax revenue.

While Karachi, located in Sindh, is the country’s financial hub and generates a substantial amount of tax revenue, Punjab’s contribution remains the largest due to its population and economic scale. Therefore, it is not incorrect to say that Punjab is the biggest contributor to Pakistan’s tax revenue.

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