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)

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%

 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........

© The Friday Times