Pakistan's mounting fiscal pressure is driven by surging tax concessions and exemptions across sales tax, income tax, and customs duties, which have grown dramatically over the past decade. For instance, sales tax exemptions under the 6th Schedule alone rose from PKR467 billion in FY2020-21 to PKR702 billion in FY2023-24.

During the same four-year period, income tax exemptions under the 2nd Schedule increased from PKR314 billion to PKR467 billion, while customs duty concessions under the 5th Schedule climbed from PKR169 billion to PKR380 billion. The latest report by the Pakistan Institute of Development Economics (PIDE) states that Pakistan's tax expenditures have expanded steadily to approach 4 to 5 percent of gross domestic product (GDP) in recent fiscal years, rising even as the national tax-to-GDP ratio remains stagnant at approximately 10 percent.

The surge in forgone revenue highlights a deepening structural imbalance in the country's fiscal policy, according to the report by عالم خان and محمود خالد of the Ministry of Finance's Tax Policy Office. Unlike regional peers such as India, which successfully reduced its revenue forgone as a percentage of GDP through base-broadening and systematic exemption rationalization, Pakistan demonstrates a persistent upward trajectory in tax expenditures.

Globally, tax expenditures typically consume 3 to 5 percent of GDP and account for 20 to 25 percent of tax revenues. However, in Pakistan, these provisions have rapidly escalated without generating a corresponding expansion of the broader tax base.

The authors attribute this fiscal drain to heavy concentration within a few statutory provisions embedded across the Income Tax Ordinance 2001, the Sales Tax Act 1990, and the Customs Act 1969. These incentives are primarily input-based or income-based concessions that boost corporate profitability without binding recipients to measurable performance criteria such as investment, export growth, job creation, or technological upgrades.

Because tax expenditures are enacted via statutory regulatory orders (SROs) and legal schedules rather than direct budgetary spending, they routinely escape parliamentary scrutiny, ex-ante cost-benefit evaluations, and periodic performance reviews. To curb revenue erosion and rebuild fiscal capacity, the report recommends linking all tax incentives to verifiable economic outcomes, embedding strict sunset clauses, reducing reliance on input concessions, and integrating tax expenditures into a broader national industrial strategy.