Taxing the Poor: Pakistan's Reliance on Indirect Taxes and Household Welfare

Abstract

This study analyzes the welfare impacts and structural challenges of Pakistan’s tax framework from FY2016–17 to FY2024–25. This study shows that nominal tax revenues tripled to Rs 11.7 trillion and the tax-to-GDP ratio stagnated around 10%. This force a heavy reliance on regressive indirect and hidden withholding taxes to bridge persistent budget deficits. The tac system disproportionately causes a burden on low- and middle-income households.  The General Sales Tax (GST) alone driving a two-percentage-point increase in the national poverty rate. The paper highlights a critical fiscal trap: rising debt-servicing costs routinely breach statutory limits, crowding out development expenditures and leaving critical public services like health and clean water chronically underfunded. It shows that lower-income citizens face high out-of-pocket costs despite being net contributors to the national budget. Regional benchmarking shows Pakistan lags behind progressive peers like India, aligning closely with indirect-tax-dependent economies. The study proposes that Pakistan must implement structural reforms to increase the direct tax base.