Zero income, luxury lifestyle: Can Pakistan fix its broken tax system?

Pakistan’s tax system is facing criticism as authorities grapple with a stark contradiction: millions of citizens filing income tax returns that report no earnings, while openly displaying immense wealth through luxury homes, high-end vehicles, expensive weddings, branded shopping, and frequent foreign travel.

The Federal Board of Revenue (FBR), the country’s top tax authority, has sounded the alarm over this widening gap, calling it a key factor behind Pakistan’s recurring economic instability and dependence on foreign bailouts.

The issue is not new, but recent figures reveal the magnitude of the problem. Out of 5.9 million income tax returns filed for 2024, almost half declared zero income, according to official data reported by Dawn.

The pattern has persisted in 2025, with more than 40 per cent of returns filed by September 27 showing nil income.

This mismatch between reported incomes and visible affluence underscores deep-rooted flaws in tax enforcement and exposes the fragility of Pakistan’s financial system.

A senior tax official confirmed to Dawn, “More than 40 per cent of taxpayers declared nil income in their returns filed up to September 27.”

Officials say this reality reflects a system in which widespread underreporting and evasion have become the norm, leaving the government with insufficient revenues to fund development, service debt, and stabilise the economy.

With only 2 per cent of Pakistan’s population paying income tax, the country’s tax-to-GDP ratio is among the lowest in Asia, forcing it to repeatedly turn to external lenders like the International Monetary Fund (IMF).

How wealth is hiding in plain sight

The FBR has identified clear signs of concealed income across various segments of society. Tax authorities point to a pattern of extravagant living that is increasingly at odds with the financial figures declared in tax returns.

Expensive imported cars, opulent houses, shopping for international luxury brands, and frequent overseas vacations are all visible markers of affluence that appear on social media and in public life.

Officials note that, in many cases, these lifestyle indicators are the most reliable evidence of true wealth. While tax records may show negligible or zero earnings, outward displays of spending tell another story.

An internal FBR assessment concluded that declared incomes are “far from an accurate reflection” of actual earnings across Pakistan.

This problem is compounded by the country’s universal self-assessment system, which allows taxpayers to submit declarations without routine verification.

Introduced with the aim of simplifying compliance, this system has been widely misused due to weak enforcement and limited auditing capacity.

Without effective checks and third-party verification, individuals are able to underreport or hide their income with little fear of detection.

The FBR has acknowledged that for the self-assessment approach to work, it must be supported by robust deterrent audits, access to reliable third-party data, and a digitised economic framework capable of cross-referencing information.

At present, all three areas remain underdeveloped, leaving significant gaps in enforcement.

In a bid to counter tax evasion, Pakistan’s tax authorities have turned to an unlikely source of evidence: social media.

In Pakistan, flaunting wealth on social media has long been a marker of prestige and social status. Luxury weddings, designer outfits, and international vacations are celebrated and widely shared online.

Recognising this, the FBR has established a specialised “Lifestyle Monitoring Cell” tasked with tracking digital displays of affluence.

The unit, which includes 40 officials, monitors platforms like Instagram, TikTok, and YouTube for posts that reveal expensive purchases, high-end events, and luxury travel.

Authorities describe these posts as a form of “public financial declaration” and a critical tool for detecting discrepancies between declared income and actual spending.

One striking case involved a wedding that the FBR examined closely due to its extraordinary cost. The celebration reportedly totalled more than PKR 30 crores.

The event lasted six days and featured top makeup artists, DJs, and qawwali performers. By analysing tagged vendors and participants, officials were able to map out the scale of expenditure and compare it against the families’ reported incomes.

“It’s all open-source information,” explained one FBR official. “People are showcasing their lavish lifestyles themselves. It gives us a clear window into their financial behaviour.”

The Lifestyle Monitoring Cell builds digital profiles of individuals using multiple data points, including:

• Social media posts and tags,

• Timestamps and screenshots,

• Identified vendors and service providers,

• Discrepancies between visible spending and declared income.

These reports can form the basis for tax audits and even investigations into money laundering. By leveraging digital evidence, the FBR hopes to close the gap between tax declarations and reality.

How the whistleblower system is being revamped

Alongside digital monitoring, the FBR is overhauling its whistleblower programme to encourage reporting of hidden wealth. Currently, informants can receive rewards of up to PKR 5 million for providing actionable intelligence on tax evasion.

However, the board is proposing to raise this ceiling to PKR 150 million, distributed on a graded scale to incentivise more substantial disclosures.

The goal is to encourage individuals with insider knowledge—such as extended family members, neighbours, colleagues, and domestic staff—to come forward. Such people often have direct access to information about undeclared assets and hidden income sources.

As one senior FBR official told Dawn, “The foundation of an effective whistleblower system rests on two elements: absolute secrecy and credible rewards.”

To strengthen this system, the FBR is also recommending the simplification of reward structures to make payouts clear and predictable, faster payment processes to build trust with informants, and limiting inquiries to the current tax year, thereby reducing fear of retroactive penalties and encouraging voluntary compliance.

Officials argue that this approach, modelled on successful systems in advanced economies, will improve tax collection without creating a climate of fear among taxpayers.

What IMF’s role and Pakistan’s repeated bailouts tell us

The consequences of Pakistan’s weak tax system are far-reaching. With limited domestic revenue, the government has consistently relied on foreign borrowing and IMF interventions to keep the economy afloat.

However, these external lifelines address only immediate crises, not the structural problems that cause them.

Experts point out that successive governments have tended to focus on short-term planning horizons, implementing policies designed to yield benefits within their electoral term while ignoring long-term implications.

This behaviour results in recurring balance-of-payments crises and mounting debt.

The cycle typically unfolds as follows:

• The government increases spending beyond its revenue capacity,

• To cover deficits, it resorts to borrowing domestically and internationally, as well as printing more money,

• Over time, foreign debt accumulates, making new borrowing more expensive and difficult,

• Eventually, the country faces a debt trap, where borrowing is needed simply to repay earlier loans,

• A balance-of-payments crisis emerges, forcing Pakistan to seek another IMF bailout.

At present, a significant portion of Pakistan’s tax revenue goes directly toward debt servicing and repayments, leaving little fiscal space for infrastructure, education, healthcare, or to absorb external economic shocks.

This vulnerability makes the country highly dependent on foreign assistance during times of crisis.

The role of the central bank is critical in maintaining currency stability and controlling inflation. In Pakistan, however, excessive money creation to finance government spending has repeatedly fuelled inflationary pressures.

When the money supply grows faster than demand, excess liquidity enters the economy, driving up prices and interest rates while weakening the currency.

Over time, this dynamic contributes to balance-of-payments problems as the cost of imports rises and foreign reserves are depleted. The IMF and other international creditors closely monitor these trends, imposing strict conditions on lending to ensure that such practices are curtailed.

What we know about Pakistan’s underground economy

High tax rates on sales, income, and business profits have also unintentionally stimulated Pakistan’s underground economy. When taxes are seen as punitive or excessively burdensome, individuals and businesses seek ways to avoid or evade them altogether.

This includes underreporting income, smuggling goods to bypass import duties, and conducting transactions entirely off the books.

Initially, raising tax rates may generate a temporary increase in revenue. However, over time, evasion erodes the tax base.

The government is then forced to spend more resources on enforcement just to maintain existing collections. If the costs of collection grow faster than revenues, the system becomes unsustainable.

Experts agree that Pakistan’s fiscal challenges cannot be solved through piecemeal measures. A comprehensive reform of the tax system is essential to address both revenue shortfalls and economic distortions.

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With inputs from agencies

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