Taxes and Transfers in Pakistan: A System That Fails the Poor, Enriches the Rich

A World Bank study reveals that Pakistan’s fiscal system increases poverty and barely reduces inequality, with indirect taxes burdening the poor and subsidies favoring the rich. Only targeted programs like BISP show meaningful redistributive impact.

A new World Bank study, carried out by economists Beenish Amjad, Haydeeliz Carrasco, and Moritz Meyer, in collaboration with the Pakistan Institute of Development Economics (PIDE) and the Pakistan Planning Commission, offers an unsettling view of Pakistan’s public finance system. Titled “The Effects of Taxes and Transfers on Inequality and Poverty in Pakistan,” the report uses the internationally renowned Commitment to Equity (CEQ) methodology to evaluate how taxes, subsidies, and social programs shaped household welfare in fiscal year 2018–19. The key finding is both counterintuitive and alarming: instead of alleviating poverty, Pakistan’s fiscal policy increased it, raising the national poverty headcount by two percentage points, and left inequality virtually unchanged.

Who Pays More and Who Benefits?

The analysis reveals that only the bottom 10 percent of the population, those in the poorest decile, receive more in benefits than they pay in taxes. Every other income group is a net payer into the fiscal system, including those in the second and third deciles who hover just above the poverty line. These households pay more into the system than they receive, a factor that directly contributes to the rise in poverty. While the richest decile does pay the most in absolute tax terms, it also captures a disproportionate share of public benefits, such as subsidies and in-kind services in education and health. The result is a fiscal structure that takes more from the poor than it gives, while offering limited redistribution from rich to poor.

Indirect Taxes Deepen the Burden

One of the most damaging features of Pakistan’s tax structure is its heavy reliance on indirect taxation. General Sales Tax (GST), customs duties, and excise taxes together form the backbone of the tax regime, but their effects on the poor are adverse. GST alone accounts for over 7 percent of pretax household expenditure, which hits low-income families particularly hard since they spend most of their income on consumption. While these taxes are not strictly regressive in legal structure, their real-world application fails to account for ability to pay, leading to a disproportionately heavy impact on the poor and vulnerable.

In contrast, direct taxes like personal income tax and property tax are far more progressive. However, these contribute only modestly to overall revenue due to limited enforcement, narrow coverage, and institutional weaknesses. The property tax, in particular, is undermined by inconsistent valuation practices across provinces and widespread tax evasion.

Subsidies: Costly and Poorly Targeted

Subsidies, ostensibly intended to support the underprivileged, fail to deliver meaningful benefits to the poorest. Instead, they tend to serve wealthier households. The richest 20 percent of the population receives 34 percent of total subsidy expenditure, 29 percent of in-kind education benefits, and 27 percent of health-related in-kind transfers. These skewed distributions are largely driven by subsidy-heavy areas like electricity, natural gas, and tertiary education, which are accessed more frequently by affluent urban households.

Programs such as electricity subsidies follow a block tariff system, but in practice, richer consumers with higher usage still capture a significant portion of the benefits. Similarly, tertiary education and advanced inpatient medical care are often out of reach for the poor, reducing their share in state-sponsored benefits. These subsidy programs are not just regressive but also fiscally inefficient, as they absorb vast amounts of public money without delivering proportionate social returns.

BISP: The Silver Lining in a Flawed System

Amidst a landscape of misaligned priorities, the Benazir Income Support Program (BISP) stands out as a rare success. Its Unconditional Cash Transfer (UCT) initiative is identified as the single most effective fiscal tool for reducing inequality. Targeted through a proxy means testing system and focused primarily on women, BISP delivers quarterly cash disbursements to around 5.5 million families. Although modest in size, the program’s targeting efficiency and reach make it significantly more impactful than broader, less focused subsidy schemes.

The Conditional Cash Transfer (CCT) component of BISP, which incentivizes school enrollment for children aged 5 to 12, also contributes positively. However, its geographic coverage remains limited. Overall, BISP demonstrates that well-targeted direct transfers can outperform untargeted subsidies and indirect tax relief in both equity and efficiency.

A Roadmap for Reform and Equity

When placed in an international context, Pakistan’s performance appears particularly weak. Compared to countries like Brazil, Mexico, Turkey, Indonesia, and Sri Lanka, Pakistan exhibits the smallest reduction in inequality and the largest increase in poverty as a result of fiscal policy. These outcomes are linked to structural features: a low tax-to-GDP ratio of 13.4 percent, overdependence on indirect taxation, and the allocation of most public funds to debt servicing, pensions, defense, and untargeted subsidies, leaving little room for meaningful investments in health, education, or social safety nets.

The study concludes with a firm recommendation to overhaul fiscal policy. It suggests replacing untargeted subsidies with direct, needs-based cash transfers, harmonizing the GST system, and boosting compliance in direct tax collection. It also calls for increased investment in public services like health and education, especially with a focus on underserved rural communities. The central message is clear: fiscal sustainability and equity are not mutually exclusive. With thoughtful reforms, Pakistan can create a fairer system that both mobilizes revenue and protects the most vulnerable.