Pakistan's tax system squeezes the middle class while the rich optimize

The IMF’s Doubling Act

Muzamil opens by naming the real pressure the government faces. The IMF is setting targets for Pakistan’s tax collection to grow from roughly 10 percent of GDP to 17 or 18 percent. That’s nearly a doubling. While this benchmark sits below what developed nations collect, it’s high relative to Pakistan’s current rate and the government’s ability to enforce collection across a largely informal economy. Muzamil walks through the numbers. India’s tax-to-GDP ratio sits at 11.5 percent, but peer middle-income economies in the region run 14 to 19 percent. Korea and Japan exceed 25 percent. The pressure is real, and the IMF increments it year on year by 0.2 to 0.3 percentage points, chipping away at the government to close the gap.

“At any given time, Pakistan has to keep raising its tax base,” Muzamil says. The country has no choice.

The Problem is Distribution, Not Just Collection

But the real issue isn’t how much is collected. It’s who pays it.

Pakistan’s problem is two-fold. First, the overall collection is too low. Second, the distribution is wildly unequal. “Are we taking a similar amount from everyone based on their wealth and income,” Muzamil asks, “or are we disproportionately targeting whoever we can easily reach?”

The answer is clear. In the last year alone, the salaried class paid 500 billion rupees in taxes. Five years ago, the entire salaried class paid 100 billion rupees annually. That’s a fivefold increase in five years, while other tax collection has remained largely static. Muzamil sees what’s happening. “The first time the hammer falls, it lands on the salaried class. Because they’re consolidated, organized, and they come through the banking system.”

Why the Rich Don’t Show Up in Tax Revenue

The wealthy in Pakistan, meanwhile, operate mostly off-the-books. They park money in real estate, use agricultural exemptions to whiten black money, move capital abroad through hawala networks, and operate businesses entirely in cash. The government knows this. So instead of collecting income tax from them, it has shifted to taxing consumption. It raised GST to 18 percent, increased fuel levies, and added surcharges on electricity. These taxes hit everyone, but they hammer the middle class hardest.

“An upper-class man doesn’t care if GST is 18 percent,” Muzamil says, “because he shops in London and doesn’t use Pakistan’s utilities. But the salaried class bears the full brunt.”

The Government’s Contradictory Signals

A bigger frustration emerges when Muzamil discusses government policy incoherence. Pakistan wants to shift away from fossil fuels and encourage solar energy and electric vehicles. So fuel prices rose, which makes sense. But then, likely under pressure from automobile lobby groups, the government turned around and began taxing electric and hybrid vehicles.

“Where’s the policy,” Muzamil asks. “If you’re going to raise petrol prices to incentivize alternatives, and alternatives start working, why tax them? Either you have a vision or you don’t. Don’t bend the rule every time someone with influence asks you to.”

PASHA’s Recommendation and the Freelancer Ruse

The recommendations from PASHA (Pakistan Software House Association) perfectly illustrate how organized groups protect themselves. PASHA asked the government to exempt the IT industry from tax (offering only 0.25 percent net revenue relief in return) but to tax individual remote workers heavily.

This is rent-seeking disguised as policy. “They’re saying, protect our members and tax everyone else,” Muzamil explains. Freelancers and remote workers rebelled online, and now the IT Minister Shaza Khawaja is engaging in damage control, which signals to everyone that taxes on remote workers are coming.

Why Freelancers Aren’t the Target

Muzamil breaks down the actual economics. A company employs someone domestically at three hundred thousand rupees a month. The company withholds tax. That employee, after tax, nets two hundred seventy thousand rupees. The same person takes a remote job for eleven hundred dollars (three hundred thousand rupees) with no withholding. From the government’s standpoint, it looks like the remote worker is escaping tax. But Muzamil digs deeper. The real issue is that Pakistan’s outsourcing and IT export economy is under pressure from AI commoditizing low-value work, and the industry is consolidating upward. What it needs isn’t taxation. It needs growth.

“If your freelancers are leaving and going remote,” Muzamil says, “the problem isn’t tax. It’s that your industry model is changing. You need to adapt.”

The Moral Hazard of Optimization

Toward the end, Muzamil shifts into a different register. He’s not advocating tax evasion. He’s saying the salaried class needs to wake up to the tools the wealthy already use.

“Tax optimization is not tax evasion,” he clarifies. “It’s working within the system’s rules to reduce your liability.” The wealthy do this all the time. They use corporate structures, agricultural income, and legal loopholes. A salaried professional can too, if they understand the rules.

He closes by reframing the conversation. “The rich will only reform the system when they can’t fool the middle class anymore. When the middle class starts using the same structures the rich use, the rich will be forced to tighten the rules because their easy paths will be crowded. That’s how change happens.”

The takeaway is unsettling. Don’t expect fairness. Adapt instead.