Using Microdata to Estimate Pakistan’s Tax Gap by Type of Tax

This study provides estimates of Pakistan’s tax gap by type of tax. We adopt a bottom-up approach that provides detailed estimates of the tax gap by type of tax of the sort that are useful for tax administration. For fiscal year 2004–05, we estimate Pakistan’s federal tax gap to be about 40 percent of potential tax revenue. We estimate the tax gap for direct taxes to be about 60 percent of potential direct tax revenue and for indirect taxes about 25 percent of potential indirect tax revenue. Direct and indirect taxes account for about 30 percent and 70 percent, respectively, of actual tax collections. When potential tax revenues are used to measure Pakistan’s tax structure, the proportions are 45 percent and 55 percent, respectively. If the indirect tax system is more regressive than the direct tax system, then Pakistan’s tax system is less progressive in practice than by design.