An essential component of a programme for structural readjustment is a reform of the taxation system so that it supports the basic thrust of the reform package. Although the system of taxation in Pakistan is supposedly based on the principles of equity and has a progressive character it has not actually functioned in this manner. This is so because the system has evolved as a result of changes made at different moments in time in response to the exigencies of the government’s revenue needs and the pressures exerted by different lobbies. The attempt to use the taxation system to serve a variety of social and economic objectives has created distortions and made the structure rather complex and non-transparent, thereby weakening its potency as a revenue generation instrument, while adding unnecessarily to costs. The structure is, therefore, characterised by direct taxes not being paid by those who should be paying them, indirect taxes being largely paid by those who are otherwise considered too poor to pay taxes and subsidies and exemptions being cornered by those who should not get them.