Pakistan’s economic recovery depends heavily on improving tax revenue without stifling investment or burdening those already contributing. However, the current approach appears to be doing the opposite, placing more weight on compliant taxpayers while letting significant portions of the economy remain outside the tax net. The result is a system that discourages formalization, reduces incentives to invest, and undermines trust in fiscal policy.
With the upcoming budget 2025–26, it is important to flag concern over this imbalance. Penalizing those already in the system is counterproductive. There is a clear need to shift the focus from taxing the few to widening the base.
Take, for instance, the 10% surcharge on individuals earning over Rs. 10 million. While the intent may be to increase revenue from high earners, in practice it punishes salaried professionals and compliant individuals whose incomes are already taxed at source. The surcharge adds to the perception that following the law results in heavier penalties, while those operating informally or outside the system are rarely brought into the fold.
Similarly, businesses that pay their taxes regularly face multiple layers of levies: corporate tax, super tax, turnover tax; while informal sectors like wholesale, retail, and parts of agriculture contribute far less than their share. There must be a gradual reduction in the corporate tax rate from 28% to 25%, along with a phased removal of super tax. These measures are aimed at improving competitiveness and reducing the financial burden on compliant businesses that drive formal economic activity.
Another area of concern is the treatment of investment and savings. Previous reforms have removed or limited tax credits on investments in mutual funds, IPOs, and life insurance. It is important to restore these credits to encourage long-term savings and channel capital into productive sectors. At a time when attracting private investment is crucial, disincentivizing savings does little to help the broader economy.
The issue also extends to indirect taxation. Businesses often face input tax disallowances and complex refund mechanisms that lock up working capital. Sectors like pharmaceuticals and telecom continue to struggle with the removal of zero-rating and the imposition of duties on essential imports. These decisions may provide short-term revenue gains, but they increase operational costs and reduce affordability for end consumers. So, restoring zero-rated regimes and rationalizing tax rates to regional averages will support both business viability and consumer access.
From a policy perspective, broadening the tax base is a more sustainable approach. Sectors like services, retail, and real estate remain significantly undertaxed compared to their contribution to GDP. Bringing these sectors into the formal net would reduce the pressure on compliant segments and improve overall revenue collection. In the digital age, there is a need to focus on technology and data integration to identify potential taxpayers and enforce compliance. This will require digitizing tax return filings, publishing import data to curb under-invoicing, and introducing a track and trace system to control smuggling in tobacco and other industries.
Another key recommendation is to simplify processes for taxpayers. This includes removing outdated exemptions, allowing fair deductions for health, education, and housing expenses, and rationalizing the taxation of employer contributions to provident funds. These changes would reduce friction for taxpayers and increase the perception of fairness.
Ultimately, Pakistan’s economic revival depends on creating a tax environment that encourages compliance, investment, and formalization. Continuously taxing the same pool of registered individuals and businesses not only limits revenue growth but also creates a negative cycle of avoidance and disengagement. Widening the net, simplifying procedures, and reducing the cost of compliance can rebuild trust and incentivize participation.
The path to economic revival lies not in squeezing those already in the system, but in designing a tax structure that is equitable, growth-oriented, and broad-based. The government’s upcoming budget is an opportunity to correct course, and it should not be missed.
