ISLAMABAD: Dr Faisal Hashmi, Founding Chairman of Beverages Advisory Foundation, shared key features of a proposed tax policy that can lead to rationalisation of tax burden, wider documentation and enforcement across the large and medium scale manufacturing sector while ensuring that the cumulative burden on compliant industry players does not constrain their ability to compete and grow.
In an exclusive talk with Business Recorder, Dr Faisal Hashmi said that Pakistan’s manufacturing sector sits at the intersection of two important economic objectives: the need to strengthen domestic revenue mobilistion and the need to encourage investment, production and industrial growth. These objectives are not inherently contradictory. The challenge lies in designing a tax system that generates sustainable revenue without placing a disproportionate burden on businesses that are already documented and compliant.
He said that the question has become particularly relevant as manufacturing begins to show signs of recovery. Large-scale manufacturing grew by 5.77 percent during July-May (2025-26), according to the Pakistan Bureau of Statistics, while the Pakistan Economic Survey 2025-26 points to a broader rebound following contraction in the previous year. This recovery is encouraging. The more important policy question is how to sustain that momentum while addressing the cost pressures.
Dr Hashmi stated that energy and financing costs, imported inputs, regulatory requirements and taxation all affect the ability of businesses to invest, expand production, and remain competitive. For companies operating entirely within the documented economy, the cumulative tax burden is therefore not simply a fiscal issue. It is also an important component of the cost of doing business.
He said the policy objective should extend beyond raising additional revenue from sectors that are already visible to the tax authorities. It should seek to create conditions in which formal manufacturing can expand while progressively bringing a greater share of undocumented economic activity into the tax system.
Pakistan’s need for stronger domestic revenue mobilisation is well established, he said. Fiscal constraints, debt servicing requirements, and development needs make improving tax collection essential. The more consequential question is how additional revenue is generated and whether the structure of taxation supports broader economic objectives.
He referred to the fund (IMF) that Pakistan’s tax base remains concentrated in a limited number of sectors. IMF’s assessment observed that revenue administration measures continue to focus primarily on existing taxpayers and emphasised the need for greater retailer registration and documentation of economic activity currently outside the system. Pakistan’s tax revenue ratio, including provincial taxes and the petroleum development levy, reached 12.3 percent of GDP in FY2025, its highest level since at least 2000, but remained below the 25th percentile of comparable economies.
Hew said these findings suggested that Pakistan’s revenue challenge is not simply one of insufficient collection, but also of concentration. Broadening documentation and rationalising the burden on compliant sectors should be viewed as complementary rather than competing objectives. Widening the base without addressing the disproportionate load on formal manufacturers leaves the underlying concentration problem largely intact, he said.
This highlights an important distinction between increasing tax rates and increasing tax revenue. Repeatedly raising rates on the same group of formal businesses may generate additional revenue in the short term, but beyond a certain point it can weaken demand, discourage investment, and increase the price differential between formal and informal products.
Recently, industry representatives have warned that changes to the sales tax mechanism introduced in the 2026 federal budget could add Rs10–15 per kilogram to cooking oil and ghee prices, he said. While taxation is only one component of final prices, the experience of the sector illustrates the broader risk: where formal manufacturers bear taxation and compliance costs that are not equally captured across the market, widening price differentials can weaken their competitiveness and encourage demand to migrate towards less-documented alternatives.
A more sustainable approach is therefore to widen documentation and enforcement across the market while ensuring that the cumulative burden on compliant manufacturers does not constrain their ability to compete and grow, he said.
The case for supporting formal manufacturing also extends beyond the individual company. Production supports suppliers, distributors, transporters, retailers and employment across interconnected value chains, he suggested.
Tax policy should therefore consider not only the revenue collected directly from manufacturers, but also the wider economic and fiscal activity generated when formal production expands. The cement industry illustrates this relationship particularly well. As a basic input into construction and infrastructure, cement has extensive linkages with housing, transport, labour, building materials and numerous downstream industries, he maintained.
Multinational companies such as Coca-Cola and Pepsi, alongside other major manufacturers, also support extensive networks of suppliers, transporters, distributors, retailers and other businesses across their value chains. Aerated waters and other specified non-alcoholic beverages containing added sugar or sweetening matter currently face a 20 percent Federal Excise Duty.
The impact of such taxation should be considered beyond the amount collected on an individual product. Excise duties contribute to the final consumer price, and price increases can weaken demand or encourage substitution towards cheaper alternatives. Where those alternatives are produced and sold outside the fully documented economy, the formal sector may lose volume without a corresponding increase in taxable activity elsewhere. Formal beverage companies operate within established standards for production, product quality, labelling and taxation, while informal food and beverage market remains undocumented. Continually increasing the cost of formal products without extending comparable regulatory and fiscal coverage across competing segments distorts market incentives and encourages greater informality.
He noted that Pakistan’s standard sales tax rate of 18 percent is not low by regional standards, yet the IMF estimates that only around one-quarter of the theoretical GST base is effectively taxed. This underlines the need for the tax policy to be assessed in terms of overall economic and revenue outcomes rather than individual rates. Where rationalisation of the cumulative tax burden allows formal businesses to achieve greater volumes, the revenue impact of lower rates may be recovered through increased turnover and activity elsewhere within the value chain, he said.
The appropriate policy objective should be to identify tax rates that maximize sustainable revenue while preserving incentives for production and investment, supported by stronger documentation and enforcement, alongside a predictable and competitive environment for compliant businesses. Revenue and industrial growth need not be opposing objectives. A tax system that encourages greater formalization, productive volumes, and sustained investment provides a stronger and more durable revenue base than one that relies on increasing the burden on those already within it, Dr Faisal added.
Copyright Business Recorder, 2026
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