Broaden the base or burden the few

Pakistan’s economy is at a turning point. Stabilisation efforts are underway, investor sentiment is cautiously improving, and there is renewed political will to reform. But none of it will hold without fixing something more fundamental: a tax system that keeps asking the same people to pay more while leaving most of the economy untouched.

The recently established Tax Policy Office is a step in the right direction. A dedicated body for tax policy formulation could bring the coherence and long-term direction that Pakistan’s fiscal framework has long lacked. But institutional reform only matters if it’s backed by genuine autonomy, adequate resources, and the courage to pursue gradual, predictable change rather than short-term revenue grabs.

Even where immediate reform isn’t feasible, a clearly articulated roadmap signals intent. And right now, investors and businesses are watching closely for exactly that.

The core problem is straightforward: Pakistan’s tax base is too narrow. Agriculture, retail, wholesale trade, real estate, and services together account for a significant share of GDP, yet their presence in the formal tax system remains remarkably thin. That absence doesn’t go unnoticed. It falls, instead, on documented businesses and salaried professionals — people and companies that have chosen to operate within the system — that end up carrying a burden that should be shared far more widely.

This isn’t just unfair. It’s counterproductive. Pakistan’s standard corporate tax rate sits at 29 percent, already above Bangladesh’s 25 percent and at the upper end of India’s range. Add in additional levies and the effective burden can climb to 46 percent, a figure that is difficult to justify when trying to attract investment in a competitive region.

The message it sends is the wrong one: that compliance is penalised while informality goes largely unpunished.

The compliant taxpayer’s experience compounds the problem. Businesses navigating Pakistan’s tax system today face overlapping provisions across multiple laws, extensive documentation requirements, frequent procedural changes, and a proliferation of withholding and advance tax obligations that squeeze working capital.

Legitimate refunds sit unprocessed for months and, in some cases, for years, tying up funds that businesses need to operate. This is the daily reality of choosing to be formal and it quietly pushes people towards the margins of the undocumented economy.

The Overseas Chamber of Commerce and Industry (OICCI), whose members are among the largest taxpayers and investors in the country, has put forward a set of proposals aimed at rebalancing this equation. They include a phased elimination of the Super Tax over three years, a gradual reduction in the corporate tax rate from 29 to 25 percent, and a reduction in sales tax on goods to 15 percent.

Each of these measures is designed not to reduce the state’s capacity to collect revenue, but to make the system less punishing for those already within it.

The proposals for salaried taxpayers carry a quiet urgency. Abolishing the 10 percent surcharge on salary income and capping the maximum personal tax rate at 25 percent would offer much-needed relief to skilled professionals at a time when cumulative inflation between FY23 and FY26 has eroded real incomes by nearly 38 percent.

The concern isn’t abstract. Brain drain is accelerating, and the professionals leaving are precisely those the formal economy depends on most.

None of this works without simplification. Fewer rates, reduced reliance on withholding taxes, streamlined filing, and greater automation would lower the cost of compliance and reduce the scope for discretionary interpretation. A tax system that is easier to navigate is one that more people will actually use.

Pakistan has a choice. It can continue extracting more from a shrinking pool of compliant taxpayers while the undocumented economy expands quietly around it. Or it can build something better, a system where the burden is broad, the rules are clear, and choosing to be formal feels like the sensible thing to do rather than a disadvantage.

That second path is harder. But it’s the only one that leads somewhere worth going.

Copyright Business Recorder, 2026