EDITORIAL: A working group on income tax led by the private sector has proposed tax reliefs amounting to Rs975 billion, and the Prime Minister has directed the authorities to take this matter to the IMF (International Monetary Fund). This comes at a time when the FBR (Federal Board of Revenue) is short by Rs428 billion, or 8 percent, from its target in 5MFY26. At best, the government can seek a waiver from the IMF for missing the FBR target by avoiding contingency measures in 2HFY26. Hence, there is virtually no chance of any tax relief being approved in the middle of the fiscal year. If any relief is possible, it will likely be in the next fiscal year.
That said, there is wisdom in lowering income tax rates, which are excessively high and heavily skewed toward the formal corporate and salaried segments. Corporate income tax stands at 29 percent, plus a 10 percent super tax beyond a certain income threshold. Dividend income is taxed at 15 percent, including inter-corporate dividends. In some cases, the effective tax burden exceeds 60 percent — a significant deterrent to fresh investment, as major business groups increasingly believe there is insufficient incentive for capital formation within the country.
The top income tax slab for salaried individuals is 35 percent, with a 10 percent tax surcharge above a certain threshold. This places an extra burden on middle-class employees, many of whom are either emigrating or opting for freelance work to drastically reduce their tax liabilities. This has resulted in a growing shortage of mid- to senior-level managerial talent in the formal corporate sector.
Incentives to exit or evade the formal system are increasing, reflected in rising informality. Export services (including freelancing income) are subject to only 1 percent final tax, while goods exports face a 29 percent tax. There are growing reports that portions of goods exports are being routed through the services’ category, which is rising even as goods exports stagnate.
Overall, high taxation is hindering growth by disincentivising both consumption and investment, while government spending is dominated by current expenditures that are inefficient and deliver poor outcomes in governance and service delivery. The model is simply not working. The government, after two years, seems to be realizing this challenging outcome. The Prime Minister recently stated that the government is considering reductions in income and sales tax rates with a view to stemming the flight of financial and human capital. The SIFC (Special Investment Facilitation Council) National Coordinator expressed similar views at the Pakistan Business Council’s Dialogue on the Economy.
Now, a proposal to reduce taxes is being floated. The thinking is correct, but there is no plan for implementation. Sources close to the IMF indicate that there is no possibility of relaxing tax requirements mid-year — especially when the FBR is significantly missing its revenue targets.
At best, such discussions may find space in deliberations for the next budget. If the government plans to lower taxes in specific areas, it must offset them through expenditure cuts to meet overall fiscal and primary surplus targets.
This is where the government lacks imagination. There is no real intent or meaningful effort to reduce the size of the government. At best, the Finance Minister cites the abolition of vacant positions, whereas the real need is to eliminate redundant existing roles.
The FBR Chairman claims over Rs100 billion in additional collection in the cement and sugar sectors through AI-enabled track-and-trace tools. He highlights that key positions are staffed with competent and honest officers. Yet the FBR continues to miss its revenue targets, and the gap is widening.
These claims are not reflected in actual numbers. Much more must be done to plug leakages; he aims to target textiles, tobacco, tiles, and other sectors next. Additionally, the FBR must focus on genuinely expanding the tax base, as most new filers still do not pay meaningful taxes.
Unless the FBR consistently meets targets and the government demonstrates real commitment to downsizing itself and reducing SOE losses, the idea of lowering tax rates will remain a wish list — and ambitions of attracting investment will remain a pipe dream.
Copyright Business Recorder, 2025