Death by taxes: how Pakistan is strangling its own investment base

The saying goes that there is nothing certain but death and taxes, but in Pakistan, there is death by taxes. The current high taxation regime is choking the formal economy, especially industrial businesses, yet there seems to be no realization within the FBR (Federal Bureau of Revenue), which keeps extracting juice from the top 1 percent.

Now that the tax policy board is separated from the FBR, the ball is in the court of the finance minister to finally demonstrate courage by rationalizing and broadening the taxation system in the next budget. The government needs to make a medium-term taxation framework to significantly reduce all types of income taxes in a staged manner.

The IMF team is here for the review and consultations on next fiscal year’s taxation policy, among other matters. Last week the mission was in Karachi and had engagements with both OICCI (Overseas Investors Chamber of Commerce and Industry) and PBC (Pakistan Business Council). Both houses echoed the need to rationalize taxation. It is time for Islamabad to manage the fiscal balance through broadening taxation, curbing SOE losses, especially in energy, and reducing the footprint of the government.

Without addressing taxation matters, investment will remain at abysmally low levels. The energy puzzle can be solved through renewables and by making the grid irrelevant. However, at high taxation, only the informal economy, mostly in retail and trade, will thrive.

Pakistan needs industrial investment. The core of the issue is that capital formation is disincentivized, as the effective tax rate, including WWF, WPPF, EOBI and super tax, is over 50 percent for large manufacturing facilities. The main shareholders’ tax is even higher if the business house has a corporate structure, as there is a 15 percent tax on intercorporate dividends. The net return after all taxes is reduced to one third of profits.

Financial capital keeps flying out of the country, and human capital too, as salaried taxes are the highest in the region. It is evident from growing Pakistani investment in the Middle East, especially the UAE.

High net worth Pakistani residents are subject to income tax of up to 45 percent, an additional super tax of up to 10 percent, and a 1 percent capital value tax on certain assets held outside Pakistan. As a result, some individuals, including business tycoons, choose to relocate to Dubai or other destinations and become non-residents for tax purposes. For many, the potential tax savings outweigh the higher cost of living abroad. Consequently, a noticeable number of Pakistanis have moved overseas in recent years.

Policymakers need to put brakes on this trend, if not reverse it. The bureaucracy should come out of the mindset that businessmen only whine. They have a legitimate case which is in sync with broader economic goals to bring investment back into the formal economy.

Investors demand rationaltaxation. For example, in the case of PIA’s privatization, a pool of investors joined together to bid to dilute per party risk. They demanded a waiver on intercorporate dividend tax, and they got it. PIA is privatized. Rs 135 billion in equity is committed to be injected into the company, apart from Rs 45 billion for the government to receive.

The intercorporate dividend tax should end anyway. It is a bottleneck for private sector participation in large infrastructure and industrial projects. Such projects usually involve collaboration through joint ventures. The tax policy needs to strip multiple layers of taxing the same income.

Super tax should be abolished. Consistency is required in reducing corporate tax rates. These were 35 percent in 2013 and were reduced to 29 percent in six years, although a 3 percent super tax was imposed midway. Later, the policy was to lower it further to 25 percent. However, it remains at 29 percent and, including add-ons, the liability increases significantly.

Indirect taxes are quite high too. Adding both direct and indirect taxes increases the incentive to evade taxes. The cost of compliance becomes high. Informal businesses become more competitive and thrive, but they have limitations to scale. The economy does not grow to desired levels.

That largely explains the exodus of MNCs from Pakistan. A few diplomats, especially Europeans, cite unfair taxation as a main complaint. Domestic groups are increasingly venturing into real estate and retail businesses, where part of the income can be hidden in cash and eventually moved out of the country.

Nothing but fixing taxation policy by bringing credibility and consistency can solve the puzzle. The government needs to reduce rates and expand the base. Provinces must take responsibility for collecting a fair share from land, agriculture, and services sales tax. The federal government must broaden the net beyond manufacturing.

Otherwise, manufacturing will keep shrinking. Foreign investors will continue to leave. The exodus of financial and human capital will not stop.

Copyright Business Recorder, 2026