The formal economy is approaching a breaking point. Compliant businesses and taxpayers can no longer be expected to bear the burden of excessively high tax rates. There appears to be little resolve within government institutions to broaden the tax base or rein in inefficient public spending. Instead, when it comes time to meet the IMF’s stringent targets, the burden invariably falls on the formal sector.
Frustration is mounting across the corporate landscape. Investment is drying up because few are willing to deploy capital when nearly two-thirds of their returns—including dividend taxes—are ultimately claimed by the state. Foreign investors share the same concerns, as reflected in the steady exit of multinational companies and persistently low levels of foreign direct investment (FDI). This trajectory must change before the economy reaches a breaking point.
The government, particularly the Federal Board of Revenue (FBR), needs to reassess its approach toward investors and businesses. Business associations across the country have repeatedly voiced their concerns—and rightly so.
The Overseas Investors Chamber of Commerce and Industry (OICCI) believe the government should seriously consider their recommendations, many of which are aimed at reviving investment, particularly FDI. What is needed is a clear and credible five-year roadmap.
A key starting point should be the gradual elimination of the super tax. OICCI has proposed phasing it out over three years (FY27–FY29), with clearly defined milestones announced in the upcoming budget. At the same time, the corporate income tax rate should begin declining—falling to 28 percent by FY28 and eventually reaching 25 percent through annual reductions of one percentage point. Such measures are essential to attracting investment that might otherwise flow to competing jurisdictions offering lower tax rates and comparable—or even better—market opportunities.
To stem the growing loss of talent from the formal sector, the government should also immediately abolish the 9 percent surcharge on salaried taxpayers.
OICCI has recommended capping personal income tax at 25 percent and raising the exemption threshold to Rs1.2 million.
Rationalizing salaried taxation is becoming increasingly urgent, as formal-sector employers are finding it more difficult to attract and retain skilled workers.
The tax regime remains fundamentally unfair. Beyond the exceptionally high rates, businesses face multiple turnover-based taxes—some adjustable and others not. These taxes create significant cash-flow pressures and, in some cases, push the effective tax burden even higher than the headline rates suggest. This is why OICCI has called for lower turnover tax rates and an extension of the carry-forward period from two years to five.
The problem extends beyond income taxation. Pakistan’s GST rate remains excessively high, suppressing consumer demand while encouraging the growth of undocumented, tax-evading businesses.
In many cases, these informal operators not only avoid taxes but also fail to comply with basic quality standards. OICCI has recommended reducing the GST rate from 18 percent to 15 percent in a phased manner.
Equally important is the digitization of the economy. Currency in circulation currently stands at around Rs13 trillion, accounting for roughly 30 percent of M2—a figure significantly higher than in comparable economies. Meaningful digitization cannot occur without bringing traders into the tax net.
The FBR’s current approach does little to encourage documentation and should be revisited accordingly.
Ultimately, the key challenge is implementation. The FBR deserves credit for progress in areas such as track-and-trace systems in the sugar and cement sectors, as well as its recent efforts to combat tobacco tax evasion. These initiatives are commendable.
However, there is no room for complacency. Much more remains to be done.
Significant gaps persist in retail and wholesale trade, professional services, agriculture—particularly livestock, which falls under the FBR’s jurisdiction—and several other sectors. The tax authority should focus its efforts on these under-taxed areas rather than continuing to squeeze formal businesses and their employees.
Time is running out. Economic pressures are building, and frustration is approaching a boiling point. The message is clear: act now, before it is too late. The authorities would be wise to take it seriously.