No budget conversation in Pakistan can begin or end without one familiar question: how do we increase tax collection and broaden the tax base?
TAXATION
No budget conversation in Pakistan can begin or end without one familiar question: how do we increase tax collection and broaden the tax base?
Every commentator agrees that the tax system must become simpler, the undocumented economy must be brought into the formal net, enforcement must improve and compliance must increase. These are all necessary and we all nod along to what needs to be done. Yet, perhaps, before we begin to consider the practicalities of execution, we must first question the more fundamental ‘Why?’ beyond enforcement. Why would an informal business choose to become formal in the first place?
Today, much of our tax architecture unintentionally creates the opposite incentive. Businesses and individuals that are already documented and compliant often feel disproportionately burdened, while large parts of the informal economy continue operating outside the system with limited consequences. A status quo that risks the dangerous perception that formality brings more friction than benefit.
No economy can grow sustainably if compliance feels prohibitive while operating outside the tax net feels commercially viable.
The way a tax system is designed can either encourage participation or discourage it. A study by the World Bank Group highlights that when tax systems become more burdensome and complex, businesses are more inclined to remain outside the formal net. Additionally, when the effective corporate tax rate increases by 10 percentage points, investment declines by up to 2.0 percentage points of GDP, while new business entry declines by approximately 1.0 percentage point. Very simply, higher tax rates are often linked to fewer formal businesses and lower private investment globally and we can see the same dynamics play out in Pakistan.
If Pakistan genuinely wants to broaden its tax base, then becoming part of the formal economy must be seen as beneficial, not punitive. Today, however, there is little visible differentiation between a compliant taxpayer and a non-compliant one. In fact, in many cases, compliant businesses face higher operating costs, increased scrutiny, delayed refunds, multiple audits, withholding tax backlogs and growing administrative complexity while undocumented sectors continue to compete without the same obligations.
This asymmetry weakens both trust and motivation. Enforcement alone is not the solution; we must create value around compliance that prevents accountability avoidance. Compliant taxpayers should experience tangible advantages that reinforce the value of participating in the formal economy. This could include accelerated refunds, simplified compliance procedures, reduced audit frequency for consistently compliant businesses, easier access to financing, faster regulatory approvals and more predictable policy frameworks.
Such measures could raise the confidence of existing taxpayers, unlock global investment and help informal businesses see the formal system as aspirational. A visible economic upside can encourage those outside the system to willingly choose to enter it.
After all, incentives change behaviour far more sustainably than fear does.
Tax collection is meant to finance the foundations of a functioning economy -- health systems, education, infrastructure and other public services. Thus, it only makes sense that an improved tax system is the immediate and long-term focus of the government of Pakistan.
This smooth functioning of the relationship between the state and the citizens is built on reciprocity, fairness and trust, which fuel accountability and action. Unfortunately, in Pakistan, there is a significant trust deficit between taxpayers and the state. And trust cannot be enforced into existence. Many businesses still perceive their interaction with tax authorities through the lens of uncertainty. The prevailing concern is that once one becomes visible within the system, scrutiny, discretion and operational impediments will increase. This naturally discourages voluntary participation.
It is also equally important to acknowledge the jarring flip side, as the state itself operates under enormous fiscal pressure. Our tax base remains extremely narrow as tax evasion, underreporting and informality continue to constrain national revenues. Compliance is not optional; it is a shared responsibility. There is clear value in the government's focused efforts to formalise the economy and broaden the tax net. We have seen the seriousness around enforcement translate into more collection. Currently, the existing tax base is serving as the major contributor to this outcome. With an enabling business case to complement this discipline, Pakistan can tap into untapped economic gains.
Businesses may become far more willing and transparent participants when procedures are simple, policies are consistent and tax contributions visibly translate into infrastructure, education, healthcare and economic stability. Without rebuilding trust, enforcement alone is an uphill battle.
Pakistan stands at a point where incremental adjustments may no longer be sufficient. The current playbook for expanding the tax base is reaching its limits. Repeatedly increasing tax rates in the same documented sectors while relying on traditional enforcement mechanisms is neither conducive nor effective.
Curbing evasion and increasing voluntary adoption can be supported by staggered tax regimes that allow SME players, who drive jobs and growth, to formalise and enter the tax net without compromising the sustainability of their businesses. Increased tax rates not only offer little additional revenue but they may also push businesses towards informality, workarounds or force them to shut down altogether. While the immediate returns may be modest, the growth of the tax base and long-term economic value is deeply significant.
Simplicity in structure and incentive in adoption are both critical to our economic development. Foreign investment relies on ease of doing business and often this decision boils down to how viable and competitive tax structures are within a country. The Overseas Investors Chamber of Commerce and Industry has also emphasised the need to gradually rationalise Pakistan’s corporate tax burden, including a phased reduction of the corporate tax rate over time to improve competitiveness and encourage investment-led growth, which can ultimately help broaden the tax base rather than relying disproportionately on a narrow pool of compliant taxpayers.
What Pakistan now requires is a fundamentally different approach, one that is modern, technology-driven and designed around enablement rather than manual enforcement. The single biggest opportunity to achieve this lies in the rapid digitisation of the economy. The faster Pakistan digitises transactions, payments, and financial flows, the easier it becomes to document economic activity across every sector, from retail and agriculture to services, manufacturing and freelancing. Unlike traditional tax enforcement, digitisation creates transparency organically, making every transaction traceable, bankable and verifiable in a stronger economic ecosystem.
In fairness, this is an area where Pakistan already has an underappreciated advantage. Over the last few years, the country’s digital payments infrastructure has expanded significantly. Mobile wallets, digital banks, QR-based payment systems and payment gateways are becoming increasingly mainstream. Consumers and businesses are already adapting faster than many expected.
Digitisation is already an equaliser; now it stands to become a great enabler too. The opportunity is to accelerate this transition aggressively. Rather than chasing taxpayers through outdated, fragmented systems, digitisation enables governments to gain real-time visibility into economic activity. It reduces leakages, lowers cash dependency, improves documentation and broadens the tax net far more efficiently than conventional enforcement.
This is about modernising the country's economic operating system. The objective should be to make digital participation more attractive, more convenient, and more rewarding than remaining informal. If implemented thoughtfully, this shift could create substantial fiscal space for the country while simultaneously reducing the burden on already compliant sectors. This means reducing unnecessary complexity, integrating federal and provincial systems, digitising tax administration, resolving refund bottlenecks, simplifying documentation requirements for SMEs and creating gradual pathways for small traders and entrepreneurs to formalise without fear of disproportionate punitive action.
Pakistan unquestionably needs stronger revenues and greater fiscal stability. For years, our policy instinct has leaned heavily towards enforcement. Yet, enforcement without enablement risks deepening the divide between the formal and informal economies. Alongside pursuing businesses to comply with accountability, the state must create the conditions that make compliance possible, secure and advantageous.
Pakistan’s next phase of growth will not come from taxing the same formal sectors harder, but from building a system that more people willingly choose to join. Sustainable revenue growth must come from intensifying accountability and adoption in parallel. Anything else risks slowing investment, discouraging entrepreneurship and shrinking the very formal economy we are trying to expand.
This budget presents an opportunity to raise revenues and redefine the relationship between the state and the taxpayer, moving from scepticism towards collaboration, simplicity and facilitation for a broader, more enabling and inclusive economic system.
The writer is a former president of the OICCI and chairman and CEO of Unilever Pakistan.
