Pakistan’s economy remains stuck in a low-growth equilibrium, sustained by short-term revenue grabs that masquerade as reform but steadily suffocate investment, innovation and exports.
Under pressure from the IMF to raise tax collection, the state has chosen the path of least resistance: punitive taxation of documented capital, global earnings and the formal corporate sector. The result is not fiscal stability but capital exit, weak investment and an enduring dependence on external financing.
Rather than positioning itself as a competitive destination for mobile global capital, Pakistan is increasingly pushing wealth towards jurisdictions such as Dubai, Singapore and Hong Kong – economies that deliberately use low, predictable, and territorial tax systems to attract investors. Pakistan’s approach is the opposite: extractive, uncertain and inward-looking.
The evidence of capital leaving the domestic economy is no longer anecdotal. Foreign portfolio investors have been persistent net sellers of Pakistani equities, with cumulative net outflows estimated at $3 billion to $4 billion over the past decade, including continued withdrawals in recent years. More strikingly, leaked property ownership data from Dubai – compiled through international investigative journalism – show that Pakistani nationals own residential real estate valued at over $11 billion in Dubai, largely acquired between 2020 and 2022. Given the sharp rise in Dubai property prices since then, the current market value is likely higher.
The trend is dangerous. Even as Pakistan’s foreign exchange reserves have recovered in 2025 to around $19 billion to $20 billion following IMF inflows, a substantial stock of private wealth remains parked abroad. The contrast highlights a deeper problem: private capital does not regard Pakistan as sufficiently attractive or predictable for long-term investment. Capital is not fleeing crisis alone; it is responding rationally to incentives.
A key driver of this behaviour is the Capital Value Tax (CVT) on foreign assets – an annual one per cent levy on the fair market value of overseas holdings above a prescribed threshold for tax residents. Introduced to capture undeclared wealth, it instead penalises global diversification. In an era when professionals routinely hold property, equities or business stakes across borders, taxing foreign assets simply for existing sends a clear signal: global ambition will be punished.
The behavioural response is predictable. High-earning professionals and entrepreneurs choose to sever tax residency, taking with them not only capital but also skills, networks and future reinvestment potential. This quiet exit is costly. Pakistan already struggles to attract foreign direct investment, which has remained well below one per cent of GDP in recent years. Policies that actively repel globally connected Pakistanis only deepen this structural weakness.
Capital is highly mobile. When faced with uncertainty or recurring levies, individuals tend to shift to jurisdictions that offer clarity and stability. Dubai imposes no personal income tax and no capital gains tax on most assets. Singapore taxes only locally sourced income under a territorial regime. Hong Kong applies a low corporate income tax rate with exemptions for most foreign-source income. These economies compete aggressively for global capital. Pakistan, by contrast, appears determined to discipline it.
The problem is compounded by Pakistan’s worldwide taxation of residents’ income. While non-residents are taxed only on Pakistan-sourced income, residents are liable to tax on earnings from anywhere in the world, with limited relief under double taxation treaties. In theory, this aligns with global norms; in practice, weak administration and aggressive enforcement turn it into a deterrent to cross-border entrepreneurship.
For overseas professionals – software engineers, consultants, traders, or small business owners – the issue is not merely the tax rate but uncertainty: audits, documentation demands and retrospective liabilities. Instead of encouraging engagement with the domestic economy, the system incentivises distance. This is self-defeating. Workers’ remittances, which exceed $30 billion annually, remain a vital source of foreign exchange, but remittances are consumption-heavy and volatile. They cannot substitute for long-term productive investment or export capacity.
The same extractive mindset afflicts the corporate sector. The statutory corporate tax rate stands at 29 per cent for non-banking firms and close to 39 per cent for banks, among the highest in the region. Effective rates are often higher due to super taxes and a growing list of disallowances. Recent measures – such as partial disallowance of sales promotion, advertising, and publicity expenses linked to royalty payments abroad – directly penalise marketing, branding and innovation.
These are not luxuries; they are core business investments. Penalising them weakens competitiveness, particularly for export-oriented firms. Additional disallowances tied to transactions with non-registered suppliers further burden formal businesses while the informal economy remains largely untaxed.
The consequences are visible. The Pakistan Stock Exchange struggles to attract new listings, market capitalisation lags behind regional peers, and foreign portfolio flows remain shallow and volatile. This squeeze on the formal sector is especially perverse given that agriculture – contributing roughly one-fifth of GDP – remains largely outside the income tax net. The burden instead falls on a narrow base of documented firms and individuals, reinforcing elite capture and discouraging scale, transparency and risk-taking.
Investment, as a result, remains stuck near 13 per cent of GDP, far below the level required for sustained growth. Underinvestment feeds infrastructure gaps, constrains job creation and traps the economy in low-productivity activities. Exports remain concentrated in low-value segments, while private capital increasingly seeks safety abroad – through offshore assets, foreign real estate or alternative residencies.
Defenders of the current approach argue that Pakistan’s low tax-to-GDP ratio – around 10 per cent – leaves no alternative. This confuses cause and effect. Revenue does not precede growth; it follows it. Punitive taxation shrinks the base by encouraging capital to exit or disengage, as the growing stock of Pakistani wealth held abroad already demonstrates.
The path forward is not mysterious. Abolish the CVT on foreign assets to signal openness. Provide clarity and targeted relief regarding foreign income, particularly when earnings are reinvested domestically. Simplify corporate taxation by eliminating distortionary disallowances and lowering effective rates, while broadening the base to include currently untaxed sectors such as agriculture. Use transparent, time-bound incentives to attract export-oriented investment, technology and venture capital.
Pakistan has the demographics, location and entrepreneurial talent to be a regional growth hub. What it lacks is a tax philosophy aligned with that ambition. Until policy shifts from extraction to expansion, from suspicion to partnership, capital will continue to drift outward – quietly, legally, and rationally.
Pakistan cannot tax its way to prosperity. It can only grow its way there.
The writer is former head of Citigroup’s emerging markets investments and author of ‘The Gathering Storm’.
