Pakistan approaches the forthcoming budget with extremely limited fiscal space. IMF commitments, elevated debt servicing, high energy costs, security expenditures, losses of state-owned enterprises and the need to protect vulnerable households leave little room for large-scale tax relief or stimulus measures in the immediate term. Yet the absence of fiscal space cannot become an excuse for policy paralysis.
The greater risk for Pakistan today is not merely high taxation. It is the absence of a credible, medium-term direction for economic policy. Investors, exporters and businesses can temporarily adapt to difficult conditions if they can see a predictable path ahead.
What undermines confidence is uncertainty: frequent changes in taxation, ad hoc measures driven by annual revenue pressures and the lack of clarity on where the system is ultimately headed.
Pakistan’s tax system remains fundamentally misaligned with the country’s economic objectives of attracting investment, creating jobs, expanding exports, encouraging formalisation and raising productivity. Fiscal consolidation may have stabilised macroeconomic indicators, but stability alone cannot deliver growth if the incentive structure continues to penalise documented economic activity.The result is a troubling paradox. Macroeconomic stability is gradually improving, but private sector confidence and investment appetite remain subdued. Fiscal policy, instead of enabling growth, has increasingly become a constraint on it.
For businesses, the cumulative burden of high tax rates, cascading indirect taxes, turnover-based minimum taxation, excessive withholding taxes and unpredictable policy changes have materially raised the cost of operating formally. Compliant businesses and salaried individuals carry a disproportionate share of the burden, while large segments of the economy remain lightly taxed or undocumented. This has predictable consequences. Investment is delayed, reinvestment of profits is constrained, formal employment becomes less attractive, export competitiveness weakens and informality is rewarded. Capital and talent seek opportunities elsewhere.
Against this backdrop, the recent establishment of the Tax Policy Office -- separating tax policy from tax administration -- is an important and welcome institutional reform. It creates an opportunity to design tax policy around long-term economic objectives rather than solely around short-term revenue extraction. However, entrusting this year’s budget-making to the Tax Policy Office carries the risk of revenue considerations overriding sound policy, especially as the latter has yet to be announced.
The government may not presently have the fiscal capacity to implement sweeping tax reductions in a single budget. However, it can and should announce a credible, phased medium-term framework that signals the direction of travel over the next three to five years. Such signalling itself can improve investor confidence and influence investment decisions today.
Pakistan urgently needs a destination tax regime benchmarked against regional competitors such as India, Bangladesh and Vietnam -- economies that have used predictable tax frameworks and export-oriented policies to attract investment and integrate into global supply chains. How long can companies in Pakistan continue to pay corporate and super tax at 39 per cent when the regional rate is 20-25 per cent?
Worse still, how can salaried employees be expected to pay twice the tax their counterparts in India pay for the same level of income? None in the region imposes recurring taxes on foreign assets similar to Pakistan’s Capital Value Tax, which yields little revenue. Unlike Pakistan, taxation of inter-corporate dividends is either exempt, lightly taxed, or structured to avoid multiple layers of taxation within group companies in
the region.Export-oriented sectors in these countries typically benefit from preferential or concessionary regimes, including reduced corporate tax rates, tax holidays, duty drawbacks, VAT refunds and simplified final tax structures designed to encourage competitiveness and scale. By contrast, Pakistan’s exporters continue to face a combination of turnover taxes, taxes under the normal regime, delayed refunds, multiple withholding taxes and policy uncertainty that raise the cost of doing business.
Equally important is reform of the withholding and minimum tax regime, which has evolved far beyond its original purpose. In many sectors, withholding taxes and turnover taxes now function as de facto final taxation regardless of profitability, and in some cases, resulting in an effective tax rate of 70%+ in low-margin businesses.
None of this implies fiscal irresponsibility. Any medium-term tax reform roadmap must be accompanied by parallel measures to preserve fiscal sustainability. These include expenditure rationalisation, privatisation or restructuring of loss-making state-owned enterprises, better targeting of subsidies, documentation of the informal economy, broadening of the agricultural and retail tax base, and lower borrowing costs through sustained macroeconomic stability.
A credible destination framework would also help align the objectives of different arms of economic policy. At present, ministries responsible for investment, exports, industry and privatisation often pursue growth objectives that are subsequently undermined by revenue-maximisation measures introduced through taxation. This disconnect is costly. The forthcoming budget may therefore need to be judged not merely by the quantum of immediate relief it provides, but by whether it establishes confidence in a future direction. That requires more than annual revenue measures.
It requires a visible national commitment to a competitive, growth-oriented tax system. Even if the government lacks fiscal space, it still has policy space to define where Pakistan needs to go. It should do so at the time of the forthcoming budget.
The writer is a former CEO of Unilever Pakistan and of the Pakistan Business Council.
