Centuries ago, the great Muslim scholar Ibne Khaldun, in his masterpiece, “The Mu-qaddimah”, argued that excessive taxation often precipitated the decline of empires, reducing revenues despite higher rates.
In the 1930s, John Maynard Keynes echoed a similar sentiment, that lowering tax rates could enhance government revenues by stimulating economic activity. These timeless insights resonate profoundly in Paki-stan’s current fiscal landscape, where the salaried class and compliant businesses are being disproportionately taxed, while vast segments of the economy remain un-der-taxed. Recently, Pakistan has witnessed an exorbitant increase in income tax rates im-posed on salaried individuals. According to the Federal Board of Revenue (FBR), withholding tax collection from the salaried class surged by 55% in FY2024–25, ris-ing to PKR 605 billion compared to PKR 391.4 billion a year earlier. Salaries now ac-count for 18% of direct taxes, making them the second-largest contributor. This sharp rise is not merely the result of improved compliance but stems from reduced income tax slabs, higher rates and stricter reporting requirements.
Mid-management and technical professionals, find themselves bearing the brunt of this fiscal strategy. The taxation measures have not only strained household budgets but also undermined Pakistan’s ability to retain talent critical for innovation and pro-ductivity. Businesses, too, are struggling under heavy taxation. With profits taxed at rates exceeding 50% once levies and indirect costs are factored in, investment en-thusiasm has waned. The convoluted withholding tax regime further complicates compliance, shifting administrative burdens onto businesses rather than the FBR it-self. While compliant enterprises shoulder this heavy load, a parallel economy thrives, evading its fair share of contributions.
Around 70% of “direct taxes” are collected through withholding regimes, effectively outsourcing compliance costs to taxpayers. Meanwhile, cash-rich sectors such as agriculture, real estate and wholesale trade remain largely untaxed. Agriculture, which contributes 20% of GDP and employs 45% of the workforce, accounts for less than 0.1% of total tax revenues. Similarly, the real estate sector has an unpaid po-tential of Rs500 billion, while wholesale and retail businesses could contribute Rs234 billion more if properly taxed. Yet successive governments have failed to bring these powerful interest groups into the tax-net. The imbalance is stark. The salaried class contributes Rs375 billion annually, while the estimated 3.6 million retailers across the country pay only Rs4–5 billion. Salaried taxpayers already pay 200% more in taxes than exporters and retailers combined, yet the government continues to consider imposing further burdens on them. This inequitable distribution of fiscal responsibility violates the principles of fairness and efficiency, undermining both equity and economic governance.
Pakistan’s persistent fiscal deficits, averaging around 7% of GDP, have forced the government to rely heavily on taxation of growth, investment and savings. With a tax-to-GDP ratio below 10%, less than half its potential of 22.3%, the country remains trapped in a cycle of deficits and external dependency. Wide-ranging exemptions and concessions, costing the exchequer Rs 1.15 trillion in FY2020, further erode revenues. Instead of broadening the tax-base, successive budgets have focused on squeezing existing taxpayers harder, missing opportunities to include the undocu-mented economy. The result is a structurally extractive and regressive system. Compliance is valorized rhetorically but penalized in practice.
The dysfunction extends beyond taxation into the realm of state-owned enterprises (SOEs). These entities, envisioned to serve the nation, have become financial black holes. Over the past decade, losses from SOEs have crossed Rs1 trillion. Pakistan International Airlines (PIA) alone has incurred losses amounting to nearly Rs1 trillion, averaging Rs140 million per employee. Overstaffed due to political pressures and paralyzed by risk aversion, PIA epitomizes the inefficiency that drains public fi-nances. No government has offered a compelling reason to sustain such losses, yet taxpayers continue to foot the bill. This misallocation of resources compounds the inequities of the tax system. Salaried professionals and compliant businesses are taxed heavily to subsidize failing enter-prises and programmes that often foster dependency rather than empowerment. The Benazir Income Support Programme, for instance, consumes over Rs500 billion an-nually. While commendable in intent, its financing through increased taxation of the salaried class exacerbates the burden on those already struggling under inflation.
When the State itself becomes an unpredictable party against businesses, investor confidence erodes. Heavy taxation, coupled with policy inconsistency, turns opportu-nity into risk. The result is low investment, capital flight and tax evasion. Conversely, international experience shows that lowering tax burdens can stimulate economic activity, create jobs and ultimately increase revenues. Pakistan’s current trajectory, taxing compliance while ignoring evasion, undermines both growth and governance. The consequences are visible: declining private investment, rising unemployment and accelerating brain drain.
Ibne Khaldun’s warning about the dangers of excessive taxation and Keynes’s in-sight into the benefits of lower rates both find poignant expression in Pakistan’s cur-rent predicament. The country’s tax regime has evolved into a structurally extractive system that disproportionately burdens the salaried class and compliant businesses while allowing vast segments of the economy to evade responsibility. Ultimately, the axe falls on the white-collar class, already crushed under inflation and shrinking incomes. Unless Pakistan undertakes meaningful tax reform, broadening the base, lowering rates and aligning policy with growth, the cycle of inequity and stagnation will persist. The salaried professionals and compliant businesses who sustain the state deserve relief, not further punishment. Only by restoring fairness and efficiency can Pakistan build a sustainable foundation for economic governance and prosperity.
— The writer is an educator, based in Sindh.
