High tax rates both on corporate sector and individuals are no longer sustainable for an economy already struggling with slow growth, declining investment and flight of both capital and talent.
When businesses are compelled to surrender a majority of their earnings to the state and the salaried class finds a large portion of their income consumed by taxes, the natural outcome is discouragement, contraction and non-compliance. The country’s recent revenue shortfall, despite record-high taxation, is proof that overburdening existing taxpayers cannot compensate for structural flaws in the system.
There is, fortunately, a growing realisation within the government that current tax structure is counter-productive. Prime Minister Shehbaz Sharif has instructed a comprehensive review of income and sales tax rates, acknowledging that excessively high rates are driving both companies and skilled individuals out of the country. His directive to the FBR seeks to explore ways to bring taxes down to levels comparable with regional economies, with the broader goal of keeping businesses anchored in Pakistan and halting brain drain. This recognition signals an important shift from a purely revenue-centric approach to a more growth-oriented fiscal philosophy. According to reports, the FBR is working on several models that propose rate cuts across multiple tax categories. The initial framework suggests reducing the corporate income tax rate from 29% to 25%, abolishing 10% super tax, eliminating 15% inter-corporate dividend tax, and cutting standard sales tax rate from 18% to 15%. Collectively, these adjustments could inject as much as Rs1.1 trillion into the economy, with bulk of the stimulus coming from reduction in sales tax. Such measures would significantly ease burden on companies and households, potentially revitalising economic activity and boosting investor confidence.
While it is encouraging that government is working on tax rates cut but whether this will translate into policy action remains uncertain. The ongoing arrangement with the IMF could limit government’s flexibility. The IMF, focused on ensuring fiscal discipline, may not readily endorse a significant tax cut. However, the Fund too must recognise the economic damage caused by over-taxation. Excessive rates discourage investment, drive businesses abroad and diminish the very tax base needed for long-term fiscal health. The IMF’s broader goal of promoting sustainable growth and attracting foreign investment cannot be achieved in an environment where businesses feel penalised for operating. It is for our relevant quarters to engage constructively with the fund on the matter so that corporate sector and salaried class can find much needed relief.
While reducing tax rates is necessary, it must be accompanied by a broader reform agenda aimed at expanding the tax net. Our chronic problem is not insufficient taxation but inequitable taxation. A narrow pool of compliant taxpayers bears the weight of national revenue needs, while many sections of the economy remain outside the formal system. Sectors such as retail contribute little compared to their earnings. The true game changer would be to ensure that every sector and individual pays their fair share. In an age of digital transformation, enforcing tax compliance should no longer be a challenge. The government can track income sources and detect evasion with precision. Technology can help create a transparent, automated tax system that minimises human discretion, curbs corruption and enhances voluntary compliance.The time has come to move beyond short-term fixes and embrace a tax model that supports growth, equity and sustainability.
