Each budget cycle in Pakistan sparks a recurring debate: businesses advocate for tax relief to encourage investment and employment, while fiscal authorities focus on stabilisation, leaving little flexibility in policy. This routine has created a pattern of short-term solutions, ad hoc levies, and shifting policy objectives that ultimately satisfy neither side.
Pakistan faces both undisciplined public spending and a lack of clear direction in tax policy. Without political will and robust enforcement, efforts to achieve a higher tax-to-GDP ratio have placed a disproportionate burden on the formal sector. This has sidelined the real drivers of increased tax revenue: wealth creation and business growth.
In the past decade, Pakistan’s tax system has increasingly prioritised immediate revenue targets over a cohesive economic strategy. Elevated government spending, high tax rates, cascading indirect taxes, extensive withholding regimes, and frequent policy changes have made formal economic activity costly and uncertain. Businesses that invest, export, and generate formal employment are hit hardest, while the informal sector benefits from implicit subsidies.
This misalignment is significant because taxation is not isolated from broader government objectives. Official statements often mention goals like encouraging investment, boosting exports, creating jobs, ensuring food security, and fostering inclusive growth. Yet, the current tax system undermines these aims by raising costs, discouraging business scale, and reducing competitiveness. As a result, fiscal policy has become a major obstacle to economic growth.
Over time, predictability will itself enhance revenue, as businesses opt for documentation and growth over evasion and fragmentation
Regional comparisons
Comparing Pakistan to regional peers such as Vietnam, India, and Bangladesh is revealing. These countries have successfully increased tax revenues over the past two decades while maintaining lower and more stable tax rates for businesses.
For example, Vietnam’s corporate tax rate is about 20 per cent, India’s simplified standard rate is 22pc, and Bangladesh has streamlined its tax structure over time. Unlike Pakistan, they avoid turnover taxes, minimum taxes, and pervasive withholding regimes.
Predictability is a key factor. Investors may tolerate moderate tax rates but avoid markets with volatile policies. Vietnam’s emergence as an export manufacturing hub is credited not just to its skilled labour and trade agreements, but also to its stable and transparent tax system. India’s investment revival after 2019 also reflects a shift toward greater policy certainty.
In contrast, Pakistan has repeatedly increased tax rates, imposed new levies such as the super tax, and changed rules unexpectedly, including the introduction of the capital value tax, which has eroded investor confidence even when new incentives are announced.
Institutional reform: policy separation
The fundamental issue is not just the level of taxation, but the absence of a well-defined long-term strategy. Annual finance acts tend to bring only incremental changes, without clarifying the overall goal for the tax system. This leaves businesses uncertain about the permanence of existing taxes, which shortens their planning horizons, reduces reinvestment, and maintains a low-growth equilibrium.
Recently, Pakistan separated its tax policy from tax collection, marking a major reform. This allows tax policy to be shaped by medium-term economic goals rather than immediate revenue needs. However, the reform will be meaningful only if supported by a clear framework that outlines the direction of Pakistan’s tax system for the next five to six years.
Aligning tax policy with regional norms
A practical destination for Pakistan’s tax policy would be alignment with regional benchmarks: a competitive corporate tax rate of 25pc (down from the current 29pc), lower marginal personal income tax rates of 25pc (currently 38–49pc), gradual elimination of the super tax along with distortionary turnover and minimum taxes, a simpler and lower value-added tax rate of 12–15pc (currently 18pc), ending multiple taxation of inter-corporate dividends, and withdrawing the capital value tax, which has triggered capital flight.
Such measures would spur investment, exports, and formal employment without undermining fiscal sustainability, as stronger economic growth would offset impacts on tax revenue. The rationalisation process should prioritise salaried employees and export-oriented businesses — the former to stem the brain drain of experienced professionals and the latter to balance the external account.
Some critics argue that commitments under the International Monetary Fund (IMF) programme hinder Pakistan’s ability to reform. However, this view confuses the pace of reform with its direction. No credible reform plan expects transformation in a single budget, and even the IMF allows for logical, phased improvements. Acknowledging constraints should not justify inaction, nor should it prevent businesses from receiving a clear roadmap for future investment.
Phased transition: a practical approach
Transitioning gradually to a growth-oriented tax system is both feasible and necessary. The first year need not bring sweeping cuts; instead, it should signal intent by publishing a multi-year tax policy roadmap, making modest rate reductions, abolishing the most damaging turnover taxes, and halting the introduction of new ad hoc levies. These steps would have limited fiscal costs while significantly boosting investor confidence. Declining interest rates, savings in debt servicing, and disciplined public spending offer additional ways to meet fiscal targets.
In the following years, reforms can deepen as compliance improves and economic activity expands. Gradual rate rationalisation can be paired with technology-driven expansion of the tax base in under-taxed sectors like retail, services, and high-income agriculture. Simplifying indirect taxes can reduce cascading effects and improve refund processes. Over time, predictability will itself enhance revenue, as businesses opt for documentation and growth over evasion and fragmentation.
Lessons from international experience
Experience from other countries supports this phased approach. Vietnam did not become a manufacturing leader by cutting taxes overnight; it committed to stable policies and followed through. India’s corporate tax reform was preceded by years of signalling and institutional strengthening. Bangladesh’s export growth has been driven by relative tax stability despite fiscal pressures.
However, tax reform alone cannot address all barriers to investment or growth. It must be complemented by competitive and reliable energy and utilities, market-driven exchange rates, skilled labour, quality infrastructure, efficient logistics, tariff reforms, accessible credit and foreign exchange for capital expenditure, security, a favourable law and order environment, and easier business operations.
Tax reforms should be aligned with these broader economic factors. Moreover, the private sector must develop greater risk appetite and move away from reliance on guaranteed returns, tariff protection, and subsidies.
Pakistan faces a crucial choice: continue with yearly firefighting — raising taxes on a narrow base, introducing new levies, and watching investments stall — or commit to a destination tax policy that marries fiscal discipline with economic ambition.
Stabilisation without growth is unsustainable, just as growth without discipline is reckless. A predictable, growth-oriented tax framework offers a solution. Without it, Pakistan risks overburdening a shrinking pool of taxpayers as the economy stagnates. With it, fiscal policy can finally support, rather than hinder, growth.
The writer, a former CEO of Unilever Pakistan and of the Pakistan Business Council, serves on the boards of several public companies.
Published in Dawn, The Business and Finance Weekly, February 9th, 2026
