Pakistan faces significant fiscal challenges, and to generate revenue from a limited tax base, its tax system has shifted to disproportionately tax those who drive the formal economy: salaried professionals and entrepreneurs. Comparing Pakistan’s approach with India, its closest economic peer, highlights how Pakistan’s personal tax policies have grown increasingly atypical.
Early entry into the tax net
The difference between Pakistan and India is evident from the outset. In Pakistan, salaried individuals begin paying income tax on annual earnings of Rs600,000, whereas in India, after current rebates, the threshold translates to approximately Rs2.1 million. This means Pakistan taxes income at less than one-third the level where India effectively starts taxation.
Pakistan’s early entry into the tax net could be justified if rates were modest, but they are not. As income rises to middle-income levels, Pakistan’s tax burden becomes significantly heavier. For example, a professional earning Rs5m annually in Pakistan faces an income tax liability of Rs931,000, while a counterpart in India would pay roughly Rs307,212. Thus, Pakistani salaried professionals pay nearly three times the tax as their Indian peers.
Pakistan’s personal tax structure burdens salaried professionals and entrepreneurs far more than comparable economies
Business vs professional income
The disparity grows when examining business and professional incomes. Pakistan imposes separate and much harsher tax slabs on non-salaried individuals, partnerships, and professional practices (Associations of Persons). While the top marginal rate for salaried individuals is 35 per cent, business and professional income can be taxed up to 45pc, with surcharges pushing the effective rate close to 49pc.
In contrast, India uses a single tax schedule for both salaried and business income, with a top marginal rate of 30pc. Even after surcharges and the health and education cess, the maximum effective rate is typically between 39pc and 43pc and applies only to very high incomes.
The result is that Pakistani entrepreneurs are taxed more heavily and at much lower income levels compared to their Indian counterparts. For instance, at an annual income of Rs5m, a Pakistani professional or small business owner pays around Rs1.49m in tax, four times as much as an Indian earning the same. With a top rate nearing 49pc, Pakistan stands among Asia’s highest personal tax jurisdictions, despite having one of the lowest per-capita incomes in the region.
Widespread disparity
These differences are not isolated; across much of the middle-income range, Pakistan’s tax burden for salaried individuals is about double that of India, and for business income, it can be three to six times higher, depending on income. Worse still, as the tax slabs start early and tax is higher in Pakistan, someone earning Rs3.6m in Pakistan would pay tax of Rs466,000 if salaried and Rs810,000 if non-salaried vs nothing in India.
Such disparities have significant economic implications. First, they contribute to the shrinking of Pakistan’s formal tax base, as excessive burdens incentivise employers and employees to shift compensation into the informal economy. The paradox is clear: tax rates rise, but the tax base remains narrow.
Second, the system discourages entrepreneurship. While most economies use tax policies to encourage risk-taking, Pakistan’s approach penalises those who operate businesses, professional practices, or partnerships compared to salaried employment.
Third, heavy taxation of skilled professionals accelerates outward migration. In a global labour market, Pakistani engineers, doctors, and technology professionals are highly mobile. Excessive tax burdens push the most capable individuals to leave, weakening the formal economy further.
Fourth, shortage of quality talent in the formal sector slows down the professionalisation of family-owned groups, thereby thwarting innovation and governance standards.
The need for structural tax reform
This is not to suggest Pakistan should abandon fiscal discipline. Sustained revenue mobilisation remains essential. However, the structure of taxation is as important as the level. Taxing income too early, imposing heavy rates across the middle-income distribution, and penalising entrepreneurship risks undermining future tax revenues.
Pakistan’s tax reform debate must focus not only on revenue generation but also on creating a system that rewards productivity, encourages enterprise, and retains skilled professionals within the formal economy. Instead of taxing the already-taxed, it should align with the objective of creating jobs, especially in exports, by equitable and competitive taxation of businesses.
Without recalibrating its tax structure, Pakistan risks taxing effort while discouraging the growth it urgently needs.
The author, a former CEO of Unilever Pakistan and of the Pakistan Business Council, writes on economic policies that promote sustainable and inclusive growth.
Published in Dawn, The Business and Finance Weekly, March 30th, 2026
