THE government must treat the tax proposals of the Overseas Investors Chamber of Commerce and Industry for the FY26 budget as a cry for help from businesses — and individual taxpayers — groaning under the weight of excessive taxation and high tax rates. The recommendations of the trade body, which represents the business interests of over 200 foreign companies operating in Pakistan, mainly focus on gradually reducing the tax burden on the corporate sector by cutting the corporate tax rate to 25pc in five years and scrapping the super tax in three years for a predictable and business-friendly fiscal environment. Additionally, it has called for doubling the taxable income threshold for the salaried and other individuals to Rs1.2m to put a little extra disposable cash into the pockets of low-income, inflation-stricken individuals to boost consumption. Nevertheless, it suggests that mandatory tax filing remain unchanged for all earnings in excess of Rs0.6m to increase the number of filers. Other suggestions include a gradual reduction of the sales tax on goods to 15pc to match the regional average and expediting the harmonisation of the federal and provincial sales tax rates in order to do away with distortions and make compliance easier.

Ostensibly, the suggested reforms are not difficult to implement, but the tax targets and one of the world’s lowest tax-to-GDP ratios might cause policymakers to think twice before reducing the existing burden on taxpayers. In other words, policymakers would need to draw up a clear reform roadmap aimed at broadening the tax base, significantly improving compliance, and plugging evasion before rates can be reduced without jeopardising revenue targets and the loan agreement with the IMF. More than that, the rulers need strong political will to reform the inequitable tax system by tackling the undertaxed sectors such as retail, real estate and agriculture. According to media reports, the OICCI believes that “a more equitable contribution across all sectors, proportionate to their share of GDP, could increase the tax-to-GDP ratio to nearly 14pc from below 10pc”. The present tax regime is opaque, unpredictable and inequitable. It impedes investment, job creation and business growth, and is responsible for increasing evasion and a growing undocumented economy. If the country is to attract foreign investment in the real, productive sectors and raise its tax-to-GDP ratio, it will have to first restructure its taxation system.

Published in Dawn, May 1st, 2025