Tax truths
PAKISTAN’S tax debate is framed almost entirely around one question: how much the state can collect, with tax-to-GDP ratio as an objective rather than an outcome of a sound tax regime. That is understandable in a fiscally stressed economy, but revenue is only half the story. A tax system also shapes incentives — to invest or not, to formalise or stay undocumented, to build factories or shift capital abroad. When taxation pursues revenue without regard to growth, investment and employment, the result is fewer jobs, less documentation and a shrinking base. Even when collections improve, the structure remains narrow and uneven. The issue is not only how much we tax, but how we tax. It helps to distinguish between good, bad and ugly taxes.
Good taxes are broad-based, predictable and neutral. They raise revenue at moderate rates across a wide base, making compliance rational and evasion less attractive. Nor do they change abruptly year after year. Most importantly, good taxes expand the base over time by rewarding formality.
Bad taxes are narrow-based, high-rate and distortionary. They treat the compliant as captive. They layer surcharge upon surcharge. They tax transactions instead of income. They complicate compliance and increase the cost of being documented. The result is a system that discourages scale and rewards informality.
Then there are ugly taxes — punitive, confidence-destroying and anti-investment. Four recent examples illustrate the point.
Pakistan does not need fewer taxes; it needs better taxes.
The first is taxation of salaried individuals. This has become one of the most distortionary features of the fiscal regime. Income tax slabs begin at relatively modest income thresholds — lower in real terms than many regional peers, including our eastern neighbour — and climb steeply to marginal rates when surcharges are applied — to 38 per cent. For non-salaried individuals, the top rate is 49pc. Over time, personal taxation has become one of the largest and most predictable sources of direct tax revenue, not because it reflects rising prosperity, but because it is the easiest segment to tax at source. The consequence is severe: highly skilled individuals face tax rates comparable to advanced economies but without comparable public services, accelerating brain drain and incentivising a shift of talent into lightly documented or informal activities.
The second is the super tax. Originally conceived as a temporary solidarity levy, it has become a recurring feature. Applied as an additional charge on top of corporate income tax, it raises the effective tax burden precisely on firms that generate profits large enough to reinvest. By these add-on levies, the state signals that scale and success will attract penalties. Investment thrives on stability; recurring ‘temporary’ taxes erode stability permanently.
The third is capital value tax.It is an annual levy on the value of foreign assets held by tax residents, declared in some cases after paying a one-time tax under the 2018 Foreign Assets (Declaration and Repatriation) Act. The implicit understanding was that the 2018 levy would regularise assets — that has been undermined. Predictably, the response has been capital flight, often accompanied by relocation of individuals who make investment decisions.
The fourth is taxation under Section 7E. This taxes deemed income from immovable property based on notional valuation rather than realised cash flow. Taxing imputed income creates liquidity stress for asset-rich but cash-poor households and reinforces incentives to under-declare asset values.
Overlaying these is a high 18pc GST. In practice, where large parts of the retail and wholesale chain remain undocumented, high GST penalises the formal sector. When informal competitors evade it, the compliant lose market share. Low-income households that spend a higher share of income on consumption, bear the burden.
The consequence of this mix is visible. Investment remains subdued. Documentation stalls. Capital seeks safety abroad. And the tax base does not expand meaningfully because the system itself disincentivises entry. Pakistan does not need fewer taxes; it needs better taxes. Broadening the base, lowering marginal distortions, honouring past commitments and prioritising predictability would raise more sustainable revenue. A country seeking growth, exports and employment cannot tax its way to prosperity by punishing the very activities it wishes to promote. If taxation undermines confidence, the economy will respond by shrinking into the shadows — and the state will collect less, not more.
The writer, a former CEO of Unilever Pakistan and the Pakistan Business Council, is an advocate of sustainable economic policies.
Published in Dawn, February 20th, 2026
