PRIME Minister Shehbaz Sharif’s plan to cut direct taxes for businesses in the next budget acknowledges the strain under which the formal sector is operating. For years, documented businesses and compliant taxpayers have been subjected to levies that amount to double taxation. Corporate profits are taxed, dividends are taxed again, and additional layers such as the super tax have further eroded retained earnings and dampened the incentive to invest. Matters have been exacerbated by FBR’s aggressive pursuit of super tax arrears, following a court decision. This has reinforced perceptions that compliance does not guarantee fairness, as people receive notices threatening the attachment of their bank accounts to recover the money. Briefly, those within the documented sector are squeezed repeatedly to compensate for the state’s failure to bring undocumented economic activity into the net. This approach risks decimating the very segment of the economy that sustains formal employment, exports and investment.

In this context, the PM’s commitment to lowering direct taxes is reassuring. However, he did not elaborate on how the government intends to reduce the tax burden on compliant businesses without simultaneously and substantially increasing the number of taxpayers and improving compliance. Pakistan’s tax-to-GDP ratio at 10.5pc is one of the lowest globally and is sustained largely by taxing the same formal sectors repeatedly rather than expanding coverage. Without structural changes in the tax system, any reduction in rates risks widening the fiscal deficit or shifting the burden further towards indirect taxation, which disproportionately affects lower-income households. Improvements are also needed to make this country investible because a credible and fair tax policy is crucial to improving the overall investment clime. Thus, reducing the additional tax burden on compliant taxpayers is necessary to revive investment and restore business confidence. Tax relief should be part of the business environment reform strategy — no reform to improve the ease of doing business and make industry and exports competitive can succeed in the presence of an extractive, unfair tax system. Pakistan’s fiscal sustainability depends less on taxing the compliant more heavily and more on bringing the untaxed into the system, while restoring confidence that the rules will be applied fairly, consistently and transparently.

Published in Dawn, February 28th, 2026