The Pakistan Business Council (PBC) recently published a report suggesting what the incoming government can do for an economically stronger Pakistan. Among its many suggestions was fixing the disproportionate tax incidence.

Arguing that the current taxation regime incentivises the informal economy, the PBC said the lamentable tax-to-GDP ratio will not improve till political will translates into a broader tax base. This requires the government to stop increasing taxes as a ‘kneejerk reaction’ every time it wants to raise revenue. Even in Special Economic Zones, where companies are supposed to be exempt, firms must pay turnover taxes.

Taxing the topline as opposed to profits is particularly problematic as it penalises large capital-intensive projects where a tax loss is normal in the initial years, thus effectively discouraging much-needed investment in the country. Given the high prevalence of cash-based transactions, the PBC called for the discontinuation of the Rs5,000 note, along with restrictions on cash for big-ticket spending, to bring the black market and informal economy within the tax net.

Without an effective, prolonged exercise of tax reforms, the government will further alienate corporations in the country.

Published in Dawn, The Business and Finance Weekly, January 8th, 2024