Pakistan’s macroeconomic woes stem from persistent fiscal imbalances, which usually fuel balance-of-payments crises and keep the economy from reaching its potential. The government and the International Monetary Fund (IMF) have attempted to address the problem largely by increasing tax revenues, without sufficient focus on expenditure reduction. Even within revenues, the emphasis remains on the topline target rather than on expanding the tax base.

This is evident from the recent increase in the tax-to-GDP ratio, from 9.3 per cent of GDP in FY23 to 11.1pc in FY25. Much of this improvement has come from further squeezing an already narrow tax base.

The overall income tax incidence on the formal corporate sector now exceeds 64pc, including income tax, super tax, and dividend taxation. Salaried taxpayers, meanwhile, face a top rate of 38.5pc, including the surcharge. On the other hand, there is still no serious resolve to tax agriculture, retail, and professional services, where collection remains abysmally low.

More of the same cannot continue. The formal sector, including multinationals, contributes nearly one-third of the country’s total revenues, which is significantly higher than its share in the economy. Formal firms are effectively paying a “compliance tax” and subsidising the undocumented sector, which is estimated at 30-40pc of GDP. The currency-in-circulation-to-monetary-aggregate ratio stands at 27pc, which is 60-70pc higher than India and more than double that of other competitive economies.

The issue is that state institutions appear to lack the political will to expand the tax base. There is no way the country can run a sustainable fiscal policy when only 2.2pc of the population, or around 5.9 million filers, carries the burden of the national exchequer. This is choking the formal economy and limiting the ability of compliant firms to expand, as they are forced to compete with informal players whose unfair advantage grows as tax rates rise.

There is no way the country can run a sustainable fiscal policy when only 2.2pc of the population carries the burden of the national exchequer

Retail, agriculture, real estate, and professional services, such as lawyers, doctors, and contractors, must be brought into the tax net. These sectors continue to thrive outside effective enforcement. Retail and agriculture together contribute almost one-fifth of the GDP, yet their income tax contribution remains negligible. Without correcting this imbalance, Pakistan will keep rewarding informality and penalising compliance.

The consequences are already visible in weak capital formation. Investment-to-GDP is at a multi-decade low, while both domestic and foreign investors remain hesitant. If excessive taxation of the compliant sector continues, the formal footprint will shrink further. The exit of foreign firms may continue, large local groups may delay new investment, and the taxation riddle will remain unresolved.

A pragmatic approach would be to return to the drawing board before the FY27 budget. The federal and provincial governments must agree on a base-broadening issue: provinces should enforce agricultural income tax, while the federal government should bring retail, wholesale, and professional services into the net through a mix of incentives, digital documentation and credible enforcement. The IMF should also shift its focus from headline revenue targets to sector-wise collection in proportion to economic activity. All income should be treated equally and taxed proportionately.

Once others start paying their due share, the government will have the fiscal space to lower the burden on already compliant sectors. The prime minister can begin by fulfilling his promise to phase out the super tax and remove the surcharge on salaried taxpayers.

Over time, the overall corporate income tax rate should be gradually reduced from 29pc to 25pc. The government should also provide relief to the “compliant middle” by raising the taxable threshold to Rs1.2 million and abolishing the 10pc surcharge on high earners.

This is not just a fiscal demand; it is a strategic requirement. Pakistan cannot keep asking the same narrow group of compliant taxpayers to carry an increasingly heavier burden while large segments of income remain outside the effective tax net.

The salaried class, documented businesses, listed companies, and multinationals are already visible, audited, withholding agents, and easy to collect from. Pushing them harder may help the revenue target in the short run, but it weakens the very segment of the economy that Pakistan needs to protect and expand.

It discourages skilled professionals, encourages brain drain, reduces the incentive to formalise, and makes foreign investors question whether Pakistan rewards compliance or penalises it. A country trying to attract investment cannot have a tax system where formality itself becomes a disadvantage.

The strategy for budget 2026-27 must therefore be built around lower rates and higher enforcement. The lesson from regional peers is clear: countries do not become investment destinations by making compliance expensive; they do it by making evasion difficult.

Vietnam, India, and Türkiye have all used variations of the same model — relatively more competitive tax rates, wider digital documentation, stronger transaction trails, and tighter enforcement across supply chains. The result is not a weaker revenue base but a broader one. Once invoices, payments, sales, imports, utilities, and banking data begin to speak to each other, the shadow economy becomes harder to hide.

Pakistan’s problem is that enforcement is too narrow. The FY27 budget should therefore move away from rate hikes and toward compulsory documentation of retail, wholesale, agriculture-linked value chains, and professional services.

The writer is Chief Executive/Secretary General, OICCI.

Published in Dawn, The Business and Finance Weekly, May 18th, 2026