Pakistan has stabilised, but that is not the same as succeeding.

The International Monetary Fund programme has restored a measure of credibility, and reserves are healthier than they were 18 months ago. While these are real hard-won gains, stabilisation alone isn’t enough. The question now is whether Pakistan can turn this period of relief into lasting gains in investment, jobs, exports, and rising incomes, or whether we cycle again into the next crisis.

Pakistan’s investment-to-GDP ratio has averaged roughly 14 per cent over the past few years — the lowest in five decades. Countries like India invest about 35pc, Bangladesh 29pc, and Vietnam 31pc.

The gap is the divergence between the countries that invest and build.

Investor confidence requires predictable policy, competitive taxation, and an environment that rewards success

Without a sharp rise in domestic capital formation, particularly in manufacturing, foreign investment remains hesitant, exports stagnate, and consumption keeps importing what we should be making, eroding consumer confidence.

Investor confidence requires predictable policy, competitive taxation, and an environment that rewards success, which is vital for economic growth.

That is where tax reform comes in, and that is where Pakistan’s challenge is sharpest.

Punishing the compliant

Pakistan’s tax structure does the opposite of what a tax system is meant to do. It loads the burden onto a narrow, formal, documented base while large segments of the economy stay outside the net. The effective tax burden on a large formal-sector company can exceed 50pc once income tax, super tax, and dividend tax are stacked. Salaried Pakistanis pay up to 3.5 times more tax than their regional counterparts, fuelling the brain drain we are watching in real time.

The issue is not revenue but design, with missing revenue from four specific places: retail and wholesale outside the point of sale (POS) system, real estate under-declaration, import under-invoicing, and high-consumption non-filers.

The Federal Board of Revenue (FBR) has the tools to reach the National Database & Registration Authority, banking trails, POS, and digital payments. but lacks the will to enforce them and make visible, consistent examples of evasion.

The principle is simple. Broaden the base. Do not deepen the burden. This approach offers a clear path to a more sustainable and fair tax system, inspiring confidence in reform efforts.

What the FY27 budget has to do

Start with the super tax. Withdraw it fully, and not phase it out across income, dividends, and corporate gains. Given that the emergency, as the government has said, has passed, removing this measure can demonstrate political will and build investor confidence, making broader reforms more feasible.

Bring the corporate tax rate down to 25pc in line with regional benchmarks, taken in measured annual steps so the fiscal path stays credible. Listed companies meeting a 25pc minimum free-float should be taxed at a rate one percentage point lower as a governance incentive. The current effective burden is uncompetitive. Capital does not need to be told twice where it is welcome.

Restore tax neutrality for inter-corporate dividends, subject to conditions. Taxing the same dividend multiple times discourages the behaviour. Pakistan needs greater scale, stronger group formation, and deeper capital markets.

But the relief should be conditioned on a meaningful public float around 55pc effective shareholding, so the benefit goes to genuinely corporatised businesses. It will make the reform politically defensible and economically sound.

Anchor personal income tax to regional reality. The squeeze on the salaried class is one of the most expensive errors in the current system. A 25pc top marginal rate for salaried taxpayers, 30pc for non-salaried, with slabs indexed to inflation.

Fix the capital-gains framework for unlisted shares with a holding-period schedule with rates of 15pc within one year, 10pc between one and two years, 7.5pc between two and four, and 0pc after four years. Long-term equity should be rewarded, not penalised. Withdraw the Capital Value Tax on overseas assets, which contributes less than 0.2pc of FBR revenue while pushing capital out of the country and discouraging diaspora money inflows. Remove Clause 7E’s deemed rental tax. The revenue cost is trivial, but the message to the investors matters.

Restore the export regime that delivered results. Reinstate the 1pc Final Tax Regime. Fully restore the Export Facilitation Scheme. Keep local supplies zero-rated for GST. Reduce exporter withholding from 2pc to 1pc. Relax the input-tax adjustment caps that leave genuine exporter refunds stuck for months, and exempt listed companies from Section 8B altogether.

The real binding constraint on export competitiveness is the blocked working capital. Automated refunds and offset of admitted refunds against current liability would do more than any new incentive scheme dreamed up in the next budget cycle.

The institutional fix won’t work without predictability. Pakistan needs a legally anchored three-year rolling fiscal framework, endorsed by Parliament and extendable to five years, that locks in tax trajectories so businesses can plan beyond a single Finance Bill. Stable policy is the foundation for all other reforms, ensuring confidence and sustained progress.

Provincial governments must do their constitutional share. Pakistan cannot reach a meaningful tax-to-GDP ratio over the next three to five years without serious provincial action on land, agriculture, and services. Sustainable reforms require coordinated federal-provincial efforts.

Energy is the other lever. Four decades of oscillation between shortages and prohibitive prices have loaded legacy contract costs onto industrial consumers and gutted export competitiveness. Privatising or concessioning distribution companies, operationalising a competitive multi-buyer electricity market, and phasing out cross-subsidies in favour of targeted support for vulnerable consumers is overdue.

The choice in front of us

Pakistan is not short of entrepreneurs, capital, capacity, or ambition; what it lacks is a tax system that rewards those willing to build and invest.

Stabilisation has bought us time. The FY27 budget is where we decide what we do with it. Investment turns stabilisation into growth, and that growth will turn recovery into lasting prosperity. There is no third path, and there is no further room to defer. The Finance Bill is where the choice will be made.

The writer is the Chairperson of the Pakistan Business Council.
This is the first of three pieces in PBC’s case for reform. The next will take up the fiscal deficit and the expenditure side. The third will turn to regulatory reform

Published in Dawn, The Business and Finance Weekly, May 11th, 2026