The taxation system needs reform

Our system today is in moral bankruptcy. Our tax system has become a tool of harassment for the weak, a shield for the elite and a mechanism of existence for governments that exchange dignity for loans. We have witnessed countless crises and our every bailout is an acknowledgement of failure, every super tax a confession that we would rather choke enterprise than reform elite privileges.

Pakistan’s financial situation today resembles a patient on life support, breathing not by the capacity of its lungs but by the synthetic ventilator of ad-hoc loans, remittances and short-term inflows. For instance, the corporate tax rate in Pakistan currently stands at 29%, with an additional super tax of 10%. There is a 2.0% Workers’ Welfare Fund, and this is further augmented by an additional Profit Participation Fund of 5.0%. Thus, the effective corporate tax rate climbs to around 45%.

Comparative analysis tells us that in the UK, US, KSA, Norway, Vietnam and Taiwan, corporate tax is around 21%. Hong Kong is maintaining around 16%, Switzerland has 14% and the UAE has 9.0%. Why would any investor invest its money in a country where practically half of every rupee earned is confiscated before reaching shareholders?

Our foreign direct investment in FY2024–25 was only $1.79 billion – and that is certainly less than what the UAE free zone attracts in a quarter. India received $81 billion, Bangladesh received $3.5 billion, the UAE received $45 billion and the KSA received $35 billion in direct foreign investment in the same fiscal year. The numbers speak of the capacity and credibility of their fiscal system, which they have developed.

Now it is easy to understand why Pakistan's tax-to-GDP ratio has stagnated at 9.0% for quite some time; regional countries, such as India (12%), Sri Lanka (14%) and Nepal (22%), have higher tax-to-GDP ratios. Pakistan has barely 5.8 million tax filers, with nearly a quarter of them filing 0 returns. That is our paradox: the highest tax rates, the lowest investment returns, growth and productivity.

This draconian tax system is compelling young IT entrepreneurs to open bank accounts in Dubai, rather than establishing roots at home. The FBR must realise that tax is not merely a fiscal instrument; it is a covenant of trust between the state and its citizens. That covenant lies in ruins now.

We can analyse two different models of prosperity: Dubai and London. The tax regime in Dubai imposes almost no taxes — 0% personal income tax, a 9% capped corporate tax, a 5% value-added tax (VAT), 0% capital gains tax and no inheritance tax. Dubai flourishes because of its openness and ease, thus attracting capital, talent and innovation from across the globe. By contrast, London taxes heavily: up to 45% personal income tax, 20% VAT, 25% corporate tax and 40% inheritance tax. And yet, it still flourishes. Why? Because their financial system is anchored in stability, trust runs deeper, with strong functioning institutions.

We can learn from India, as its model shows how sustained reforms can transform a weak tax system into an engine of economic growth. Following the preparation for the implementation of GST and digitisation, India unified its tax net and brought over 120 million new taxpayers into the system. Through decentralisation and by separating direct and indirect taxes under different boards, it ensured effective institutional focus, while strict enforcement of documentation abridged evasion, notwithstanding political pushback. Its decentralisation also empowered regional administrations, making revenue collection more professional and citizen-friendly.

Pakistan’s FBR, conversely, remains stuck with redundant practices — concerned with arbitrary targets, advance tax collection and stating 'record collections' that are not driven by real growth but through rupee devaluation. This is not progress, but rather fiscal misapprehension, which erodes trust and compromises systemic stability.

Perhaps we can also learn from the UK, HM Treasury, which combines facilitation with a penalty. Their digital AI enables platforms to offer online filing, digital VAT compliance and e-invoicing, thus leaving very little space for fraud. The system supports and rewards the honest taxpayers, while tax evasion is met with serious repercussions. And here in Pakistan, we still allow billions of rupees to move in cash by security companies guarded by private firms and beyond the FBR’s radar. This is not inefficiency but incompetence. The movement of cash through security companies between private individuals should be banned.

The structure of our tax regime incentivises dishonesty and penalises integrity. Because of the high taxation rate, nearly half of Pakistan’s GDP operates informally under the radar. Smuggling and unregistered traders selling Chinese imports escape the 18% sales tax, weakening those who comply. Tax fatigue and the cost of compliance in Pakistan are very high. The World Bank’s Doing Business 2020 report discovered that Pakistani companies face 47 separate tax payments annually, compared to 10 in the UAE, 11 in KSA and 8 in Hong Kong.

Compliance in Pakistan consumes 577 hours each year, compared to 55 hours in the UAE and 72 hours in KSA. In Lahore alone, businesses must make 34 separate payments, consuming 283 hours annually, with a total tax-and-contribution rate of 34% of profits. In Bangladesh, the burden is 33 payments and 435 hours; in India, 11 payments and 252 hours; in the UAE, only five payments and 116 hours. Pakistani companies, thus overly regulated, spend ten times more on red tape and bureaucracy than their competitors, wasting time and resources on audit notices and harassment instead of innovation and productivity.

Another fundamental problem is the chaos of overlapping authorities and the disjointed structure of tax collection. There is no interaction and integration, for instance, between the FBR, the Punjab Revenue Authority, provincial excise and taxation departments, and local municipalities, all of which levy overlapping taxes. They do not share data and coordinate audits. There are duplications and redundancies as each body sends separate notices, issues penalties and consumes endless hours. In many cases, sales tax overlaps become ridiculous. The FBR claims GST on goods at 18%, while provincial authorities impose 16% on services. Many sectors, such as construction, hospitality, telecom and software, often fall into grey zones where both parties issue notices, making business impossible.

The reforms demand rationality, equity, and courage. We need to broaden the tax base, for instance, agriculture, which makes up 25% of GDP and contributes almost nothing. Exports, nearly 15% of GDP, are taxed at just 1%. Together, 40% of the economy is just exempt such as the real estate and retail sectors, which today contribute nothing despite generating vast wealth. Digitisation of the economy must be uncompromising: implement track-and-trace, point-of-sale integration, e-invoicing. Enforcement must be strict yet fair, with special tribunals, whistle-blower protection and real-time data sharing AI-algorithm integration across institutions.

We need to sequence these reforms very carefully and stipulate it with a three-year phase-out plan, where rate cuts are tied to FDI inflows, new registrations and compliance milestones. Transitional shortfalls can be addressed through IMF-approved buffers and the bond market. No one is seeking collapse but credibility.

Genuine reform is not technocracy but statesmanship. Those who are at the helm of affairs must have the courage to confront cartels, renegotiate the NFC and demonstrate that the untouchable can indeed be touched. Citizens must see their taxes building schools and hospitals, not just feeding corruption and protocols.

Without reforms, Pakistan will continue to lose its talent and capital to other countries, exporting its brightest minds and deepest pockets to Dubai, Toronto and London. But with reform, it can eventually become the magnet that it was meant to be.

The writer is a political economist, public policy commentator and advocate for principled leadership and regional cooperation across the Muslim world.

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

The writer is a trade facilitation expert, working with the federal government of Pakistan.

Originally published in The News