The country’s major chambers of commerce and industry observed a nation-wide strike on July 19, in protest against the harsh taxation measures introduced in the Finance Act 2025.
According to business circles, a number of controversial provisions have been introduced in the Finance Act, including a Rs200,000 threshold on cash transactions, the wide-ranging powers of arrest granted to FBR officials on allegations of tax fraud, and the mandatory implementation of digital invoicing and e-billing.
This is in addition to the recent increases in GST and withholding tax rates which have put new burdens on the trade and industry. The general complaint is that the rise in withholding tax rates year after year has eroded the profitability of the industrial sector, undermining investor confidence, leading to a sustained reduction in industry’s contribution to GDP. What has caused special concern is that in the Finance Act there has been a sharp increase in withholding tax rates for service providers which has undermined the viability of countless businesses, including those in the manufacturing sector. The standard withholding tax rate has now been raised to 15 percent of turnover which means that businesses have to surrender 15 percent of their total revenue to the government, regardless of profitability. This is too much as the earlier rates were nine percent for companies and 11 percent for individuals or associations of persons. It is clear that very few businesses can afford a 15 percent tax on gross revenue, irrespective of the profit margin.
It is true that the economy cannot function without taxes but it is equally true that excessive taxation causes inflation and price hikes and retards economic growth. Those who decided to impose a 15 percent withholding tax on gross revenue are unaware of the fact that many businesses operate on a profit margin of 10 percent or less. The Finance Act also contains provisions mandating digital invoicing and restricting cash transactions but these are difficult to enforce in an environment in which educational level is not high and cash payment is the norm. If the government wants to move towards a digital economy, it must allow for a transitional period and launch a concurrent awareness raising campaign.
Taxation is a sensitive matter and it has to be handled with care and caution. Draconian tax measures can boomerang and will lead to the growth of the informal economy. The latest strike once again brings into sharp focus the lack of equity and justice in our taxation policy. This policy has an extremely narrow base, putting excessive burden on certain sectors while sparing some holy cows. Its biggest failing is its reliance on indirect taxes which is hard on the poor classes.
Successive governments have continued to focus on raising revenue rather than on undertaking long overdue reforms that would render the structure fair, equitable and non-anomalous. Direct taxes account for nearly 49 percent of total collections; however, this does not take account of the fact that 75 to 80 percent of these collections are withholding taxes levied in the sales tax mode, which is an indirect tax — an exercise that the Auditor General of Pakistan noted and recommended to the FBR. In this context, it is relevant to note that increasing reliance on petroleum levy is budgeted to generate 1.468 trillion rupees this year, which is an indirect tax and impacts the transport costs of the poor and vulnerable classes. The authorities assert that the attempt to raise FBR collections through raising existing taxes or bringing more items under the sales tax net is to ensure that the budget deficit is sustainable. But a better option would be to reduce administrative expenditure which has become bloated during the last few years. For instance, the budget for the current year envisages a 10 percent raise in civil administration expenditure.
Needless to say, without structural reforms and revamping the existing tax structure, revenue cannot be increased proportionate to the paying capacity of various sectors of the economy. Despite years of repeated efforts aimed at expanding the tax base and boosting revenue collection, the country has not succeeded. In a recent report the Asian Development Bank highlighted the broader structural issues that have long plagued the economy: a narrow and inequitable tax base, a burdensome, complicated compliance regime and a vast informal economy that remains outside the tax ambit.
As a result, revenue collection has seen little growth in real terms over the past decade. The tax-to-GDP ratio continues to lag well behind other regional economies, falling short of the 10.6 percent target for FY2024-25. While formal registrations have increased on paper since 2014, they have not been matched by a commensurate rise in actual revenue, as many filers declare negligible or no taxable income. Besides weakening compliance among existing taxpayers, the structural inefficiencies are driving more and more businesses to move to the informal sector. A key reason for the reluctance of many enterprises to formalise is the prohibitively high cost of compliance to the tax regime. In recent years, not only have tax rates risen steeply, but the procedural complications have also deterred businesses from joining the formal economy.