As Pakistan grapples with slowing growth, widening fiscal gaps, and an IMF programme that leaves little room to breathe, a fresh debate has resurfaced over whether the country is taxing its economy into stagnation.
An ambitious Rs975 billion tax relief proposal floated by a private-sector working group—and cautiously entertained by the Prime Minister—has exposed the core contradiction of Pakistan’s fiscal strategy: the need to revive investment and formal economic activity while remaining shackled to rigid revenue targets. With the Federal Board of Revenue already falling well short of its FY26 goals, the prospect of relief has ignited a broader reckoning over whether Pakistan’s tax structure is sustainable—or self-defeating.
In early December, as Pakistan’s economy limps through FY26 with a widening revenue shortfall, a private-sector-led working group floated an ambitious Rs975 billion tax relief package, prompting Prime Minister Shehbaz Sharif to direct officials to engage the International Monetary Fund (IMF) for approval. This proposal—encompassing cuts for salaried workers, corporate rate reductions, super tax withdrawal, and surcharge abolition—arrives amid dire fiscal straits. The Federal Board of Revenue (FBR) has missed its July-November target by Rs428 billion (8 percent shortfall), signaling deepening collection woes. With the IMF’s Extended Fund Facility demanding unwavering revenue targets, mid-year relief appears improbable at best, relegating any concessions to FY27 deliberations—if offset by expenditure cuts. This episode highlights a broader malaise: excessively high, skewed taxes deterring investment and formal activity, yet reforms stalled by structural rigidities and enforcement gaps.
The private-sector panel’s blueprint addresses longstanding grievances. Corporate income tax at 29 percent, augmented by a 10 percent super tax on high earners (effective burdens exceeding 60 percent in layered cases), and dividend taxation at 15 percent—even inter-corporate—stifle capital formation. Business leaders lament insufficient incentives for reinvestment, as major groups eye offshore opportunities. Salaried individuals face a top slab of 35 percent plus 10 percent surcharge beyond thresholds, fueling middle-class exodus: skilled managers emigrate or shift to freelancing, slashing liabilities amid a mid-to-senior talent crunch in formal sectors.
These distortions breed informality’s rise. Export services, including freelancing, enjoy a mere 1 percent final tax, contrasting 29 percent on goods—prompting reports of goods rerouted as services, inflating the former while the latter stagnates. High rates disincentivize consumption and investment, with government spending skewed toward inefficient current outlays yielding poor governance outcomes. After two years of IMF-driven austerity, realization dawns: the model falters. The Prime Minister’s remarks on slashing income and sales taxes to curb capital flight, echoed by the Special Investment Facilitation Council coordinator, reflect this shift.
Yet, intent clashes with reality. However, IMF does not affirm mid-year relaxation, especially with FBR’s Rs428 billion hole threatening primary surplus targets. At best, waivers for shortfalls might avert contingency hikes in H2FY26, but relief demands offsets—likely via deeper development cuts, perpetuating growth’s sacrifice. Phasing over years, as suggested, could align with FY27 budgeting, but requires demonstrating base expansion and expenditure restraint.
FBR’s track-and-trace initiatives offer glimmers: over Rs52 billion additional from sugar and cement via AI monitoring in late 2024-2025, with plans for textiles, tobacco, and tiles. Chairman claims competent placements in key posts, yet widening gaps belie progress. New filers often contribute minimally, underscoring enforcement’s limits against informality.
The core impediment: lack of imagination in downsizing government. Rightsizing vacant posts saves Rs56 billion annually, but redundant active roles persist. SOE losses exceed Rs500 billion yearly; privatization crawls. Without slashing current expenditures—pensions, bureaucracy perks—by Rs1-2 trillion through bold reforms, tax cuts remain illusory.
High taxation’s toll is multifaceted. Investment at 13 percent of GDP lags regional 30 percent averages, FDI tepid at 0.7 percent. Exports, 53 percent textiles, falter amid cotton shortages and energy costs double peers. Human capital flees: 335,000 emigrated H1 2025, remittances $35 billion notwithstanding global squeezes. Youth unemployment at 22 percent risks unrest in a 64 percent under-30 demographic.
The proposal’s wisdom is evident: lower rates could spur formalization, investment, and growth, mirroring Bangladesh’s garment boom or India’s manufacturing incentives. Yet, without offsets—expenditure rationalization, SOE sales, elite taxation—IMF veto looms. The Rs975 billion package, bulk corporate-focused per analysts (salaried relief Rs30-40 billion), demands fiscal space Pakistan lacks mid-program.
As FY26 unfolds with deficits yawning and growth at 3 percent—insufficient for 2 million annual job seekers—the crossroads sharpens. Embrace comprehensive reform: digitize FBR for Rs2 trillion untapped, prune bureaucracy genuinely, privatize loss-makers. Or persist in patchwork, inviting the 25th bailout. For a nation rich in youth and potential, high taxes’ drag isn’t sustainable. The private-sector push signals urgency; government’s response will define if relief materializes—or evaporates into another wish list. Amid IMF oversight, true relief demands courage: shrink the state to enlarge the economy.
The Rs975 billion tax relief proposal is less a fiscal wishlist than a warning signal. Pakistan’s economy cannot grow, formalize, or retain talent under a tax regime that penalizes productivity while shielding inefficiency. Yet without decisive expenditure reform—curbing bloated bureaucracy, halting SOE hemorrhages, and rationalizing pensions—meaningful relief remains fiscally impossible under IMF oversight. As FY26 unfolds with subpar growth and mounting social pressures, Pakistan faces a stark choice: undertake courageous, structural reform that shrinks the state and widens the tax base, or continue cosmetic fixes that merely postpone the next bailout. The private sector has sounded the alarm; whether the state listens will determine if relief becomes policy—or fades into another missed opportunity.