This is budget making time and various trade bodies and business groups are coming up with their proposals to be included in the annual national accounts to be presented to Parliament in the next few weeks. One such set of proposals for the 2025-26 federal budget has come from the Overseas Investors Chamber of Commerce and Industry (OICCI), which represents over 200 of the largest foreign investors in Pakistan. It is a comprehensive set of recommendations which include ideas for tax simplification, investment promotion, and industrial growth.

The OICCI has suggested a phased reduction in the corporate tax rate from 28 percent to 25 percent and the gradual abolition of the super tax over three years. Implementation of this proposal will align Pakistan’s tax structure with global norms and ease the burden on businesses. But the question is: Will the government accept this sound proposal given the narrow fiscal space and IMF constraints requiring more revenue generation.

The OICCI has also proposed a reduction in the sales tax rate on goods from 18 percent to 15 percent over three years which is quite reasonable. In most advanced economies, the sales tax rate hovers between 7 and 10 percent. In our immediate neighbourhood too, the rate varies from 5 to 12 percent. For edibles and daily necessaries, the existing 18 percent is too high and punishing for the poor section of the population.

At the same time, the chamber has proposed restoring zero-rated regimes for pharmaceuticals, local supplies under Export Facilitation Schemes, and called for reducing federal excise duties on soft drinks and juices to 18 and 15 percent respectively. It further proposes removing the 5 percent regulatory duty on telecom power equipment and exempting infrastructure for 5G deployment from duties and taxes. This is a good proposal and merits attention from the authorities concerned.

Another area where reform is required is withholding tax which is not only too high but unfair given the fact that small account holders not liable to income tax are treated at par with the big ones. Withholding tax is a kind of indirect tax, a system which hides the inefficiency of the FBR in increasing the share of direct tax in the overall revenue pool. For the energy sector, the OICCI recommends restoring the taxable status of petroleum products, clarifying condensate taxation, and allowing export of surplus materials. In dairy, lower sales tax on packaged milk and exemption on infant nutrition inputs have been recommended in order to make the commodities affordable for the common household. The pharmaceutical industry has pitched for the restoration of zero-rated status and elimination of the 3 percent value-added tax on imported medicines.

On the other hand, telecommunication companies seek exemption from withholding taxes, a harmonized tax framework, and relief on 5G-related duties. The tobacco industry looks for rationalized excise rates and rigorous enforcement of track-and-trace systems to curb illicit trade which is highly damaging to legally operating entities. For the beverage producers, the OICCI recommended lower excise duties to boost sales and support agricultural development, while automakers stand for reduced sales tax on local vehicles and lower withholding taxes on dealer transactions. Banks, insurers, and chemical and fertilizer manufacturers seek simplified tax treatments, better recognition under accounting standards, and input tax adjustability. All these sectoral measures are aimed at stimulating growth and need favourable consideration from the budget makers.

The OICCI has made a strong recommendation for structural reform, that is operationalization of the Tax Policy Board under the Ministry of Finance. The idea behind this is to separate tax policy formulation work from administration, which will make for more coherent and consistent planning. Some of the proposals also emphasize transparency and digitization, including demonetizing high-value currency notes, publishing monthly tax refund data, and integrating tax systems with other government databases. It may be added here that OICCI members account for over Rs. 120 billion in refunds, a fact which underlines the need for thorough going systemic reform on an urgent basis.

According to the OICCI as well as independent experts, tax credits and depreciation incentives can play an important role in promoting the growth of green technology, locally manufactured machinery, and the use of indigenous raw materials. It has also proposed incentivizing the cultivation of strategic crops such as palm oil and oilseeds to reduce dependence on imports. It will be a good idea if the government allows a 10 percent tax credit or rate reduction for the first time listed companies, and exporters from emerging sectors are given a 20 percent tax credit on incremental exports for five years. To give relief to individual taxpayers, the OICCI has rightly proposed abolishing the 10 percent surcharge on annual incomes exceeding Rs10 million for compliant taxpayers and raising the taxable income threshold to Rs1.2 million.

It is universally recognised that the use of targeted tax credits goes a long way to shape responsible business behaviour and support exports, green energy, and sustainable production. It is also high time the government moved urgently to broaden the tax base to include all sources of income, including those from agriculture and real estate. At the same time, the tax burden should be reduced for the salaried class which is the backbone of the economy and provides expertise to run various sectors of society.