Pakistan’s taxation policies are increasingly proving counterproductive, constraining investment and suppressing growth. Key stakeholders now hope the International Monetary Fund (IMF) will recognise the centrality of economic expansion to durable stabilisation and ease pressure on the government, allowing it fiscal space to recalibrate its tax policy.
They contend that only such flexibility can unshackle the country’s economic potential and unlock its vast productive capacity.
Under the IMF oversight and a strict focus on fiscal stabilisation, Pakistan’s tax collection has risen sharply over the past two years.
According to the State Bank, tax revenue grew by a notable 12.5 per cent year-on-year in Q1FY26. However, despite repeated claims of broadening the tax base, tangible progress remains elusive.
‘Out of the proposed Rs975bn package, the bulk of the relief may go to companies, with super tax potentially cut from 10pc to 5pc’
Large sectors, including agriculture, wholesale, retail trade, real estate, and high-earning service providers such as lawyers, doctors, architects, artists, consultants, etc, continue to operate largely outside the tax net. As a result, the burden of additional revenue mobilisation has fallen disproportionately on those already within the tax system.
This pattern is also reflected in official publications. According to the ‘21st Edition of the Revenue Division Year Book 2025’, the share of direct taxes in total taxes rose from 37.2pc in FY22 to 49.3pc in FY25. A review of the Pakistan Economic Survey 2024-25 and related publications confirms that the government does not regularly publish a clean breakdown of the share of categories of direct taxpayers, such as corporations or salaried individuals, in total direct tax collection.
However, the corporate sector is understood to account for around 65pc of direct tax collections. The salaried individuals, presumed to be captive taxpayers, whose taxes are deducted at source and who constitute less than 8pc of the labour force, are believed to be contributing far more than their proportional share to the tax take.
Acknowledging that Pakistan’s unusually high tax burden has become a drag on growth, Prime Minister Shahbaz Sharif reportedly directed his economic team last week to engage the IMF on a proposed Rs975 billion tax-relief package as a part of a strategy to spur job creation and capital formation.
‘High taxation is the single biggest obstacle to investment, and we are hoping the IMF will approve the relief package’
The package was crafted by one of the government’s working groups, which included representatives from civil society and the private sector, to recommend tax structure reforms. The private-sector-led group on taxation, chaired by Shahzad Saleem, proposed phasing the relief over three years, with an estimated immediate cost of Rs600bn. The government, however, opted to seek the IMF’s endorsement before proceeding with implementation.
Senior members of the economic team were approached for comment, but no response was received by the time of filing. However, a source familiar with the deliberations said the prime minister’s close advisors broadly support the tax panel’s proposals, viewing them as critical for kick-starting growth.
“High taxation is the single biggest obstacle to investment, and we are hoping the IMF will approve the relief package,” a senior official noted privately. “We have some fiscal space, with the fiscal deficit down from over 8pc to around 5pc, but we need the Fund’s relaxation on the primary-surplus target to move ahead.”
Responding to a question on how much of the proposed relief targets the salaried class, former FBR chairman Shabbar Zaidi noted, “The maximum salary tax rate is proposed to be reduced by five percentage points. The impact will be no more than Rs30–40bn. So, out of a Rs975bn package, the bulk of the relief would go to companies. Super Tax is to be cut from 10pc to 5pc.” He pointed out that the proposal contains no concrete measures to offset the resulting revenue shortfall.
Business leaders serving on government working groups declined to comment under their engagement terms. However, former Pakistan Business Council CEO Ehsan Malik endorsed the proposed tax relief, arguing that Pakistan’s tax regime renders businesses uncompetitive and punishes the most tax-compliant. “Salaried employees and formal-sector firms bear a crushing tax burden while large segments of the economy remain untaxed.”
He warned that the high-tax approach under the 24th IMF programme is stifling investment, destroying jobs and accelerating skilled emigration, while repeated pledges to tax retailers, wholesalers, transporters, doctors, lawyers and salon operators have produced little progress.
“In this context, tax cuts are not just desirable but essential. Proposed measures include lowering the corporate tax rate from 29pc to 25pc; bringing maximum individual and AOP rates down from 38–49pc to a rational 25pc; abolishing the super tax; removing taxes on inter-corporate dividends; cutting sales tax from 18pc to 15pc; and withdrawing the Capital Value Tax. The real challenge, as always, will be closing the fiscal gap and securing IMF approval,” Mr Malik remarked.
“That requires political will. The government must cut expenditure, fast-track privatisation, and phase in tax reductions over three years. Evidence shows that lower, predictable taxes stimulate investment, create jobs, and ultimately raise revenue. Pakistan cannot grow while choking its most productive sectors.
“Above all, personal income tax rates need an immediate cut. Salaried workers have become the easiest target, taxed far beyond economic reality. Easing this burden is vital to restore confidence, stem the brain drain, and put the country on a sustainable growth path,” he concluded.
Abdul Aleem, Secretary General, Overseas Investors Chamber of Commerce and Industry, supported a calibrated reduction in tax rates for both the corporate and salaried groups. He noted that publicly available details do not explain how the Rs975bn figure was derived or what share is intended for salaried taxpayers.
He believed that the IMF is broadly aligned with the proposed relief but urged the Ministry of Finance to clarify how the resulting revenue shortfall would be addressed.
Published in Dawn, The Business and Finance Weekly, December 8th, 2025
