Tax reform must start at the core

As budget nears, relief for salaried workers and expansion of tax net are crucial to revive growth, protect

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KARACHI:

As budget season looms, attention is firmly fixed on the current finance czar and team Sharif, who are tasked with steering Pakistan from the stabilisation phase into a sustainable growth trajectory. While the first year under the new government and the International Monetary Fund (IMF) programme has largely met expectations, the real test lies in the next two to three years.

Despite some geopolitical triumphs and a renewed sense of national security amid regional tensions, the true battle for Pakistan remains economic. We can ill afford complacency. Structural economic reforms are urgent, particularly in enhancing the country's chronically low tax-to-GDP ratio — currently hovering around 10.6%, with an ambitious target of 11% set for this year.

Tax reform: A shift towards equity

Thus far, the burden of taxation has disproportionately fallen on the already compliant segments of the economy. Now is the time to widen the net. Greater fiscal inclusion must be achieved by targeting the largely untaxed informal and retail sectors—those operating outside the formal economic structure.

One pressing area for reform is the taxation of the salaried class. Over recent years, salaried individuals have endured what can only be described as a 'quadruple shock'. First, significant currency depreciation has eroded the real dollar value of their earnings. Second, income tax rates have increased on these already diminished earnings. Third, economic stagnation has led to job losses and a dearth of new opportunities. Finally, soaring utility bills and indirect taxation have dramatically reduced disposable income, making daily life increasingly unaffordable for the lower and middle classes.

Recognising the middle class as a growth engine

The World Bank estimates that 40% of Pakistan's population now lives below the poverty line. Combined, the lower and middle classes constitute well over 200 million citizens — a vast segment of the labour force and the electorate. In most developed economies, the salaried class forms the backbone of both economic productivity and consumer demand. Pakistan must move in a similar direction.

Providing tax relief to this segment is not merely a moral imperative—it is also sound economics. Reduced income tax for salaried individuals could generate a multiplier effect. Given their higher marginal propensity to consume, such relief would inject liquidity directly into the economy, stimulating demand, growth, and eventually tax revenues. Furthermore, increased savings could help reduce the cost of borrowing for public and private sector investments alike.

Lowering the effective tax burden on salaries also incentivises formal employment and entrepreneurial activity. Employers often focus on net-of-tax salary offers; a lower tax regime would encourage job creation and business expansion, particularly among SMEs.

Political economy of reform

Currently, both salaried and corporate tax rates in Pakistan are among the highest in the region and peer economies. Such a high-tax environment hampers competitiveness and suppresses economic dynamism. A bold new vision is required to tackle this crisis.

Convincing the IMF of a Laffer Curve-style argument — that lower taxes can lead to higher revenues — may be a stretch, given Pakistan's historical credibility issues. However, a credible reform package could still win support. Key pillars of such a package should include: rapid privatisation of loss-making state-owned enterprises like PIA; the expansion of the tax base to include the vast retail sector; higher capital gains taxation on real estate speculators; and, crucially, the devolution of agricultural tax collection to provinces, targeting influential landowners who often escape the tax net while shaping policy.

Without these structural changes, Pakistan risks perpetuating a model where military strength is unmatched by economic independence. True sovereignty in the modern world is measured not just in strategic capability but in economic resilience.

THE WRITER IS AN INDEPENDENT ECONOMIC ANALYST