Tax System Under Pressure: Overseas Investors Call for Expanding Tax Base in Budget 2026–27
As Pakistan moves closer to finalizing its Budget 2026–27, an important debate has once again come into focus — should the government continue increasing taxes on existing taxpayers, or should it bring more people into the tax net?
Foreign investors have made their position very clear. Instead of putting additional pressure on those who are already compliant, they believe Pakistan must expand its tax base to create a fair and sustainable system.
Such a view was aired in a meeting with Minister of State for Finance Bilal Azhar Kayani, when the overseas investors chamber of commerce and industry submitted a number of proposals to deal with the forthcoming fiscal reforms in Pakistan.
The Main Problem: A Small Tax Base
The major structural problem of Pakistan’s economy lies in the fact that only a few people and companies are responsible for making tax contributions, while a restricted number of tax-paying entities still carry much of the load.
As a result, the following consequences follow:
• Taxpaying individuals and companies face the overload of their responsibilities
• Taxation becomes less appealing
• Foreign investment decreases in importance
• An informal sector grows
Foreign investors noted that increasing tax rates is not the right decision in the long run. On the contrary, bringing informal sectors to light should become the goal of fiscal reforms.
Untapped Sectors That Must Contribute
According to the investors, several sectors are either under-documented or not taxed according to their actual income levels. These include:
• Agriculture sector
• Retail and wholesale markets
• Real estate industry
• Service providers
These sectors play a significant role in the economy but often remain outside the effective tax net. By improving documentation and enforcement in these areas, the government can significantly increase revenue without raising tax rates.
Corporate Tax Relief Proposals
To make Pakistan more competitive and attractive for investment, the investors suggested reducing corporate tax rates.
Their recommendations include:
• Reduction in corporate tax to 28% for the financial year 2026-27
• Progressive reduction by three more years to bring down the rate to 25%
Currently, when corporate tax along with super tax and other levies is considered, it amounts to around 45% or more. At this rate of taxation, Pakistan does not stand a good chance against other regional markets.
Decreasing the tax burden will help attract investments and promote employment and growth in the economy.
Phase-Out of Super Tax
The second major issue that needs attention is the issue of continuing the levy on super tax. Investors recommended its gradual removal.
The arguments are straight forward:
• The super tax creates uncertainty
• It creates an additional burden on top of the very costly business operation environment
• It discourages planning for investment over the long term
Gradual phase-out will instill confidence in investors and improve predictability in the tax regime.
Worries over Taxation of Banking Sector
The other issue brought up by investors was the excessive taxation of the banking industry. Although on the surface it might appear to be a direct source of government revenues, excessively taxing banks may not turn out that way.
For example:
• The banks may cut down on lending activities
• Lending becomes expensive
• It becomes difficult for businesses to get loans
This would have an overall impact on slowing down economic activities especially small and medium enterprises.
Tax Relief for Salaries
The final suggestion made by investors was regarding the salaried category especially those earning large incomes.
Proposals for Tax Reform Include:
• No super tax for salaried individuals
• No additional 10% surcharge
• 25% as maximum personal income tax rate
The proposal will help in easing the burden on the income-earning people and retain talented individuals who might leave the country for better job opportunities because of high taxation in Pakistan.
Suggestions for Indirect Taxation
Investors recommended some modifications in indirect taxation as well to ensure a balanced and growth-oriented tax environment.
Main proposals:
• Sales tax must be lowered to 17% initially and eventually to 15%
• WHT system should be simplified
• The structure of minimum and alternative minimum tax systems must be examined
The said proposals may prove effective in creating an appropriate business atmosphere.
Practical Issues Faced by Foreign Investors
Aside from the proposals stated above, foreign investors were also able to raise operational issues encountered by them in Pakistan, such as:
• Prompt refunding is not done when there is foreign investment
• The receipt of notice even with full compliance with rules
• Ineffective coordination between the Federal and Provincial tax administrations
These are among other issues adding to the burden of business operation.
Emphasis on Exports
Foreign investors stressed on the importance of promoting export industries in Pakistan.
Recommended actions:
• Give incentives to the exporting companies
• Have consistent policies
• Compete internationally well
Despite all restrictions in terms of the IMF program, investors think that proper adjustment of policies will allow improving the state of exports without breaking any promises.
2026 Forecast: Emphasis on Documentation
In future, the tax system of Pakistan is expected to be more oriented toward the use of documentation. In particular, in 2026, the government will most probably:
• Use sophisticated information gathering methods
• Carry out better integration of tax databases
• Enhance supervision of economic activities
• Introduce stricter regulations
Government’s Position
The government has shown a positive response to these recommendations. Some of the things officials have stressed about their intentions include:
• Broadening the tax base
• Making things more transparent
• Talking with stakeholders
• Aiming for economic stability
This discussion comes as part of the attempt by officials to put together an effective and balanced taxation system for next fiscal year.
Final Thoughts
It should be clear from foreign investors that what Pakistan needs is more taxpayers rather than higher tax rates.
The broadened tax base will enable Pakistan to achieve the following benefits:
• It will lessen the burden on current taxpayers
• It will make the whole process more transparent and thus fair
• It will generate additional revenue
• It will attract investments
With the proper execution of such plans, Pakistan stands a chance of having a more stable and prosperous economy.