Dr. Ikramul Haq and Abdul Rauf Shakoori
The delegation of the Federation of Pakistan Chamber of Commerce & Industry (FCCPI), along with senior members from the business community, recently held an important meeting with the country’s top military officials. According to an official statement, the military leadership extended full support toward reviving Pakistan’s struggling economy. The engagement followed major market shutdowns in Pakistan’s two largest cities in response to protest calls by traders opposing what they described as anti-business taxation policies embedded in the Finance Act, 2025.
The Finance Act 2025 significantly expands the enforcement reach of the Federal Board of Revenue (FBR). It introduces sweeping provisions such as sections 37A and 37B in the Sales tax Act, 1990, authorizing tax officials to detain individuals arbitrarily. Section 21(s) of the Income Tax Ordinance, 2001 imposes strict penalties on cash transactions exceeding Rs. 200,000, while mandatory digital invoicing under SRO 709 and e-Bilty enforcement under section 40(c) of the Customs Act, 1969 introduce new compliance costs and surveillance risks.
The business leadership expressed gratitude for the military’s directive to suspend the implementation of arrest-related clauses and encouraged revenue officials to enter meaningful dialogue with stakeholders. The delegation also drew the broader economic challenges faced by industrial sectors. Delays in policy clarity on the Export Facilitation Scheme (EFS), especially the removal of cotton and yarn from its ambit, were flagged as key concerns.
The imposition of an 18% sales tax on essential imports only deepens the crisis for exporters. The delegation further urged the authorities to revise the interest rate policy, bringing it closer in line with inflation to spur investment. The message was unequivocal: fiscal overreach without monetary flexibility or policy certainty will continue to cripple Pakistan’s productive sectors.
The government’s narrative leading up to the 2025 budget was laden with promises of economic revival, investor confidence, and tax fairness. Expectations were high that the government would ease burdens on the salaried class, provide breathing room for formal businesses, and initiate structural tax reforms. Yet, the resulting budget dashed those hopes. The Finance Act 2025 revealed a short-sighted, revenue-maximization strategy that disproportionately impacts those already within the tax net, leaving untaxed segments untouched.
This fiscal document lacks both vision and pragmatism. Nowhere in the Finance Act is there evidence of a strategic plan to widen the tax base or stimulate key sectors of the economy. Instead, the government continues its dependence on indirect taxation, specifically withholding taxes, as a primary source of revenue.
Compliant businesses have effectively become unpaid tax collectors, bearing the brunt of the system without any compensation. Under the new budget, the withholding tax rate under section 153 has surged to 15% for services. Disturbingly, this is treated as a minimum tax, non-adjustable against actual profits, rendering it a fixed financial burden, irrespective of business performance.
This form of taxation disregards operational realities. Even loss-making businesses are subject to the same deduction. Such provisions dismantle the principle of tax justice and reflect a complete disconnect between policy formulation and real-world business conditions. In essence, companies are now paying tax not on profits, but on transactions, effectively forfeiting up to 15% of gross income regardless of viability.
The headline numbers from FY 2023–24 suggest a strong performance with tax revenues hitting Rs. 9.3 trillion, marking a 30% annual increase. This success is superficial. Nearly half of the revenue (Rs. 4.46 trillion) came from income tax, and over 60% of that (about Rs. 2.67 trillion) was gathered through withholding mechanisms. The corporate sector’s role as a collection agent has been critical. Yet, despite its facilitative function, the sector receives no reward, only regulatory complications and persistent refund delays.
Refunds, which form a lifeline for many companies, continue to be withheld arbitrarily. This practice immobilizes legitimate business funds, forcing firms into liquidity crises. In many cases, refund release demands intervention from the highest tiers of political leadership, turning what should be an automatic fiscal process into a political ordeal. It’s a deeply corrosive practice that undermines trust and reduces economic agility.
Looking forward, FY 2025–26 presents even more aggressive targets. The government aims to collect Rs. 14.13 trillion—an 18.7% increase from the previous year. Of this, Rs. 6.9 trillion is projected from direct taxes. If the trend continues, an estimated Rs. 4.1 trillion will be raised through advance withholding alone. This approach will only magnify the cash flow distress that formal businesses are already facing. Startups, small and medium enterprises (SME)s, and exporters will suffer the most, as these taxes choke their limited working capital and restrict growth potential.
This excessive reliance on withholding is not just regressive, it is counterproductive. It reinforces the informal economy by punishing those who choose compliance. The state continues to ignore massive, undertaxed sectors such as agriculture, retail trade, and real estate, sectors that jointly contribute more than half of the national GDP. Instead, those already inside the tax net are squeezed even tighter. This strategy disincentivizes formalization and encourages regulatory evasion.
Meanwhile, initiatives such as e-Bilty and digital invoicing under SRO 709, though billed as modernization tools, lack supporting infrastructure. The abrupt enforcement of these digital mandates has raised confusion, compliance costs, and operational risks. Rather than fostering digital transformation, the policies risk paralyzing small businesses already operating at narrow margins. Genuine modernization requires phased implementation, institutional support, and stakeholder alignment, none of which have been ensured.
Even more problematic are the new enforcement clauses under sections 37A and 37B of the Sales Tax Act, 1990. Granting tax officials, the power to detain individuals without due process, without first finalizing the civil liability, is not reform—it is repression. These provisions have created a climate of fear, turning tax offices into zones of coercion rather than compliance.
Fiscal policy built on threats rather than trust is not sustainable. It corrodes governance, disrupts business continuity, and deters domestic and foreign investment alike. True reform demands vision, not velocity. Policymakers must now pivot away from coercive tactics and build a structure grounded in equity, transparency, and credibility. Taxation should be a shared obligation, not a unilateral imposition. That requires simplification of laws, widening of the tax base, meaningful dialogue with stakeholders, and strong dispute resolution mechanisms. Reform must be about creating value, not just extracting it.
The illusion of fiscal strength through record revenues masks a weakening economic core. The state is depleting the very sources it relies upon, formal businesses, salaried professionals, and corporate entities, while allowing untaxed sectors to flourish in the shadows. Pakistan cannot afford to alienate its productive class through fear and fiscal overreach.
The Finance Act 2025, although aggressive in its numbers, falls short in fairness. It is a budget of missed opportunities, a document of short-termism, and a reflection of a government more concerned with collections than with course correction. Until the state redefines its social contract with the business community and taxpayers, it will remain stuck in a cycle of stagnation, extracting more from fewer and delivering less to all.
The way forward is clear and requires fundamental structural reforms, institutional accountability, inclusive policy design, and a genuine commitment to economic justice. The only question now is whether the political will exists to walk that path.
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Dr. Ikramul Haq, an advocate of the Supreme Court and writer is an adjunct faculty at Lahore University of Management Sciences (LUMS). Abdul Rauf Shakoori is a corporate lawyer based in the USA.