Reducing rates without addressing multiple taxation of income, withholdingisation, and fiscal federal distortions leaves intact a system where the State’s power to tax increasingly resembles the power to extract
Dr. Ikramul Haq
“An ideal tax system should consist of the lowest possible tax rate on the broadest possible tax base”— Ibn Khaldun (1332–1406) in Muqaddimah (Introduction)
This simple proposition—often repeated yet persistently ignored—captures the essence of Pakistan’s fiscal dilemma. The reform brief circulated by the Overseas Investors Chamber of Commerce and Industry (OICCI) and echoed through the Policy Research Institute of Market Economy (PRIME) appears, at first glance, to move in that direction.
The brief calls for reducing corporate tax rates, phasing out super tax, rationalising withholding regimes and easing indirect tax burdens. This reflects a recognition that the present system is punitive, complex and economically distortive. But the difficulty lies elsewhere. These proposals, while sensible in isolation, remain confined to the surface. They adjust rates without interrogating the structure that has produced the distortions in the first place.
Pakistan’s tax crisis is not rooted in high statutory rates alone; it is embedded in a design that fragments the base, multiplies levies and erodes constitutional boundaries. Lowering the corporate tax rate from 29 percent to 25 percent over time may improve optics, but it does little to address the deeper problem of parallel taxation through devices such as super tax.
Super tax, as per the short order of the Federal Constitutional Court (FCC), entrenched under section 4C of the Income Tax Ordinance, 2001, operates not as a surcharge but as an independent impost on “income,” distinct from total or taxable income under section 4.
This raises a fundamental issue of legislative competence. Taxes on income fall squarely within the ambit of Entry 47, Part I of the Federal Legislative List. The proliferation of additional levies on the same base—under different nomenclature—stretches this competence in ways that constitutional jurisprudence has yet to fully confront. Any credible reform must begin by restoring this discipline; otherwise, rate reductions merely soften the edges of an inherently flawed system.
The PRIME–OICCI brief correctly points to the excessive burden on the formal sector, particularly in banking and large-scale manufacturing. However, this is not an accidental outcome of policy drift; it is the predictable result of a system that has come to rely almost entirely on withholding and advance taxation. Over time, the Federal Board of Revenue (FBR) has transformed from an assessing authority into a collection agency operating at the transaction level.
Income is taxed not when it is earned and determined, but when it is presumed through a series of deductions, many of which acquire finality. This “withholdingisation” has created the illusion of a broad tax base while, in reality, narrowing the field of actual taxpayers. The consequence is a familiar paradox: a small segment of documented entities bears a disproportionate share of the burden, while large swathes of the economy remain outside the net.
In this context, the proposal to simplify withholding taxes, though welcome, does not go far enough. The problem is not merely one of complexity but of substitution. When withholding provisions displace the charging section itself, the architecture of income taxation is fundamentally altered. The principle of taxing real income gives way to presumptive and minimum regimes, undermining both equity and efficiency. A reduction in the number of withholding provisions, without restoring the primacy of assessment-based taxation, risks leaving the core distortion intact.
Comparisons with regional tax rates—India at 22 percent, Vietnam at 20 percent, Bangladesh at 27.5 percent—are often invoked to justify downward adjustments. Such comparisons, however, can be misleading if divorced from institutional context. These economies combine lower rates with broader bases, more coherent policy frameworks and relatively stable administrative systems.
Pakistan, by contrast, has increasingly supplemented its tax effort with non-tax levies such as the petroleum levy, which lies outside the divisible pool and distorts fiscal federalism. This practice not only undermines provincial finances but also obscures the true incidence of taxation. Competitiveness cannot be meaningfully assessed without accounting for these quasi-fiscal instruments.
The recommendation to reduce the standard sales tax rate similarly confronts structural limitations. Pakistan’s sales tax regime remains fragmented between federal and provincial jurisdictions, riddled with exemptions and weakened by incomplete input adjustment mechanisms. In such an environment, rate reduction alone is unlikely to yield significant efficiency gains. Without harmonisation across jurisdictions and a credible move toward a unified value-added tax, the system will continue to generate cascading effects and compliance burdens.
Equally significant is the silence of the PRIME–OICCI brief on the question of fiscal federalism. The constitutional framework, particularly after the Eighteenth Amendment, envisages a decentralised structure in which provinces play a meaningful role in taxation.
In practice, however, the federation continues to dominate revenue mobilisation, often through instruments that circumvent the spirit of the National Finance Commission. This imbalance has produced a system in which provinces remain fiscally dependent while lacking the capacity—or incentive—to expand their own tax bases. Any reform that does not address this structural asymmetry will remain incomplete.
The proposal to cap personal income tax rates and introduce a surcharge on higher-income salaried individuals reflects an attempt at balancing equity and revenue needs. Nevertheless, it risks reinforcing an already skewed pattern.
The salaried class, by virtue of its visibility and ease of taxation, has become the default source of revenue. Expanding this burden, without integrating untaxed or under-taxed sectors into the system, deepens the perception of inequity and further discourages voluntary compliance.
What emerges from the PRIME–OICCI agenda is a familiar pattern: recognition of symptoms without a willingness to confront causes. Pakistan’s tax system is not merely complex or burdensome; it is structurally misaligned with its constitutional foundations and economic realities.
Incremental adjustments—however well-intentioned—cannot substitute for a comprehensive reset. Such a reset would require dismantling overlapping levies, re-establishing the primacy of the charging provisions, rationalising the division of taxing powers and rebuilding administrative capacity around assessment rather than transaction-based collection. Until these foundational issues are addressed, the promise of lower rates and simplified regimes will remain largely aspirational.
The existing oppressive and anti-growth tax system will continue to penalise the documented economy, distort resource allocation and undermine the very objectives that reform proposals seek to achieve. Pakistan’s problem is not the absence of reform ideas; it is the persistence of a framework that resists meaningful change.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.