KARACHI:
While tax reforms have remained largely unimplemented, except during the tenure of former Finance Minister Miftah Ismail, there is strong evidence to suggest that reducing taxes on salaried individuals could generate significant political support, potentially influencing election outcomes. After all, isn’t that the ultimate goal of policymakers?
Last week, India’s Finance Minister, Nirmala Sitharaman, presented the national budget amid political and investor pressure to sustain growth. A key factor that garnered public support for the Bharatiya Janata Party (BJP) was the substantial reduction in tax rates for the middle class, with increased exemptions benefiting lower- and middle-income earners.
In contrast, Pakistan, under the guise of International Monetary Fund (IMF) policies, continues to place an excessive financial burden on its shrinking urban salaried class. This segment is unfairly penalized for being part of the formal economy, while the government attempts to recover losses caused by economic mismanagement, weak enforcement, and the protection of certain sectors such as trade, real estate, and agriculture from taxation. Despite superficial efforts to tax traders and agriculture, meaningful progress remains elusive, and the real estate sector presents a mix of advantages and challenges.
A comparative analysis reveals stark disparities: A Pakistani earning $2,000 per month (Rs550,000) faces a 35% marginal tax rate, whereas their counterparts in India, the US, and Bangladesh pay 25%, 22%, and 20%, respectively. Similarly, someone earning $3,000 per month (Rs800,000) is taxed at 37% in Pakistan, while in India, the US, and Bangladesh, the rate stands at 25%, 22%, and 25%, respectively. Emerging economies such as Vietnam and Hong Kong impose even lower tax rates.
The issue extends beyond taxation; it involves the benefits that taxpayers should receive in return, such as free education, healthcare, security, and infrastructure. In the US, nearly 50% of federal revenue comes from individual (direct) taxes, despite lower tax rates. Ironically, in Pakistan, middle-to-upper-class incomes are equivalent to minimum wage in some US states and industries.
A fair taxation system is imperative. Pakistan has long relied on indirect taxes, such as sales tax, customs duties, and excise taxes, while overlooking the vast black economy that flourishes in agriculture, trade, wholesale, retail, blue-collar services, and real estate. The high volume of cash transactions in these sectors is a testament to widespread tax evasion, creating an imbalance that severely hinders Pakistan’s economic progress.
By 2047, Pakistan is projected to become the world’s third most populous country. With limited efforts toward population control, a thriving private sector will be essential to generate employment opportunities. Overburdening the formal sector with excessive taxes while ignoring broader economic challenges is unsustainable.
A well-structured tax policy could shift electoral dynamics in favor of the ruling party. If this year’s budget outlines a gradual reduction in corporate and salary taxes—by 1% annually over the next nine years—and the government remains committed to this vision, purchasing power would increase, leading to higher domestic consumption and GDP growth. Concurrently, the government must ensure annual revenue growth of 20-30% from traders, wholesalers, retailers, and real estate, compelling these sectors to contribute their fair share to the economy.
The World Bank has already indicated that Pakistan’s low investment-to-GDP ratio limits economic growth to a mere 3-4%. A new strategy is essential. Last year alone, losses from PESCO, LESCO, QESCO, and SEPCO amounted to Rs96 billion, Rs48 billion, Rs38 billion, and Rs29 billion, respectively—totaling Rs210 billion in losses. Meanwhile, Rs368 billion was collected in salary taxes. If these entities had been managed effectively to break even, tax rates could have been significantly reduced.
Policymakers must recognize the growing influence of the urban salaried class. As agricultural employment declines, this segment will become increasingly dominant. Implementing a fair taxation system isn’t just good economics—it’s a strategic move for any government seeking re-election. The question remains: Will Pakistan’s leadership take the necessary steps to achieve true reform, or will the cycle of economic mismanagement continue?
