FY26 Budget proposals: Businesses urge govt to gradually reduce GST rate

ISLAMABAD: Pakistan Business Council (PBC) has strongly recommended the Federal Board of Revenue (FBR) to gradually reduce the sales tax rate by one percent until it reaches 15 percent.

Moreover, it has recommended reduction in withholding taxes for exporters to minimise impact on cash flow of their business.

According to the budget proposals of the PBC for next fiscal year, an 18 percent general sales tax (GST) in a largely undocumented economy provides a high incentive to evade. A 48 percent effective tax rate on the corporate sector makes Pakistan an unattractive investment destination.

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Multiple taxation of dividends in a group structure removes the incentive to consolidate and diversify.

The tax rate on the formal corporate sector should be reduced gradually by 1% annually until it reaches 25%, which is in line with other emerging economies.

Multiple taxation on inter-corporate dividends be discontinued to encourage scale, diversification, and to grow the capital market and widen shareholding.

Reduce the tax burden on salaried employees to stem the brain drain and loss of talent to the informal sector.

The major thrust of the PBC is the revival of manufacturing, agriculture and the services sectors, supported by formalization of the economy.

The ongoing transformation plans of the FBR include a heavy element of subjecting high taxpayers to special audits.

In contrast, the principal target for the FBR should be tax collected from new and low taxpayers. This target, however, is unlikely to be achieved if existing taxpayers continue to be harassed and burdened with complex processes and their tax refunds are withheld for no good reason.

Separating policymaking from tax collection, with key ministries and the private sector represented on the Policy Board, would encourage the continuity of a fiscal policy that promotes growth and equity.

The current tax system has several conceptual faults. Instead of taxing profit, it relies on taxing turnover as a proxy. Loss-making businesses are burdened with minimum taxes, as are better governed listed companies. The FBR treats the formal sector as unpaid tax collectors by obliging them to collect withholding taxes.

Contrary to global practice, the tax regime discourages the formation of corporate groups by taxing dividends at multiple stages of the profit flow. This also thwarts the listing of new ventures on the PSX.

The withdrawal of the holding period for capital gains tax on disposal of shares in listed companies has removed the incentive for long-term investment.

Salaried employees in Pakistan pay between one-and-a-half to three-and-a-half times the tax compared to their Indian counterparts. As a result, many are moving abroad or to the informal sector.

The faulty tax construct on banks not achieving a 50 percent advance-to-deposit ratio (ADR) failed to sustainably broaden lending to the private sector and had to be withdrawn.

Another example of an ill-thought measure is the imposition of the Capital Value Tax on the declared overseas assets. This is contested in the Supreme Court and is yielding very little tax revenue, but it is causing wealthy people to leave the country, with some giving up their Pakistan passports. This does not augur well at a time when we are trying to attract FDI.

Indiscriminate taxing of cellular and fixed internet connectivity is impeding the growth of the knowledge economy, PBC added.

Mindlessly pursuing a higher tax-to-GDP ratio is a hopeless effort without a sound and well-integrated fiscal policy that responds to the economy’s long-term needs instead of short-term, tick-in-the-box objectives currently pursued, with and without the IMF.

PBC appreciates the limited space under the IMF programme to immediately and fully implement all the reforms required in fiscal policy and tax regime. Therefore, it is proposing a phased reform agenda, the BC added.

Copyright Business Recorder, 2025