Concerns grow over economic impact of Pakistan’s super tax

Pakistan’s Federal Constitutional Court has upheld the constitutionality of the controversial “super tax,” a decision that has alarmed businesses and banks while promising a potential revenue boost for the government.

Following the ruling, the Federal Board of Revenue (FBR) has begun preparations to recover the tax, signaling a significant policy shift in the country’s already fragile economic environment.

In the latest episode of On My Radar, Kamran Khan discussed the potential impact of the ruling, noting that while the tax could bring an estimated PKR 300 billion into the national treasury, the simultaneous burden on industry and banking could strain liquidity and slow economic activity.

The court rejected more than 2,200 petitions challenging the super tax and invalidated earlier decisions by the Islamabad, Lahore, and Sindh High Courts. Analysts estimate that the ruling could generate around PKR 300 billion in additional revenue, though the exploration and production (E&P) sector may receive exemptions totaling approximately PKR 90 billion.

The super tax has a history in Pakistan. It was first introduced in 2015 during the Pakistan Muslim League-Nawaz (PML-N) government to support the rehabilitation of internally displaced persons in Khyber Pakhtunkhwa affected by terrorism, levying a 5% tax on companies earning over PKR 300 million.

The measure was reintroduced in 2022 under the PML-N-led Pakistan Democratic Movement (PDM) government, this time at 10%, with officials describing it as a one-year effort to reduce the budget deficit.

The current ruling applies the super tax under Section 4C to banks and companies with annual income over PKR 300 million starting in Tax Year 2023. Rising interest rates had previously allowed banks to post record profits, but the sudden imposition of the tax may force banks to tighten credit, complicating financing for industry and potentially slowing economic activity.

Following the ruling, the FBR has started issuing recovery notices. Reports indicate outstanding demands exceed PKR 200 billion, with thousands of taxpayers being called upon to pay. Failure to comply may result in asset seizures, arrests, or imprisonment of up to six months.

Business leaders have warned that the timing and scale of the recovery could trigger a severe liquidity crisis. The Karachi Chamber of Commerce called the demand for PKR 300 billion in a single installment “an attack on working capital,” cautioning that factories could halt operations, employees could lose jobs, and the broader market could face further decline.

In response, the government announced a relief package, including reducing the Export Finance Scheme rate from 7.5% to 4.5%, lowering industrial electricity tariffs by PKR 4 per unit, and cutting wheeling charges from PKR 9 per unit. While these measures aim to ease industrial pressure, analysts question whether they can offset the immediate liquidity shock posed by the super tax recovery.