Pakistan Business Council asks govt to reduce corporate, sales tax in FY26

The Pakistan Business Council (PBC) has floated a federal budget proposal for the new fiscal year whereby it recommended tax cut for the corporate sector, trimming of general sales tax and revision in the tax slabs for salaried persons to help them combat the inflation rate.

The PBC said that 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 Federal Board of Revenue — the tax collection authority — 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 Pakistan Stock Exchange. 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, according to the Pakistan Business Council.

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a 50% advance-to-deposit ratio (ADR) failed to sustainably broaden lending to the private sector and had to be withdrawn.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

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 the country is trying to attract FDI, according to the PBC.

Taxes on internet

Indiscriminate taxing of cellular and fixed internet connectivity is impeding the growth of the knowledge economy. 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 International Monetary Fund.

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

PBC urged the government to gradually reduce the general sales tax rate by 1% until it reaches 15%. 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 should be discontinued to encourage scale, diversification, and to grow the capital market and widen shareholding.

The tax burden on salaried employees should also be cut by revising the slabs to adjust for inflation to stem the brain drain and loss of talent to the informal sector, the PBC suggested.

Tax on exporters and companies

It also urged the government to reduce the withholding tax on exporters from 2% to 1% and rationalize it on the services sector to minimize the cash flow impact.

The PBC asked the government to phase out the minimum turnover tax, starting with listed companies, stating that future taxation should not be based on the balance sheet of banks or companies.

Regarding overseas Pakistanis, it said the income, not the declared overseas assets, should be taxed.

Listed companies with a minimum float of 25% in a year may be taxed at a 1% lower corporate tax rate. Super tax should be phased down by 2% annually until it is phased out totally for non-export profits. Super tax on profit arising from exports should be halved in FY26 and removed entirely in three years.

In the meantime, the super tax rate should apply progressively on a marginal basis for each profit slab. Profit slabs/thresholds should also be revised to take inflation into account, according to the council.

The PBC said new exporters achieving a minimum export level of 15% of their annual turnover be subjected to 1% lower corporate tax rate on the audited profit arising from such incremental exports.

Moreover, existing exporters that increase their exports by 15% in the prior year should be subject to 0.5% withholding tax on export proceeds and 1% lower corporate tax rate on the profit arising from incremental exports.

Businesses reducing their audited reliance on direct and indirect imports by 15% on the previous year should be allowed a lower corporate tax rate of 1% on their entire profit for that year.