17/02/2026
Countries such as Ivory Coast, Finland, Denmark, and other Scandinavian states function with some of the highest tax-to-income ratios in the world, often ranging between 50% to 60%. However, these jurisdictions follow a robust social welfare framework, under which citizens are provided comprehensive public services including free or subsidized education, efficient public transport, universal healthcare, social security, and infrastructure of international standards. In such systems, higher taxation is justified because taxpayers tangibly receive value in return.
In stark contrast, Pakistan has imported the high-rate taxation model without importing the corresponding social framework. Taxpayers are compelled to bear the cost of education, healthcare, transport, utilities, and even security entirely from their own pockets, while simultaneously being subjected to progressively higher tax rates. This policy approach can best be described as ill-conceived, economically irrational, and detached from ground realities.
To illustrate the burden, the taxation of a sole proprietorship business in Pakistan presently operates as follows:
An income of Rs. 12,000,000/- attracts tax of Rs. 1,610,000/- plus 45% on the income exceeding Rs. 6,400,000/-, amounting to Rs. 4,490,000/-, to which an additional 10% surcharge of Rs. 449,000/- is added. The total tax liability thus comes to Rs. 4,939,000/-, translating into an effective tax rate of approximately 41% of total income.
The hardship does not end here. Where the business is also registered under the Sales Tax Act, 1990, it must additionally account for output tax, reconcile input tax, comply with POS integration requirements, and bear extensive compliance costs. In many cases, the cumulative tax and compliance burden approaches or even exceeds the net earnings of the business. Such a structure inadvertently incentivizes informality and discourages voluntary compliance, pushing businesses outside the documented economy.
Notably, regulatory restrictions such as POS integration, audits, and monitoring mechanisms apply almost exclusively to registered taxpayers, creating a sense of inequity. Continually tightening controls around compliant taxpayers while large segments remain undocumented is akin to strangling the very trees that bear fruit, eventually pushing them to a breaking point where compliance no longer appears rational or sustainable.
It is high time for the government to seriously reassess whether such elevated tax rates can survive in a country that provides minimal public services. In the upcoming budget, the legislature must give due consideration to substantially reducing tax rates and, more importantly, announcing a predictable and stable tax policy framework for the next 10 years. Such certainty would allow businesses to plan, invest, and strategize with confidence ultimately expanding the tax base rather than shrinking it.
