Budget 2026–27: PBC demands tax reforms to lower business cost

May 22, 2026 (MLN): The Pakistan Business Council (PBC), the country’s preeminent business advocacy body representing over a hundred of Pakistan's largest local and multinational corporate entities, has officially submitted its comprehensive tax reform proposals for the Federal Budget 2026–27.

Acknowledging the stringent macroeconomic conditions and limited fiscal space under the ongoing International Monetary Fund (IMF) program, the PBC has advocated for a phased reform agenda.

The council suggested starting with revenue-neutral measures in the short term, scaling up to a comprehensive revenue-positive structural overhaul across a three-to-five-year horizon.

The collective body, whose members generate 40% of Pakistan’s annual exports, contribute a third of direct taxes, and employ over 3 million people, stressed that its proposals do not seek exemptions.

Instead, they target a fair, rational, and growth-oriented fiscal framework to lower the cost of doing business and aggressively broaden the tax base.

Critical Assessment of the Current Tax Regime

In a blunt critique, the PBC stated that Pakistan’s current fiscal regime lacks the essential elements of a sound fiscal policy, namely growing the income base, distributing an equitable tax burden, ensuring globally competitive rates, and separating policy from enforcement.

"The current regime discourages investment and extracts the maximum possible in a predatory manner from a narrow set of taxpayers," the report noted, highlighting that Pakistan’s tax rates and tariffs are among the highest in Asia. The body pointed out key systemic failures:

• Rampant Informality: Approximately 40% of Pakistan’s GDP operates in the undocumented economy, with currency in circulation swelling to PKR 11 trillion as of mid-April 2026.
  
• Severe Brain Drain & Capital Flight: Excessive corporate tax rates, complex withholding mechanisms, and heavy salary tax brackets are triggering talent and wealth flight to other nations.

Key Strategic Demands and Income Tax Proposals

1. Super Tax and Corporate Tax Rationalization

The council has strongly urged the federal government to eliminate the Super Tax (Section 4C) or define a clear sunset timeline, arguing it should be applied on a progressive marginal basis rather than a flat threshold.

The effective tax rate on individual shareholders within holding corporate structures can currently spiral up to an astronomical 68.09%, heavily discouraging reinvestment.

Furthermore, the PBC requested a gradual reduction of the general corporate income tax rate from 29% to 25% over three years, with listed companies receiving priority to incentivize public listings.

2. Reversing Professional Brain Drain

To stem the continuous migration of experienced professionals, the PBC proposed removing the 9% surcharge introduced on salaries exceeding PKR 10 million per annum. It also requested the restoration of the highest tax bracket of 35% to apply only to income exceeding PKR 120 million per annum.

3. Export Facilitation & Liquidity Relief

The PBC recommended withdrawing the 1% advance income tax withholding on export realizations, which it says drains vital working capital. On Sales Tax, the council called for the removal of distortions within the Export Facilitation Scheme (EFS) by reinstating zero-rating on domestic procurement and ensuring all imported raw materials are free from sales tax under the scheme.

4. Group Taxation and Capital Gains Tax

To foster corporate scale, consolidation, and mergers, the PBC advised reinstating the Inter-Corporate Dividend (ICD) exemption and removing procedural bottlenecks in consolidated returns.

Additionally, it sought a Capital Gains Tax (CGT) exemption on the disposal of private/unlisted company shares after a holding period of six years, aligning its treatment with public shares and immovable property to shift investments away from speculative land.

Enforcement Measures: Squeezing Non-Filers and Curbing Smuggling

Aggressive Filer/Non-Filer Differentials

A core pillar of the PBC's submission is an overhaul of non-filer withholding tax rates. The council noted that current non-filer penalties are inefficient, as non-filers pass costs to consumers instead of choosing compliance.

The PBC has proposed doubling or tripling withholding tax penalties on critical utility and lifestyle transactions for non-filers:

Curbing Under-Invoicing and Trade Fraud

Domestic manufacturing faces immense pressure due to rampant under-invoicing by commercial importers, alongside the misuse of the Afghan Transit Trade (ATT) and smuggling from Iran.

The PBC has strongly recommended making all customs clearance values publicly available, mandating Electronic Data Interchange (EDI) for Free Trade Agreement (FTA) imports from China, and enforcing stricter border restrictions.

Climate and ESG Commitments

Aligning Pakistan's fiscal policy with its United Nations Sustainable Development Goals (SDGs), the PBC highlighted that current frameworks inadvertently punish formal green initiatives.

It specifically targeted the 14.4% sales tax withholding applied to the purchase of plastic and paperboard waste, which makes formal recycling economically unviable.

The PBC urged the immediate abolition of this withholding for registered entities alongside broad-scale fiscal incentives, accelerated depreciation for renewable energy investments, and duty exemptions on clean-production machinery.

Outlook

The PBC concluded its brief by urging the Federal Board of Revenue (FBR) to shift from its continuous predatory auditing of existing compliant corporate entities to using data and technology to bring the shadow economy into the tax net.

Implementing these changes, the council noted, will significantly reduce the cost of doing business, stabilize national wealth, and make Pakistan a globally competitive destination for Foreign Direct Investment (FDI).

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