Pakistan Business Council proposes sweeping tax reforms for budget FY27

Pakistan Business Council has submitted a sweeping set of tax reform proposals for the Federal Budget 2026-27, urging the government to adopt a phased and growth-oriented fiscal strategy aimed at reducing the cost of doing business and broadening the tax base. The council, which represents more than 100 of Pakistan’s largest local and multinational companies, said its recommendations take into account the country’s difficult macroeconomic environment and fiscal constraints under the ongoing program with the International Monetary Fund. The Pakistan Business Council proposed beginning with revenue-neutral measures in the short term before moving toward a revenue-positive structural overhaul over the next three to five years. According to the council, its member companies generate nearly 40 percent of Pakistan’s exports, contribute one-third of direct taxes, and employ more than 3 million people. In its proposals, the council argued that the existing tax structure discourages investment and disproportionately burdens a narrow pool of compliant taxpayers. “The current regime discourages investment and extracts the maximum possible in a predatory manner from a narrow set of taxpayers,” the council said, adding that Pakistan’s tax rates and tariffs rank among the highest in Asia. The business body said nearly 40 percent of Pakistan’s economy remains undocumented, while currency in circulation reached PKR 11 trillion by mid-April 2026, reflecting the scale of informality in the economy. The council also warned that high corporate taxes, complicated withholding tax procedures, and heavy taxation on salaried individuals are accelerating brain drain and capital flight. Among key recommendations, it called for the withdrawal of the 1 percent advance income tax withholding on export proceeds, arguing that the levy erodes exporters’ working capital. It also proposed eliminating distortions in the Export Facilitation Scheme by restoring zero-rating on domestic procurement and ensuring imported raw materials under the scheme remain exempt from sales tax. To encourage corporate expansion and consolidation, it recommended reinstating exemptions on inter-corporate dividends and removing procedural hurdles in filing consolidated tax returns. The council further proposed a capital gains tax exemption on the sale of shares in private and unlisted companies held for at least six years. It said the move would align taxation with public shares and real estate, while encouraging investment in productive sectors instead of speculative land holdings. It also highlighted concerns over under-invoicing and trade fraud, saying domestic manufacturers are being undermined by commercial importers exploiting loopholes in customs valuation, misuse of Afghan Transit Trade mechanisms, and smuggling from Iran. To address the issue, it recommended making customs clearance values publicly available, mandating electronic data interchange systems for imports under free trade agreements with China, and strengthening border enforcement measures. On environmental policy, the council said Pakistan’s current tax framework penalizes formal recycling and green investments. It specifically criticized the 14.4 percent sales tax withholding imposed on purchases of plastic and paperboard waste, saying the measure makes documented recycling operations commercially unviable. The council urged the government to abolish the withholding tax for registered entities and introduce broader fiscal incentives, including accelerated depreciation allowances for renewable energy investments and duty exemptions on machinery used for clean production initiatives.