Revamping Corporate Tax Policy in Pakistan A Strategy for Economic Growth

Revamping Corporate Tax Policy in Pakistan A Strategy for Economic Growth

In Pakistan, the high corporate tax rate of 29%, along with additional levies like a 10% super tax, a 2% workers’ welfare fund, and a 5% workers’ participation fund, poses a significant challenge for businesses. This heavy taxation, including a dividend tax of 15% to 25%, not only amounts to double taxation but also hinders critical business activities like innovation, employment generation, and competitiveness.

Corporations, with their primary goal of maximizing shareholder wealth, find it increasingly difficult to thrive under such tax burdens. Pakistan’s approach to taxing profitable companies heavily while providing support to struggling ones, including State-Owned Enterprises (SOEs), raises questions about the government’s economic strategy.

The belief that Pakistan’s economy is disconnected from the global market is a misconception. Corporations, capable of operating internationally, are influenced by varying corporate tax rates across countries. This is evident in Pakistan’s stagnant Foreign Direct Investment (FDI), averaging $1 billion annually over the past five years, in stark contrast to a 40% increase in FDI in Southeast Asian countries from 2017 to 2022.

Southeast Asian governments actively compete for business by creating favorable economic environments, recognizing the importance of corporate taxes in attracting and retaining businesses. To enhance investment and economic growth, a reformed corporate tax code in Pakistan is essential. A proposed solution is a 20% flat-rate corporate tax with no deductions, reducing complexity and eliminating loopholes.

Lower corporate tax rates are known to boost investment-to-GDP ratios, State GDP growth, employment, government tax revenues, and foreign exchange reserves. Furthermore, reducing corporate taxes can enhance equity valuations, as lower taxes increase expected after-tax cash flows from investments, encouraging companies to undertake more projects. This leads to economic prosperity, increased market capitalization, and a vibrant stock market. In conclusion, a reformed corporate tax policy could be a triple win for Pakistan, fostering economic growth, higher government revenue, and overall economic prosperity.