The Case for Fairness in Pakistan’s Taxation

By Aman Ghanchi At a time when inflation eats into real income and purchasing power remains under pressure, it is worth asking: does the current tax system serve the salaried class fairly? The budget for 2025–26 must reflect a few key reforms that aim to fix longstanding inequities in Pakistan’s personal income tax framework. The focus is on introducing changes that not only lighten the burden on compliant taxpayers but also bring a sense of fairness and structure to the system. The critical suggestion is the revision of the taxable income threshold. Currently set too low, the threshold is proposed to be raised to Rs 1.2 million per annum. Incomes above Rs 600,000 would still require mandatory filing, but with a nominal token tax of Rs 1,000. This approach could encourage more individuals to enter the formal tax system without immediately facing financial stress, while still promoting compliance. Importantly, this step also aligns with the broader goal of widening the tax net without penalizing entry-level earners. It is also important to consider reinstating tax credits on investments in mutual funds, IPOs, and life insurance policies. These incentives had previously served to promote long-term savings and financial planning among middle and upper-middle-income households. Their removal not only discouraged saving habits but also pushed financial planning tools further out of reach for many salaried individuals. Reintroducing these credits could help support capital markets while enabling financial security for taxpayers. In addition to these tax credits, there is a strong case for bringing back deductible allowances for housing loans, education, and medical expenses. These are not luxuries but essential expenditures that families incur to maintain a basic standard of living. A system that recognizes these outlays and offers relief accordingly is not just more humane, it’s economically prudent. Another area where reform is long overdue is the taxation of employer contributions to provident funds. Currently, there is a fixed cap of Rs 150,000 on such contributions. It would make sense to replace this with a proportional limit of 10% of the employee’s basic salary. This move would better reflect modern salary structures and ensure that tax benefits are fairly distributed across income levels. The Capital Value Tax (CVT) is a form of double taxation in perpetuity i.e. assets created through tax-paid income are taxed and income generated from the said assets is taxed. The transfer of tax residencies, creation of offshore companies and upsurge in setting up new business entities in middle east are encouraged by CVT also. There’s also recognition of the role played by returning expatriates and foreign nationals working in Pakistan. An exemption from Capital Value Tax (CVT) is sufficient on foreign assets of expatriate Pakistanis returning home and for foreign nationals taking up residence for employment. Another immediate change proposed is the abolition of the 10% surcharge on individuals. While the logic of taxing higher income brackets more heavily may appear justified on paper, in practice this surcharge  hits compliant, salaried professionals the hardest. They are already contributing through higher payroll deductions, unlike large swathes of the informal sector that continue to operate outside the tax net. Removing this surcharge would not only correct this imbalance but also help restore trust in the tax system and will bring the effective tax rate down to a reasonable level in line with other emerging markets. Collectively, these recommendations point to a simple but crucial idea: a tax system should not penalize individuals for being compliant. It should encourage savings, reward transparency, and support living wages with living systems, ones that adapt to changing economic realities. These could also serve a meaningful incentive to attract skilled talent and reverse the brain drain. Pakistan’s personal tax grid has remained largely stagnant, while inflation, housing costs, and educational expenses have surged. Bridging this gap requires more than one-off reliefs, it needs structural reform. The above proposals offer a roadmap for a more equitable and modern system that better reflects the needs of a diverse, dynamic workforce. Fixing the personal tax grid isn’t about offering favors, it’s about fairness. A more balanced tax regime can support compliance, drive formalization, and build a more resilient economy. And for a country facing fiscal challenges, that’s not just desirable, it’s necessary. The writer is Regional General Counsel for Unilever.