Pakistan’s economy may be showing signs of short-term stability, but for businesses and investors already operating in the market, the cost of that stability is becoming increasingly visible. Behind improving macro indicators lies a tougher reality shaped by rising operational costs, constrained liquidity, and a tax regime that places growing pressure on those who are already documented and compliant.
Fiscal consolidation has remained the cornerstone of recent economic policy, driven largely by revenue targets rather than growth considerations. Debt servicing and fixed expenditures continue to absorb a substantial portion of national resources, leaving limited space for development and private-sector support. As a result, economic adjustment has been transferred downward to businesses, particularly those within the formal economy. According to financial analyst Muhammad Umair Zeb, this approach risks weakening the productive base of the economy by repeatedly extracting revenue from the same compliant sectors without expanding the tax net.
The current tax regime has become a central concern. Extensive reliance on advance taxes and withholding taxes, many of which operate as minimum taxes regardless of profitability, has significantly reduced working capital for businesses. For manufacturers, traders, and service providers alike, taxes are often paid upfront even before income is realised. Umair notes that while these measures may help the exchequer meet short-term revenue targets, they inadvertently undermine liquidity, discourage reinvestment, and slow down business expansion across key sectors.
For existing investors, the challenge is not merely taxation but uncertainty. Frequent amendments to tax laws, procedural changes through SROs, and inconsistent interpretation by tax authorities have made compliance complex and costly. Businesses already embedded in the system cannot easily withdraw, yet expansion decisions are increasingly delayed. The environment rewards caution rather than risk-taking.
Small and medium enterprises remain particularly vulnerable. With rising energy tariffs, expensive financing, and heavy documentation requirements, many SMEs are struggling to remain viable. Instead of being encouraged to grow and formalise further, they are pushed to the edge, where survival becomes the priority over innovation or employment generation.
Foreign investors, observing these dynamics, remain hesitant. While Pakistan’s market size and potential remain attractive, policy unpredictability and tax enforcement risks weaken competitiveness compared to regional peers. For them, stability without policy clarity is insufficient to justify long-term capital commitments.
The paradox is evident. Pakistan urgently needs investment to expand its tax base, yet the existing framework leans heavily on those already paying taxes. Without meaningful efforts to document untaxed sectors, rationalise advance taxation, and simplify compliance, revenue mobilisation risks becoming counterproductive.
Sustainable economic recovery will require a recalibration of priorities from short-term revenue extraction to long-term growth facilitation. A predictable tax regime, fair enforcement, and policy continuity are essential to restore confidence. Stability may offer breathing space, but without reform, it will not deliver growth. And without growth, the burden on existing businesses will only grow heavier.
Muhammad Umair Zeb is a Financial Analyst specialised in macroeconomic policy, taxation, and socio-economic reform in South Asia.
