‘TPU to ensure tax rationalisation for supporting economy’

ISLAMABAD: The Tax Policy Unit (TPU) of Ministry of Finance will ensure tax rationalisation to support economic activity within documented and taxpaying sectors, particularly multinational companies ensuring their new investments, expansion with increased volumes and turnovers in 2026-27. Officials told Business Recorder that the key challenge in Pakistan is not only to raise revenue, but to do so in a way that preserves the incentives for businesses to maintain confidence. The separation of tax policy from the Federal Board of Revenue (FBR) will only produce the desired results in case the TPU would facilitate foreign direct investors in the form of tax incentives. Investors and multinational companies are anticipating “out of box solution” and major policy shift in drafting of tax proposals by the TPU for 2026-27. READ ALSO: Tax rationalisation body formed to facilitate businesses 1 In the context, the crucial role of the Special Investment Facilitation Council (SIFC) cannot be ruled out. The SIFC’s persistent support for the multinational companies would also pave the way for the Finance Ministry’s TPU for an incentive-based tax policy for 2026-27. Sources said that the Tax Policy Unit would focus on a sustainable approach for broadening the tax base rather than deepening the burden on a limited number of compliant sectors. Large segments of retail trade, small-scale manufacturing, and wholesale distribution still remain largely undocumented despite representing a significant share of economic activity. Bringing these players gradually into the tax net would expand revenue while improving fairness across industries. At the same time, the government is pursuing an ambitious revenue agenda. The shortfall in FBR’s tax collection has been increased to Rs 683 billion during July-April (2025-26). How these revenues are generated will determine the long-term health of Pakistan’s formal economy. Industry sources said that the exit of several multinational corporations in the recent past marked a significant shift in the country’s economic landscape. Procter & Gamble, which had been present for over three decades, announced in late 2025 that it would wind down its direct manufacturing and commercial operations, including its subsidiary Gillette Pakistan, transitioning instead to a third-party distribution model. This follows similar moves by pharmaceutical giant Pfizer, which sold its manufacturing facility to a local firm in 2024, and DuPont, which has seen a reduction in its direct footprint amid global corporate restructuring. The external environment obviously has become significantly more fragile in recent months. The Iran-Israel war has created turbulence across global energy markets. Concerns over supply disruptions in the Middle East have shocked energy-importing economies like Pakistan quickly translate into higher fuel import costs, inflationary pressure, and additional fiscal stress. For Pakistan, this means the domestic policy environment becomes even more important. Investors weighing long-term commitments are not only assessing macroeconomic conditions, but also the predictability of taxation and regulatory frameworks. A structural concern within Pakistan’s fiscal framework is the increasing concentration of taxation on a relatively small number of documented industries. As revenue pressures intensify, policy measures seem to be focusing on low-hanging fruits: sectors that are already formal, regulated, and compliant. While this approach can generate short-term revenue, it creates distortions when the broader economy remains only partially documented. Industries that operate transparently face rising compliance costs, while large segments of informal economy remain obscure with impunity. Pakistan’s informal economy is widely estimated to account for between 30 and 40 percent of GDP meaning that a large share of economic activity operates outside the documented tax system. When fiscal policy relies heavily on industries that are already compliant, the burden of revenue generation becomes concentrated on a relatively narrow base of taxpayers. Over time, this has discouraged investment within the formal sectors leaving large segments of economy beyond the reach of taxation. According to sources, the tax rationalisation can also support economic activity within documented sectors. For example, a moderate reduction in the Federal Excise Duty on aerated beverages from 20 percent to around 15 percent could encourage higher production volumes. Increased turnover within formal industries such as cement has historically translated into higher overall tax collection. Equally important is policy consistency, as observed in case of pharmaceutical sector. Frequent tax changes and unexpected fiscal measures create uncertainty that discourages long-term investment planning. The tobacco industry is a revealing case study of how fiscal and regulatory policy can interact in unintended ways. Over the past several years, the sector experienced significant increases in Federal Excise Duty, alongside the introduction of the government’s Track and Trace System. These measures were introduced with two primary objectives: discouraging tobacco consumption as a public health measure and strengthening tax enforcement by digitally monitoring production and distribution across the supply chain. The Track and Trace system, implemented in 2022, requires unique tax stamps and digital identifiers on cigarette packs so authorities can monitor production volumes and ensure that applicable taxes are paid. However, the interaction between high excise taxes and uneven enforcement across the market has produced complex outcomes. The cement industry, a cornerstone of the construction value chain, has already been grappling with rising energy costs and slowing demand. Additional fiscal measures, including the 7 percent Federal Excise Duty on property transactions, have further dampened activity across the broader construction ecosystem. The pharmaceutical sector faces a different but equally complex challenge. Drug manufacturers operate under strict government price caps intended to ensure affordability. However, indirect taxation creates cascading “tax-on-tax” effects throughout the supply chain. When input costs rise but regulated prices cannot adjust, manufacturers struggle to sustain production. The imbalance between formal and informal markets is particularly visible in the food and beverage sector. Large beverage manufacturers operate entirely within the documented tax framework. Their production, bottling, distribution, and retail networks are traceable and audited across multiple stages of the supply chain. Multinational beverage giants such as Coca-Cola and Pepsi, alongside other industry participants, represent examples of transparent corporate taxpayers whose operations support extensive supply chains that include bottling plants, transport networks, retailers, and small businesses, industry experts said. The formal beverage sector always complies with the evolving global health standards and ensures the implementation of same in Pakistan. Many carbonated beverages produced by regulated manufacturers now contain approximately 7-10 percent sugar and sugar free options, reflecting international efforts to encourage responsible consumption. The broader marketplace; however, tells a different story. A large informal ecosystem of sugary drinks, syrups, and confectionery products operates across Pakistan with minimal regulatory oversight. These products often contain significantly higher sugar levels, commonly estimated between 30 and 50 percent, yet remain outside meaningful taxation and health regulation. Sources recommended that any proposal to reduce taxes on beverage sector would be compensated through alternate taxation measures, expanding the tax net in sectors having high consumption of sugar. The reduction in the FED would actually be materialised in increased collection of sales tax, FED and other taxes following high volumes, consumptions and usage among general masses. If the increased FED on beverages is only due to high content of sugar, the high tax rates could easily be imposed on sweets shops, confectionaries, bakeries, chocolates and biscuits manufacturers and companies producing thick sugary syrups. The revenue shortfall can be overcome through taxation of these sectors as compared to aerated beverages sector which is using only 7-8 percent of the total sugar produced in the country. Government may also think to manage its tax deficit by taxing equally bad for health the trans-fats and high sodium products, experts added. Copyright Business Recorder, 2026

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