World Bank: Pakistan Business Tax Rate World’s Third Highest

The World Bank has released its December 2015 report titled “Toward a More Business Friendly Tax Regime: Key Challenges in South Asia.” In it, the World Bank warns that Pakistan’s tax rate is unusually high, particularly for a nation in a developing region. In fact, it is the third highest rate in the world.

The World Bank has released its December 2015 report titled “Toward a More Business Friendly Tax Regime: Key Challenges in South Asia.” In it, the World Bank warns that Pakistan’s tax rate is unusually high, particularly for a nation in a developing region. In fact, it is the third highest rate in the world.

According to the report, “Corporate tax rates in South Asia are higher than those in other developing regions.” While the report identifies a number of factors that contribute to this situation, it primarily notes that a “narrow tax base” contributes to the relatively higher tax rate overall, suggesting that as the economy grows, the rate may come more in line with other, wealthier nations.

Compounding the problem, the report notes, is that despite Pakistan’s relatively small tax base, its government has been giving tax incentives to favored businesses. While this may benefit the select few, these incentives are more of a kickback than an actual vehicle for growing business investment in Pakistan. As a result, they actually worsen the nation’s overall investment climate, and unfairly shift the tax burden to an even smaller slice of the already narrow business taxpayer base.  

According to The Express Tribune, only 1.2 million individuals and business entities file income tax returns in Pakistan. However, the country has a population of 180 million. Of the few who actually file returns, roughly half are corporate income tax filers. In fact, although enrollment in the Pakistani sales tax system is about 118,000, only about 15,000 actually pay any taxes. On the other hand, the nation gives away almost two percent of its annual gross domestic product (GDP) in tax concessions, despite the little evidence that these concessions generate any positive impact for the Pakistani economy.

Although the World Bank’s report made special note of Pakistan’s policies, it is not alone among its neighbors for unusual corporate tax policies. As it turns out, the average corporate income tax rate for South Asian countries is about 32 percent, as compared to the global average of 24 percent. In this context, Pakistan is not too remarkably above the rates charged by its neighbors at about 34 percent. 

Unfortunately, these tax policies reduce returns on capital and discourage foreign investment. To counter this effect, the World Bank recommended, “Governments can keep the negative effects of corporate and consumption taxes at a minimum by setting the tax rates at the lowest possible level given the revenue needs and by imposing a single rate on a broad base.”