The Federal Board of Revenue (FBR) acknowledged during a National Assembly Standing Committee on Finance and Revenue meeting that the hefty federal excise duty imposed on business class air tickets in 2025-26 failed to generate expected revenue. Instead, business class passengers stopped buying tickets from Pakistan, purchasing them from other jurisdictions or upgrading after departure to avoid the charge. This led to lost business for airlines and travel agents, and the FBR did not collect the anticipated billions.
Evidence from Pakistan's Tax Policy
This outcome illustrates the Laffer Curve principle: beyond a certain point, higher tax rates do not increase revenue but can shrink the tax base, encourage avoidance, and push activity into informal channels. The assumption that affluent travelers would simply pay more proved incorrect, as they found legal ways to avoid the tax. After a year, authorities effectively conceded the measure had not worked.
Success with Lower Tariffs
Conversely, when the government reduced customs duties, additional customs duties, and regulatory duties under the National Tariff Policy last year, critics feared lower rates would undermine revenue. However, the reduction encouraged more formal imports and widened the tax base, leading to a substantial increase in customs revenue. This demonstrates that lower, more rational rates can bring activity into the documented economy.
Real Estate Taxation and Capital Flight
Real estate taxation provides another example. The Capital Value Tax on Pakistanis owning property abroad required payment on assets already acquired outside the country, often from already-taxed income. Similarly, the tax on deemed rental income taxed an imaginary return rather than actual income. Both measures were viewed as unfair and contributed to capital flight. Investors compare jurisdictions: if Pakistani real estate entails a tax burden approaching 15% while Dubai's transaction cost is around 5%, capital will move. Pakistan loses not only immediate revenue but also investment, construction activity, jobs, and future taxable income. These taxes have since been withdrawn, but damage has been done.
Broader Conclusion for Fiscal Policy
Pakistan should consider reducing excessive rates of corporate income tax, personal income tax, and general sales tax. A simpler, lower-rate regime can improve compliance, reduce evasion incentives, encourage savings and investment, and ultimately increase revenue by expanding the tax base. This is not a call for abandoning revenue mobilization but for smarter revenue mobilization. The Ministry of Finance, the FBR, and the IMF should pay closer attention to taxpayer behavior. Supply-side economics may be unfashionable, but Pakistan's own experience shows that incentives matter. The country needs a tax system that is predictable, moderate, and broad-based. The surest way to collect more is to tax less, but tax better.
