Multinationals Urge Tax Reforms to Support Formal Manufacturing and Broaden Tax Base

Leading multinational companies have called for tax policies that encourage the expansion of formal manufacturing and gradually bring a larger share of undocumented economic activity into the tax system.

Speaking to Business Recorder, Dr Faisal Hashmi, Founding Chairman of the Beverages Advisory Foundation, outlined proposals to bring under-taxed sectors into the documented economy.

He said Pakistan needs a tax system that generates sustainable revenue without placing a disproportionate burden on businesses that already comply with tax and regulatory requirements.

Manufacturing Recovery Highlights Need for Tax Reforms

The issue has gained importance as manufacturing shows signs of recovery. Large-scale manufacturing grew by 5.77% during July-May FY2025-26, according to the Pakistan Bureau of Statistics. The Pakistan Economic Survey 2025-26 also points to a broader recovery following the previous year’s contraction.

Hashmi said the challenge is to sustain this momentum while addressing rising business costs.

He argued that Pakistan’s revenue problem is not limited to low tax collection. It also reflects a concentration of the tax burden among a relatively narrow group of documented businesses.

Broadening the tax base and reducing pressure on compliant manufacturers should therefore go hand in hand. Expanding documentation without addressing the burden on formal businesses would leave the underlying problem largely unresolved.

He distinguished between raising tax rates and increasing overall revenue. Higher rates on the same group of businesses may generate short-term gains. However, excessive taxation can weaken demand, discourage investment and widen price differences between formal and informal products.

Edible Oil Sector Highlights Uneven Documentation

Pakistan’s edible oil and ghee industry illustrates the challenges of uneven documentation, Hashmi said.

Established manufacturers operate within the formal tax and regulatory system, while parts of the wider market have historically remained less documented.

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In 2026, the Federal Board of Revenue moved to introduce electronic production monitoring across registered edible oil and ghee manufacturing facilities. The initiative aims to strengthen compliance, address production under-reporting and prevent revenue leakage.

However, the issue extends beyond enforcement. In a price-sensitive market, differences in taxation and compliance costs can influence consumer choices.

Where formal manufacturers carry costs that are not equally reflected across the market, their products can become less competitive. This may shift demand towards less-documented alternatives.

Hashmi said a sustainable policy should strengthen documentation and enforcement across the market while ensuring that the tax burden does not restrict the competitiveness and growth of compliant manufacturers.

Formal Manufacturing Supports Wider Economic Activity

He said the benefits of formal manufacturing extend beyond individual companies. Industrial production supports suppliers, distributors, transporters, retailers and employment across interconnected value chains.

Tax policy should therefore consider not only direct revenue from manufacturers but also the wider economic activity generated by expanding formal production.

The cement industry offers a clear example. As a key input for construction and infrastructure, cement supports housing, transport, labour, building materials and several downstream industries.

Beverage Industry Faces Higher Taxation Costs

The formal beverage industry provides another example of a documented manufacturing sector.

Large beverage manufacturers operate through regulated production and distribution systems. Their factories, suppliers, distributors and commercial transactions contribute to the formal economy.

Multinational beverage companies and other major manufacturers also support extensive networks of suppliers, transporters, distributors, retailers and related businesses.

However, aerated waters and beverages currently face a 20% Federal Excise Duty (FED).

Hashmi said policymakers should assess the impact of this taxation beyond the amount collected on individual products. Excise duties increase final consumer prices, which can weaken demand or encourage consumers to switch to cheaper alternatives.

Where those alternatives operate outside the fully documented economy, formal manufacturers may lose sales without a corresponding increase in taxable activity elsewhere.

He said formal beverage companies follow established standards for production, product quality, labelling and taxation. Meanwhile, parts of the informal food and beverage market remain undocumented.

Increasing the cost of formal products without extending comparable regulatory and fiscal coverage across competing market segments can distort competition and encourage informality.

Large and Small Manufacturers Have Interconnected Interests

Hashmi said policy discussions sometimes treat large-scale and small-scale manufacturers as competing groups. In practice, however, both depend on each other.

Large manufacturers procure goods and services from smaller enterprises. They also rely on distributors, transporters, contractors, vendors and retailers.

Smaller businesses benefit from the demand, infrastructure, supply chains and market access created by larger industrial activity.

He said fiscal policy should focus on formalising the wider manufacturing ecosystem rather than placing an increasing share of the revenue burden on businesses already within the tax system.

Pakistan Needs a Broader and More Competitive Tax Base

Pakistan’s standard General Sales Tax (GST) rate of 18% is not low by regional standards. However, donor agency estimates suggest that only around one-quarter of the theoretical GST base is effectively taxed.

Hashmi said this highlights the need to assess tax policy through overall economic and revenue outcomes rather than individual rates alone.

Reducing the cumulative tax burden could help formal businesses increase production and sales. Higher volumes could, in turn, support revenue collection through greater turnover and economic activity across supply chains.

He called for tax rates that maximise sustainable revenue while preserving incentives for production and investment. Stronger documentation and enforcement should accompany a predictable and competitive environment for compliant businesses.

Revenue generation and industrial growth, he added, should not be treated as opposing objectives. A system that supports formalisation, higher production and sustained investment can provide a stronger revenue base than one that repeatedly increases the burden on already documented businesses.

Pakistan needs stronger domestic revenue mobilisation to meet fiscal constraints, debt-servicing obligations and development requirements. The central question, Hashmi said, is how the government raises additional revenue and whether the tax structure supports broader economic objectives.