The life and times of the Super Tax

The Super Tax was born, contested, buttressed, and then finally abandoned (for some). If there’s anything that points at the heart of Pakistan’s taxation issues, it is the heavily contested life of this tax.

The roots of the super tax were laid in 2015, where it was imposed to collect funds to rehabilitate the IDPs, created by the operation Zarb-e-Azab. Yet since then, the government extended and expanded it, and continued to use it as an avenue of revenue. The major push came in 2022, with the Finance Bill of that year amending the Income Tax Ordinance, 2001.

What this became essentially was a double tax. Companies and eligible individuals falling in certain income slabs had to pay tax on their incomes, and then another tax or surcharge on that income if it exceeded certain thresholds. The maximum possible tax rate was set at 10 percent, and given that the normal corporate tax rate in Pakistan was 29 percent, this effectively meant that companies could be paying nearly 40 percent of their incomes (not profits) in taxes.

Companies, expectedly, took the government to court on this issue. By the end there were over 2000 cases filed against the super tax, alleging its non-constitutionality. Initially the companies put their case to the provincial high courts, which effectively watered down – and in some cases struck – the double tax as non-constitutional. The case was then referred to the Federal Constitutional Court, which in a controversial decision in January 2026, upheld the super tax as constitutional. 

Yet, even as things appeared to be becoming settled, albeit a portentous calm, the government decided to abolish the super tax on certain slabs in the latest budget, and reduced the rate on certain slabs. It appears that the government is finally listening to reason, but given the opportunity it offered the government to extract tax revenue, it has to look elsewhere, since broader tax reforms still seem part of an unlikely future. And pending large scale reforms to bring the vast parts of undocumented economy into the tax net, the government will still be looking for some easy way - one like the super tax - to finance its collection shortfall.

 The Background of the Super Tax

The super tax was introduced in 2015 by the Finance Act, which instituted Section 4B into the Income Tax Ordinance, 2001. Ostensibly, it was put in place to “for rehabilitation of temporarily displaced persons,” who had been forced from areas where the Operation Zarb-e-Azab was being carried out. The super tax, here, applied to entities earning over 500 million rupees to raise money to support the IDPs.

Yet, the emergency tax kept being extended, and expanded to cover newer industries, essentially the entire corporate world, with the culmination coming around in 2022, when the year’s Finance Act imposed a super tax by adding Section 4C into the Income Tax Ordinance, 2001. What this did was to impose a maximum 10 percent surcharge that companies and individuals earning over a certain threshold would have to pay, in addition to the normal taxes they were already paying. Thirteen sectors felt the brunt: banks, cement, iron and steel, sugar, oil and gas, fertilizers, LNG terminals, textiles, automobiles, cigarettes, beverages, chemicals, and airlines.

Certain slabs were established. Unlike the previous super tax which applied only on entities earning more than 500 million, now entities earning over 150 million were liable for this surcharge. For entities earning between 150 and 200 million rupees, the effective super-tax rate was 1 percent, over the normal 29 percent they were already paying as income tax. The rate increased gradually until 500 million rupees, after which there was a flat 10 percent super tax surcharge. This would make 39 percent the effective tax rate for a majority of corporations. For banks, who normally pay a higher tax rate of 39 percent, their effective tax rate now increased to 49 percent. Furthermore, under the Finance Act, the super tax was to be applied retroactively with effect from July 2021.

Companies rose up in an uproar against what they felt was an unconstitutional double tax, and challenged it, more or less successfully, in multiple high courts of the country. The Lahore High Court deemed the tax discriminatory and reduced the rate from 10 percent to 4 percent, refusing, however, to strike it down completely. The Sindh High Court too invalidated the retrospective application of the surcharge, while the Islamabad High Court declared the super tax illegal.

The decisions of these high courts were challenged by the commissioners of Inland Revenue of Lahore, Karachi, Peshawar, and Islamabad in the Supreme Court, and after the passage of the controversial 27^th amendment to the Constitution, the cases were transferred to the Federal Constitutional Court (FCC).

 The Happenings of 2026

In January 2026, the FCC finally reached a decision. In a widely-criticized decision, the FCC dismissed all challenges against the super tax and upheld it and struck down the judgments of the high courts, especially concerning Section 4C of the Income Tax Ordinance. The high courts, the FFC argued, did not have the authority to re-determine tax slabs, rates, thresholds, or fiscal policy. Therefore, their decisions constituted judicial overreach. At the same time, the FCC declared that Section 4C (of 2022) did not amount to double taxation. The decision effectively settled over 2200 cases and opened access to 310 billion rupees in revenue for the government, and given that the government had already provisioned for this influx, this decision was welcomed by them.

For companies, this decision felt like a bag of bricks. When the super tax was imposed in 2022, they provisioned for their tax liability in their books, yet when the high courts effectively removed or reduced their super tax liabilities, these companies had removed these tax liabilities and showed them as their income. Now that the FCC restored these taxes, the companies had again to re-provision all of that tax amount, starting from the year the super tax was applicable from. The result was a shock reduction in their profits. In fact, the slump in the Pakistan Stock Exchange from its peak at over 191,000 points – before the Iran war – was partly attributable to the effect of the reinstatement of this super tax.

Just as the companies were resigning themselves to this new reality, the government seemingly did an about-face in the recently announced budget for FY2027. What they had fought so hard for against the whole corporate world of Pakistan, they relented seemingly on their own. In the recently announced budget for FY27, the government proposed to remove super tax on businesses earning up to 500 million rupees annually, and for those earning more than that, it proposed a reduced super tax rate of 8 percent. Even while doing so, the government stipulated that this exemption would not apply to banks, oil and gas exploration companies, and fertilizer companies.

So, now it would appear that of the 13 industries on which the super tax was applicable, companies earning less than 500 million rupees in at least 10 sectors are now exempt from the super tax. These companies, however, would still need to pay the super tax arrears on all income they earned from the time the super tax became effective until June 2026.

 Super Tax – A Problem and the Symptom of a Problem

The idea of a super tax, in an already heavily taxed economy, has often been seen as something that would depress company performance and discourage further investment. Critics argue that if a company is paying almost 40 percent of its income in taxes, after accounting for other liabilities, not much is left to the company to invest in the development of its capabilities and the expansion operations. The result, as the argument goes, – and there’s certainly some merit in that – is reduction in the return on investment. This obviously has spillover effects since it directly affects the companies abilities to spend massive amounts in setting up infrastructure and driving exports.

Then, there is another point – one that has often been argued – that such measures erode the ability of businesses to plan for the future. This is the case, especially, with the judgment of the FCC which appeared to be applied retrospectively. Such measures discourage planning since they appear to cut away at the framework of certainty that underpins any healthy growing economy.

The problem of the super tax runs deeper, however. And it is not a new story either. The government effectively uses such measures to make up for any shortfall in its tax collection figures. It is a fact not uncommonly known that massive swathes of Pakistan’s population and economy lie beyond the legibility of the tax net. Making these realities transparent and reflected in the tax revenue of the state would require broad-based and forward-looking tax reforms, something which not many governments in Pakistan have been interested in.

So, essentially, they have been taking the easy way out. They have been plastering the wound with bandages upon bandages of levies and surcharges, while the wound has been festering underneath. This super tax, too, was one of these bandages, but it appears that the government is now willing to forgo part of it, one can hope, in a bit to give some breathing space to local businesses.

Yet the problem is not simply of super tax, but of taxation, and until something real is done about that, we might see the same thing happening again, possibly in a different shape, but with a similar effect nevertheless. We already have been seeing another cash lever in the shape of the petroleum levy which the government moves in order to meet its revenue targets. And let’s not forget the three industries upon whom the recent watering down of the super tax does not apply. They will still be paying the super tax as it was prior to the budget. So, it would still be a pain for some of the biggest companies in Pakistan. And this is a situation that might not be sustainable for very long.