Dr. Ikramul Haq
The just ended 2025 witnessed the pathetic and disappointing performance of Federal Board of Revenue (FBR) and provincial tax agencies in bridging the huge tax gap. It was mainly due to perpetual structural impediments, lack of infrastructure and trained human resource, incompetence, corruption, inefficiencies, and leakages, etc. Making the things worse, the federal government could not reduce the burgeoning debt servicing and wasteful expenses in the fiscal year 2024-25 (FY 2025).
The impact of reduced policy rate by State Bank of Pakistan (SBP) from 22% to 11% and then to 10.5% has started showing positive result. Over the last twelve months, Pakistan has recorded a meaningful reduction in debt-servicing costs, even though the overall stock of public debt continues to rise. The federal government’s debt-servicing allocation for FY 2025-26 is of Rs 8.206 trillion, reflecting a year-on-year decline of about Rs 739 billion (over 8 percent) compared to the revised estimates for the outgoing fiscal year.
This easing has been supported by proactive debt-management measures, including early retirement of around Rs 2.6 trillion in high-cost domestic liabilities, which has generated substantial interest savings. The development underlines an important distinction often missed in public debate: while Pakistan’s total debt has increased, the immediate fiscal pressure from servicing that debt has moderated, creating limited but much-needed fiscal space for the government.
On the one hand, the federal government remained in a deep debt trap, and on the other, provinces—heavily dependent on transfers under Seventh National Finance Commission (NFC) Award—received less than budgeted amounts in FY 2025. Provinces also miserably failed to collect due agricultural income tax from the rich absentee landowners. The fact remains that the fiscal mismanagement of federal and provincial governments since 2008 has been badly affecting the country’s economic landscape, highlighted in various articles in these columns.
Provinces have been dejectedly unsuccessful to mobilize their own resources by collecting due agricultural income tax from the rich absentee landowners and failure in imposing progressive taxes assigned/devolved to them in the wake of Constitution (Eighteenth Amendment) Act 2010 [18th Amendment] became effective on April 19, 2010 after receiving assent of President of Pakistan. Their inaction on this account for over 15 years is highly lamentable and needs urgent correction in the light of National Fiscal Pact.
The financial viability of any country depends on its fair and just revenue generation capacity and prudent spending. Governments collect revenues through various sources such as taxes on incomes and/or assets, consumption and transfer receipts from natural and artificial persons. However, significant importance is attached to collection of direct taxes as it is linked with ‘ability to pay’ principle.
Unfortunately, the successive governments in Pakistan—civilian and military alike—have been meeting tax revenue targets through imposition of regressive and oppressive indirect taxes, even in the garb of income taxation through pass on withholding taxes. Consequently, Pakistan has witnessed unabated increase in the cost of doing business and production, high prices and inflation and rising tide of wealth/income inequalities.
According to the latest figures released by the SBP, gross public debt and liabilities as on September 30, 2025 were Rs. 79.14 trillion, out of which foreign debts and liabilities were Rs. 37.82 trillion.
The details of federal budget for the current fiscal year (FY 2026) show the debt servicing alone is estimated at Rs 8.2 trillion (Rs 7.2 trillion domestic and Rs 1 trillion foreign), while the defence at Rs 2.56 trillion and pension at Rs. 1055 billion (military Rs. 742 billion and civil Rs. 243 billion). The net income of the federation, after transfer of shares to provinces of Rs. 8206 billion, is estimated at Rs. 11072 billion. In this way, after meeting the above three expenses, all estimated expenditure (current and capital) of Rs 23.84 trillion will attract further expansive borrowing.
In the above scenario, it hardly matters that the FBR through regressive, high rate oppressive taxes, unfair means of recoveries, blocking of refunds, and after obtaining huge undue advances from large taxpayers, manages to meet the tax target of Rs. 14.131 trillion or not, out of which share of provinces is 57.5 percent as per 7th NFC award.
The inadequacy of federal receipts to meet burgeoning expenses is a recurrent, rather a permanent phenomenon, due to structural issues—for example the retaining of ministries transferred to provinces under 18th Amendment, monstrous size of government, restraints under Article 160(3A) of the 1973 Constitution and denial of provincial right to impose indirect taxes on goods produced and consumed in their territories.
The above proves beyond any doubt that Pakistan’s real fiscal problem is reckless borrowing and ruthless spending, pushing the country deeper and deeper into the deadly debt trap. The budgets for last many years show grossly understated expenditures and exaggerated income/inflows, deliberately or otherwise, confirming incompetence and/or fraudulent behaviour.
Pakistan, like many other developing economies suffering from chronic corruption and rampant corruption, weak institutions and lack of rule of law, has been facing a formidable challenge in establishing an efficient tax policy framework.
Till to this day, Pakistan has failed to devise a rational tax policy by establishing an independent/autonomous Board (establishing Tax Policy Office in Ministry of Finance is yet another useless exercise for lack of independence, transparency and public accountability), lowering tax rates, bringing the broadest possible base into tax net through simplification of procedures and incentivizing documentation of the monstrous informal economy.
The incumbent government, instead of following the above suggestions, on December 18, 2024 tabled in National Assembly the obnoxious anti-people, anti-business, controversial and largely unconstitutional Tax Laws (Amendment) Bill, 2024. Luckily after wide public campaign it was dropped. However, some provisions, after modifications, retained in the Finance Act 2025, yet FBR suffered deficit of over Rs. 500 billion in the first six months of the current fiscal year.
Some of the provisions of above-cited Bill, inserted in Finance Act 2025, patently violate the fundamental rights of protection to life and property, privacy and human dignity, e.g. Article 9, 14 and 23 of the Constitution. These provisions as highlighted have failed to harness the real potential of tax, rather have opened new vistas of corruption and highhandedness for the tax administrators, many call them adminis(traitors)!
The governments’ inability to introduce an efficient and just tax system that can cater for the country’s needs often leads to a vicious debt trap where the gap between revenue and expenditures is bridged through borrowings, compromising ability of the state to spend on the welfare of its citizens. It also hampers provision of basic facilities like health, education and infrastructure. This is exactly the dilemma of Pakistan since inception, especially after first military coup of October 7, 1958.
Our tax-to-GDP ratio in recent years has gone down due to multiple reasons but major factors remain higher taxes leading to slow investment and growth and ever-increasing size of informal economy.
In their inability to broaden the tax base, tax policy design for FBR has been relying mainly to transactional changes like higher revision of tax rates or further extortion from the existing taxpayers, increasing rates of withholding taxes, resorting to confiscatory taxation by levying super tax and introduction of unconstitutional deemed income under section 7E of the Income Tax Ordinance, 2001.
However, even all the above and using draconian measures to freeze bank accounts while litigation is still pending, the FBR was yet seeking from Parliament more destructive powers to deny fundamental rights of free business, trade and hold property, even right to life by cutting mobile, electricity and gas connectivity.
Another impeding factor is the nexus between legislature and powerful elite of the country that has stunted the country’s ability to grow financially. Taxing the rich and facilitating lower/fixed income earners or greenfield industries is always resisted by the powerful elites—militro-judicial-civil complex and unscrupulous traders—as it would eventually increase their tax burdens.
As usual, FBR is facing huge shortfall in its half-yearly target as per media reports. 2025 has proved to be FBR’s Waterloo. After imposing all pervasive destructive taxes, it miserably failed to meet even the revised target.
The latest published data confirms that the overwhelming quantum of so-called income tax collection by FBR is from withholding taxes, advance taxes or taxes paid with returns. Its own effort (collection from current demand and arrears is only 5% that too includes extortion from banks in the name of windfall tax).
According to a news report of December 12, 2025, “The original tax target for July-December was Rs6.7 trillion, later cut to Rs6.49 trillion. The FBR now faces at least Rs560 billion in shortfalls against the revised target. Against the original target, the shortfall will exceed Rs775 billion. The FBR has already sustained Rs413 billion in shortfalls in the first five months”. The report further reveals:
“According to the PM’s Office, the premier was briefed on the progress of initiatives being taken to achieve revenue targets, digitise the economy, and curb tax evasion. He was also updated on pending tax cases in tribunals and various institutions. The Federal Constitutional Court has scheduled the super tax case for next month, making it unlikely that the FBR will receive a ruling this month. The FBR has repeatedly assured the IMF that a super tax case could come at any time in its favour. Sources said one participant warned that a major revenue shortfall may increase the chances of a mini-budget. The IMF approved the $1.2 billion loan package this week only after Pakistan assured it would introduce a mini-budget to compensate for revenue losses. The finance ministry cautioned the PM that in case of a significant shortfall, expenses would have to be curtailed, as the IMF would not allow deviation from the primary surplus target”.
Many writers, institutes and think-tanks like Pakistan Institute of Development Economics (PIDE) and Prime Institute have been highlighting the vices of oppressive and narrow-based taxation in various reports/articles/research papers/books.
Viable solutions have also been offered to make it fair and broad-based, but Ministry of Finance, FBR and foreign lenders and donors have never paid any heed. The following need consideration on macro level:
- Corporate tax rate should not be more than 20% including super tax etc.
- Income tax rate should be lowered to maximum 10% with alternate tax of 2% on net wealth exceeding Rs. 100 million, whichever is higher.
- All individuals should be facilitated to file simple income tax return [no wealth statement]—those earning below taxable limit should be paid income support [negative tax].
- Single-page return form should be in English/Urdu/all regional languages. Reporting of real income by all will help create data bank at national level of all households. Their earning levels will determine who needs to pay and who should be entitled to social benefits and how to improve social/economic mobility ending poverty trap.
- The State must end the culture of appeasement—no more amnesties/immunities giving incentives to the dishonest and penalizing the honest. Those who filed but underpaid be offered to make up deficiency paying due tax with no penal action/audit. It will yield much more than target fixed for FBR at 14.131 trillion.
- For reducing fiscal deficit to the level of 4% of GDP, it is imperative to (i) curtail unproductive and wasteful expenses by 50%, (ii) increase non-tax revenues by leasing out valuable state lands and assets e.g. palatial government houses etc. through public auction and for specific activities to generate employment and boost economic activity and (iii) taxes at all levels—federal, provincial and local—should be made simple, low rate, broad-based and payable with ease.
- Expenditures by federal and provincial governments should be subjected to parliamentary oversight and restrictions to ensure public welfare as the topmost priority for which constitutional amendments should be made. The subordinate legislations cannot control/curtail discretionary and wasteful expenditure by the Executive.
- Taxpayers’ Bill of Rights should be passed to guarantee, inter alia, budgetary allocations by national and provincial assemblies for fulfilment of fundamental rights and social security payments.
- Taxpayers’ rights must be safeguarded and strengthened by giving adequate rights under Taxpayers’ Bill of Rights ensuring quality of treatment, guaranteeing privacy and confidentiality of their declarations, providing right to assistance by the State in tax matters, ensuring unfettered right of appeal through an independent National Tax Court and providing independent review of disputes with tax authorities.
- Instead of being overburdened with advance/heavy taxes/duties/other charges businesses should be facilitated by improving all indexes of ‘Ease of Doing Business’ and reducing ‘Cost of Doing Business’. Tax credits/incentives for investing in human resource development (HDR) and research & development (R&D) to have qualified workforce in all areas—providing employment to all and paying them as ordained in Article 3 of the Constitution.
- All possible facilities and incentives to all kinds of entrepreneurs/innovators, especially Small & Medium Enterprises (SMEs) to concentrate on innovations, growth and productivity. Banking sector must be proactive in lending to SMEs and big businesses. Banks are overwhelmingly extending loans to the government considering it as a safe bet. Banking laws need to be amended for quick disposal of disputes as done in many countries.
- Facilities to foreign investors including grant of long-term visas and/or nationality. Many Afghans and Iranians are keen to invest.
- Central data creation/management of all citizens to determine their economic status. There should be universal pension, social security/food stamps for the needy, at the same time empowering them to unshackle themselves from the trap of poverty.
- Establishment of National Tax Agency (NTA) and All Pakistan Unified Tax Services having professional expertise in all related fields. NTA would communicate to all citizens what their income/expenditure levels are—it would determine correct tax obligations and bona fide entitlement of social support from the State.
- National/provincial legislators should impose simple, predictable and low rate taxes—income tax on all incomes including agricultural income should be under the exclusive domain of federal government and harmonized sales tax on goods/ services exclusively to the provinces on the basis of goods produced/supplied and services rendered/performed within their territories—it would ensure fiscal consolidation making the country self-reliant.
- We must abolish multiple taxes and collect local taxes e.g. property, vehicle taxes etc. to meet the needs of local residents by allocating funds to local governments to provide services of health, education, civic amenities of all kinds, and recreation etc.
- Allocation of minimum of 4% of GDP for education and additional 2% for R&D by federal and provincial governments.
- All citizens and other entities should be given a chance to declare all untaxed assets for any past year, at home or abroad, by paying due tax liability in full or in installments to overcome cash liquidity problems—of course paying additional tax for grace period(s). After the deadline, stringent action under the law should be taken including confiscation of property, fine and/or imprisonment.
Shockingly, both IMF and FBR have ignored proposals given in Tax reforms: Agenda for Self-Sustainability for collecting Rs. 30 trillion at federal alone enabling Pakistan to overcome monstrous fiscal deficit, get rid of fresh loans, achieve rapid economic growth and provide social services to all citizens.
Failure to undertake fundamental reforms as suggested above is the real problem. The federation can easily collect taxes of Rs. 30 trillion (15% of GDP if informal economy is also included) to create adequate fiscal space to come out of the present economic mess and provide the much-needed and long-delayed benefits/entitlements to all citizens and reliefs to trade and industry.
For achieving the above levels of taxes, our focus should be on rapid/sustainable higher growth that will increase taxes as a byproduct—harsh taxation only hampers expansion and prevents investment in existing and new businesses. Will politicians in power care to take corrective measures? Let us pray that 2026 brings prosperity for Pakistan and equal opportunities and universal entitlements for all citizens as guaranteed in the Constitution.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.