Provincial tax reforms & municipal finance Huzaima Bukhari & Dr. Ikramul Haq As Budget 2027 is expected on June 10, 2026, the federal government has approved a GDP growth target of 4.2 percent and a development programme exceeding Rs 4.3 trillion, share of federal government is Rs. 1.1 trillion. Both objectives are commendable. Neither is likely to be achieved unless policymakers address one of the most neglected dimensions of Pakistan's fiscal crisis: provincial taxation and local government finance. For decades, fiscal debates have revolved around the Federal Board of Revenue (FBR), revenue targets dictated by International Monetary Fund (IMF) and federal deficits. The discussion rarely extends to the vast constitutional powers available to provinces and local governments. This imbalance has produced a peculiar situation in which the federation remains under pressure to raise revenues while provinces continue underutilising major tax bases entrusted to them under the Constitution. The Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] fundamentally altered Pakistan's constitutional framework. Provinces received expanded legislative authority and assumed responsibility for major sectors including education, healthcare, agriculture, local development and social services. Fiscal federalism was intended to bring governance closer to citizens and improve accountability. The expected results did not materialise. Provincial governments became increasingly dependent upon transfers under the National Finance Commission (NFC) Award while their own tax effort remained weak. The consequence is visible in fiscal data. Despite significant constitutional empowerment, provincial own-source revenues remain modest relative to the size of provincial economies and public expenditure responsibilities. The problem is not absence of taxable capacity. Agricultural income taxation provides a striking example. Public debate frequently portrays any discussion of agricultural taxation as an attack on farmers. The real issue is different. Small farmers struggling with rising costs and climate uncertainty deserve protection. Rich absentee landowners and large commercial agricultural enterprises generating substantial incomes do not. Provinces possess constitutional authority to tax agricultural income but implementation remains largely symbolic. Urban immovable property taxation presents an even greater missed opportunity. Throughout the world, municipal governments rely heavily upon property taxation to finance local infrastructure and services. Property taxes are among the most efficient and least distortive forms of taxation because land cannot be concealed, transferred abroad or shifted into the informal economy. Yet Pakistan's urban property tax collections remain extraordinarily low relative to the appreciation in land values witnessed over recent decades. The result is a fiscal paradox. Cities generate enormous wealth through commercial activity and rising land prices, yet local governments remain financially weak and dependent upon transfers. Roads deteriorate, water systems collapse, waste management remains inadequate and urban planning becomes reactive rather than strategic. A federation cannot function efficiently when local governments lack sustainable revenue sources. The experience of successful federations offers valuable lessons. Municipal governments in Canada, Switzerland and many European countries, especially Finland, rely substantially upon property-based revenues and enjoy meaningful fiscal autonomy. Local taxation creates accountability because citizens can directly observe the relationship between taxes paid and services received. Pakistan has moved in the opposite direction. Local governments frequently exist as administrative units rather than genuine fiscal entities. Revenue authority remains concentrated at higher levels of government while service delivery responsibilities continue expanding. This disconnect weakens accountability and encourages dependence. Provincial tax reform, thus, must become an integral component of any serious revenue strategy. The objective should not be higher rates. Pakistan already suffers from excessive taxation of documented sectors. The objective should be broadening of provincial tax bases, rational valuation systems, improved administration and integration of revenue databases. Technology can play a significant role. Land records, property registries, utility data and banking information provide sufficient information to construct modern property taxation systems. The challenge is political will rather than administrative feasibility. Municipal finance reform also carries broader economic implications. Strong cities generate growth. Efficient urban infrastructure lowers business costs, improves productivity and attracts investment. Weak municipalities impose hidden taxes through congestion, poor services and declining quality of life. Provincial governments should therefore view municipal finance not merely as a governance issue but as an economic development strategy. The relationship between provincial taxation and exports deserves attention as well. Pakistan's growth prospects depend heavily upon exports, industrialisation and value-added agriculture. These objectives require infrastructure, logistics, skills development and local services-all areas influenced directly by provincial and municipal governance. Fiscal reform and economic growth are inseparable. The recurring mistake of policymakers has been to treat taxation as an isolated exercise in revenue extraction. Successful economies understand that sustainable revenue growth emerges from rising productivity, expanding economic activity and stronger institutions. Pakistan's provinces possess significant untapped potential to contribute to this process. Agricultural income taxation of large commercial operations, rational property taxation, strengthened municipal finance and integrated provincial revenue administration can generate substantial revenues while improving governance and accountability. The central lesson is simple. Pakistan's tax problem is not lack of taxable capacity. It is failure to utilise the constitutional powers already available. Without provincial tax reform and local government finance reform, ambitious growth targets and development programmes will remain difficult to sustain. A federation that neglects its provinces and municipalities ultimately weakens its own fiscal foundations. [To be concluded] _____________________________________________ Huzaima Bukhari, lawyer and author, is an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Senior Visiting Fellow of Pakistan Institute of Development Economics (PIDE) 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.
The Tax Proposals Budget 2027 series: Tax Proposals Budget 2027-I · Tax Proposals Budget 2027-II · Tax Proposals Budget 2027-III · Tax Proposals Budget 2027-IV · Tax Proposals Budget 2027-V · Tax Proposals Budget 2027-VI · Tax Proposals Budget 2027-VII · Tax Proposals Budget 2027-VIII · Tax Proposals Budget 2027-IX · Tax Proposals Budget 2027-XI · Tax Proposals Budget 2027-XII
