Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The federal budget for financial year 2025-26 presented on June 10, 2025, in the National Assembly, has laid bare both the ambitions and contradictions of Pakistan’s fiscal strategy. The total revenue receipts, estimated at Rs. 19,278,090 million, is up from Rs. 16,802,123 million in the revised estimates of 2024-25, reflecting a significant increase of over Rs. 2.47 trillion. Tax revenue target has been set at Rs. 14,131,000 million, with direct taxes amounting to Rs. 6,902,000 million and indirect taxes at Rs. 7,229,000 million. The share of indirect taxation remains worryingly high, pointing to the regressive nature of revenue mobilization framework.
The total non-tax revenue stands at Rs. 5,147,090 million, supported primarily by petroleum levy (Rs. 1,468,395 million), State Bank’s surplus profits (Rs. 2,400,000 million), and dividends (Rs. 206,134 million). Dominance of petroleum levy in non-tax receipts suggests fiscal reliance on consumer end fuel prices, with inflationary consequences for the common man. The markup receipts from provinces and public sector enterprises are estimated at Rs. 283,810 million and Rs. 188,000 million respectively, showing a recovery from the preceding year’s underperformance.
Capital receipts, including recovery of loans and domestic debt receipts, are estimated at Rs. 17,274,113 million. Domestic debt receipts alone are Rs. 16,671,113 million, reflecting continued borrowing to meet budgetary shortfalls. Repayment of domestic debt is projected at Rs. 14,007,189 million, yielding net domestic debt receipts of Rs. 2,663,924 million. Reliance on treasury bills, accounting for Rs. 8,430,000 million of the floating debt, reflects the government’s short-term borrowing preference with implications for interest rate volatility.
The external receipts have been estimated at Rs. 5,777,554 million, marginally down from the revised Rs. 5,833,308 million in 2024-25. Project loans from federal and autonomous bodies total Rs. 215,719 million, with programme loans and other loans amounting to Rs. 4,413,510 million. The sustainability of external borrowing remains under strain given the increasing repayment obligations, as evidenced by Rs. 5,472,222 million allocated to foreign loan repayments.
Gross federal resources have been computed at Rs. 28,532,694 million, with a deduction of Rs. 8,205,723 million for the provincial share in federal taxes, resulting in net federal resources of Rs. 20,326,971 million. Cash surplus expected from provinces is Rs. 1,464,000 million, while privatization proceeds have been ambitiously pitched at Rs. 86,550 million, a more than tenfold increase from Rs. 8,000 million in the previous year. Total estimated resources thus stand at Rs. 23,848,112 million, which equals the total proposed expenditure.
The current expenditure on revenue has been set at Rs. 16,286,045 million, which includes Rs. 12,210,851 million under public services, Rs. 2,557,950 million for defense services, and Rs. 734,187 million for social protection.
The defense budget sees an increment of Rs. 368 billion, raising critical questions about prioritization amidst economic distress. The allocation for education stands at Rs. 112,683 million and for health at Rs. 31,975 million, barely increasing from revised estimates and falling short of international benchmarks.
The current expenditure on capital accounts is estimated at Rs. 5,787,114 million, a dramatic surge from Rs. 3,398,098 million last year, due to ballooning foreign loan repayments. The total current expenditure sums up to Rs. 22,073,159 million. The development expenditure has been reduced to Rs. 1,774,953 million, with Rs. 590,774 million allocated for revenue account and Rs. 1,184,179 million for capital account, suggesting fiscal consolidation at the cost of long-term growth.
Total expenditure stands at Rs. 23,848,112 million, with Rs. 16,876,819 million on revenue account and Rs. 6,971,293 million on capital account. Debt servicing constitutes domestic Rs. 8,207,250 million and Rs. 1,009,322 million for foreign debt, totaling Rs. 9,216,572 million, representing 38.6% of total current expenditure. The burden of debt repayment limits fiscal flexibility and crowds out essential public services.
The policy measures embedded in the Finance Bill 2025-26 under the Customs Act of 1969, Sales Tax Act of 1990, and Income Tax Ordinance of 2001 introduce wide range changes. Tariff rationalization initiative eliminates outdated slabs and introduces new 5%, 10%, and 15% slabs, reducing additional customs duty (ACD) rates and regulatory duties across thousands of PCT codes. Digitization pushing through centralized assessment units, cargo tracking systems, and customs modernization aligns with global best practices, yet its effectiveness hinges on implementation.
The Sales Tax Act amendments propose taxing e-commerce through e-Bilty and cargo tracking definitions and shifting collection responsibility to banks and couriers. Expansion of the Third Schedule to include imported coffee, cereal bars, and chocolates underlines the government’s attempt to formalize retail tax collection. Withdrawal of exemptions on solar panels and industrial units in the ertswhile FATA/PATA marks a move toward harmonized taxation but may generate backlash from impacted sectors.
The income tax measures include a new digital transaction proceeds levy, increase in tax on dividends to 25%, and enhancement of tax on debt income from 15% to 20%. Tax burden on non-filers and pensioners earning above Rs. 10 million has also increased. Relief measures offer marginal reduction in salaried class tax rates and extend exemptions to the erstwhile FATA/PATA. The procedural tightening on cash transactions and property valuations aims to expand the formal economy.
The fiscal framework for 2025-26 reveals a strategy focused on aggressive revenue mobilization, enhanced digitization, and expenditure rationalization. The projected revenue receipts of Rs. 19.28 trillion against an expenditure of Rs. 23.84 trillion still leave a fiscal deficit, to be bridged by Rs. 5.78 trillion in external receipts and Rs. 2.66 trillion in net domestic borrowing. The macroeconomic implications of such debt-driven budgeting include inflationary pressures, exchange rate vulnerabilities, and heightened interest obligations.
The common citizen faces a dual burden. Increase in petroleum levy, withholding taxes, and indirect taxes will translate into higher prices of essentials. The limited allocation for health, education, and social welfare undermines human development prospects. The disparity between current and development spending, with the former constituting over 92% of total expenditure, reveals a short-term orientation at the cost of long-term growth.
The government must revisit its budgetary priorities. The tax policy should shift from indirect to direct taxation to promote equity. The expenditure side must see rationalization of defense and administrative costs, while enhancing allocations to education, health, and job creation. The privatization target of Rs. 86.5 billion must be accompanied by transparency and accountability. The success of digital enforcement, customs reform, and tax policy overhaul will depend on institutional capacity, governance, and political will.
The federal budget 2025-26 represents both a fiscal necessity and a political choice. The numbers reflect economic urgency, but the distribution reflects entrenched priorities. The path forward demands more than arithmetic, it requires structural reform, inclusive planning, and a vision beyond fiscal survival.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions