Budget 2025: How To Generate Extra Revenues Of Trillions

Dr. Ikramul Haq

“If we were to construe Entry 52 of the Legislative List keeping in view the above meanings of the expression “in lieu of”, it becomes evident that the Legislature has the option instead of invoking Entry 47 for imposing taxes on income, it can impose the same under Entry 52 on the basis of capacity to earn in lieu of Entry 47, but it cannot adopt both the methods in respect of one particular tax. Since under sections 80-C and 80-CC the imposition of presumptive tax is in substitution of the normal method of levy and recovery of the income-tax, the same is in consonance with Entry 52”—Supreme Court of Pakistan in Messers Elahi Cotton Mills & others v Federation of Pakistan & others [ PLD 1997 Supreme Court 582].

Budget 2025 for fiscal year 2025-26 is in the making amidst very difficult times when we are faced with industrial stagnation, the challenge of economic revival and fiscal consolidation. It is expected to be presented on June 2 or 5, 2025. The traditional approach adopted for decades in Pakistan for balancing the books, levying more oppressive indirect and high rate taxes for containing (unsuccessfully) fiscal deficit, and mere number game here and there will have to be abandoned in totality.

There is a need to take concrete measures in the Budget 2025 to drastically cut all kinds of non-productive and wasteful expenses and generate extra revenues (tax as well non-tax) of trillions by broadening of base without hampering the struggling economy, and leasing out lucrative government-owned properties. The daunting challenge for budget makers is how to facilitate the businesses for moving towards a higher, inclusive and sustainable growth.

The biggest challenge on revenue mobilization front faced by Federal Board of Revenue (FBR) is bridging monstrous tax gap through automation and introduction of tax intelligence system and refrain from levying more oppressive indirect taxes or enhancing the rates of the existing ones, including income taxation. The World Bank in its report, Pakistan Revenue Mobilisation Project, has aptly noted:

Pakistan’s tax revenue potential would reach 26 percent of GDP, if tax compliance were to be raised to 75 percent, which is a realistic level of compliance for lower middle income countries (LMICs). This means that the country’s tax authorities are currently capturing only half of this revenue potential, i.e. the gap between actual and potential receipts is 50 percent. The size of the tax gap varies by tax instrument and by sector. The tax gap in the services sector is larger than in the manufacturing sector (67 percent vs. 46 percent respectively) and it is larger for the GST/GSTS than for income tax (65 percent vs. 57 percent respectively). 

While extra revenue (tax and non-tax) generation is very important to meet the growing needs of the federal and provincial governments, these are also urgently required to help nearly 60 million Pakistanis identified as chronic poor in the latest Multidimensional Poverty Index [MPI] 2024.

The central points of federal budget 2025 and provincial budgets to follow should be achieving the long-delayed and much-needed goal of simplification of the tax system, ensure welfare of the common people and provide universal entitlements [free education, health, decent living, affordable public transport, universal pension, income support, civic amenities etc] to all citizens through a comprehensive social security system. This would only be possible by following a federalized economic planning, and implementing a rational tax system, proposed in 2016. It is updated in November 2024 [Towards Broad, Flat, Low-rate, and Predictable Taxes, Third Edition, PRIME Institute, November 2024] and some concrete measures suggested below.

Unfortunately, nobody is talking, what to speak of debating, about raising tax and non-tax revenues by taking some out of box measures. Somebody needs to tell the Prime Minister, Shehbaz Sharif, and his economic team that the iniquitous prescription of erratic and oppressive taxes and austerity in the coming federal budget will not solve our problems.

The federal and provincial governments need to generate and spend more money for infrastructure improvement to create more employments and ensure higher growth, engaging private sector to take part in public projects. This would kick-start the economy. Simultaneously, the governments need to reduce wasteful expenditure, right-size the monstrous size of their machinery, monetize all the perquisites of bureaucracy and make taxes simple and low-rate.

State lands lying unproductive, including palatial government residences for bureaucrats, owned by the federation and provinces, should be leased out for industrial, business and commercial ventures through public auctions, with 10% income tax collection at source as full and final tax, generating billions for the FBR to meet it targets fixed by International Monetary Fund (IMF). It will generate substantial funds, both tax and non-tax revenues, and facilitate private investment for rapid economic growth.

The dire need in today’s Pakistan is to undertake fundamental institutional and structural reforms. Our biggest burden on economy is the huge unproductive workforce comprising nearly four million people, in various governments (federal, provincial, local and corporations) and Public Sector Enterprises (PSEs), who waste time and money and mostly create hurdles for citizens and businesses rather than serving them. Right sizing of monstrous administrative machinery and improving quality of public services should be at the top of agenda for reforms. This can be done by transferring much of the work to local governments, which should be installed from the lowest level up.

Local elected authorities should handle all health, education, water and sanitation, local roads, local policing, local property transfer, property and income tax etc. For making Pakistan a self-reliant economy, we need to stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, the government-owned corporations should be run with private-public partnerships giving stock shares to the employees and introduce other steps to make these profitable through complete restructuring, increasing productivity through better technology and trained human resource, improving agricultural sector to meet local needs and creating exportable surplus; and reducing economic inequalities through redistribution of income and wealth using rational tax policy.

The following measures, both by the federal and provincial governments, can help generate additional revenues (tax and non-tax), making Pakistan a self-reliant economy. These will also provide relief to all citizens, especially the weaker section of society. Additionally, creating nation-wide data showing their earning/expenditure levels and assets for providing a comprehensive social security system.

• For the next three years, the actual quantification of income of non-corporate businesses and professions should be given up and taxation be moved to gross basis at fixed rate (after determining the fair rate for each class of business/profession). There should be no audits and raids. In the books or wealth statements, taxpayers be allowed to take credit of imputable income.
• Presently, barring a few, income tax is levied on net income with minimum tax to the extent of amounts collected through over 60 withholding provisions. It is patently unconstitutional, as held by Supreme Court in Elahi Cotton Mills & others v Federation of Pakistan & others [PLD 1997 Supreme Court 582].
• The apex court in the above case held that the National Assembly through Money Bill can impose taxes on income under Entry 47, Part I of Federal Legislative List, Fourth Schedule to the Constitution of Islamic Republic of Pakistan [“the Constitution”] or impose the same under Entry 52 on the basis of capacity to earn, but “it cannot adopt both the methods in respect of one particular tax”. The Finance Act 2019 violated this constitutional command by resorting to minimum tax and none has taken the matter to a high court under Article 199 of the Constitution.
• For ease of doing business and waiving lengthy disclosures, if presumptive tax is imposed on turnover/receipts under Entry 52, the collection under income tax will be around Rs. 16 trillion from all persons other than companies. The total income tax collection, if we add corporate sector’s contribution of nearly Rs. 2 trillion, will be Rs. 18 trillion. The additional revenue of Rs. 14 trillion under one head of collection alone will be a significant achievement without hampering the revival of economy and, in fact, giving the businesses and professions a stimulant to grow fast in the next three years and file simple tax returns with fear of audit etc.
• Total tax expenditure of Federal Board of Revenue (FBR) alone in fiscal year (FY) 2022-23 as per official report was 3.879 trillion that touched Rs. 4.5 trillion in FY 2023-24 and at the end of the current FY 2024-25 it would touch a mark of Rs. 5 trillion. There is a need to rationalize it and remove exemptions, concessions and waivers available to powerful segments.
• The federal government should amend the definition of “agricultural income” after fulfilling the command of Article 162 of the Constitution to bring into its ambit receipts from sale/lease of orchards, lease of lands, and in this way the rich absentee landowners will come under the Income Tax Ordinance, 2001. The addition revenue of at least Rs. 500 billion will come from this move, if taxation is based under Entry 52, Part I of Federal Legislative List, Fourth Schedule to the Constitution as discussed above, rather than going for the existing cumbersome methodology.
• The historic decision of taxing “agricultural income” by the Parliament in the shape of Finance Act, 1977 was thwarted by the military regime of General Ziaul Haq. Through this law, the Parliament amended the definition of “agricultural income” to tax big absentee landowners in the ambit of federal income tax law. This was a revolutionary step to impose tax on agricultural income at federal level for the first time in the history of Pakistan, but was foiled by a military dictator. It needs to be revived.
• The small farmers having land holding up to 15 acres should remain exempt from income taxation. There is no need to amend the Eighteenth Constitutional (Amendment) Act, 2010 [18th Amendment] or disturb National Finance Commission (NFC) Award if this measure is taken in Finance Bill 2025 as was the case under Finance Act, 1977.
• Military rulers abolished all progressive taxes e.g. Estate Duty, Gift Tax, Capital Gain Tax etc. After the 18th Amendment these are with provincial governments, but they are least interested in taxing the rich and mighty. If these taxes are imposed on the rich, additional tax revenue of Rs. 2 trillion can be generated by all the four provinces.
• During Zia’s 11 years rule and that of General Pervez Musharraf for nearly 9 years, absentee landowners (including mighty generals who received state lands as gallantry awards or otherwise as rewards!) did not pay a single penny as agricultural income tax or wealth tax.
• Taxation of “agricultural income” is the sole prerogative of provincial governments under the 1973 Constitution All the four provinces have re-enacted/amended laws with effect from January 1, 2025, but no efforts are underway for its fair and efficient collection.
• The total collection during the last five years under agricultural income tax by all the provinces never reached even Rs. 3 billion (share of agriculture in GDP on average was about 25% for this period). Therefore, there is a need to give collection of this tax to FBR, which should then directly be transferred to provinces after 1% collection charges.
• Multi-national Companies (MNCs) through abusive transfer pricing mechanism, deprive Pakistan of taxes of over Rs. 800 billion every year and this can easily be recouped by entering into the Advance Transfer Pricing Agreements with relevant countries.
• Wealth Tax Act, 1963 was abolished through the Finance Act 2003 on specific demand of Shaukat Aziz before he took charge as Finance Minister of Pakistan. He was fully aware of the fact that by virtue of his status as resident in Pakistan, his global assets would attract provisions of the Wealth Tax Act culminating into substantial tax liability on annual basis.
• The repeal of the progressive wealth tax on net wealth, especially suitable to Pakistan where enormous assets are created without disclosing income, was shown to be justified despite substantial revenue losses, and the resultant misery inflicted on the majority of the people of Pakistan. The successive governments through amnesties and asset-whitening schemes caused loss of billions of dollars to the national exchequer.
• In view of the 18th Amendment, there is a need to levy 1% tax on the those having net moveable assets exceeding Rs. 50 million by the Federal Government and the at the same rate on immovable assets by the provincial governments. It will bring equity in taxation, as the rich segments of society will contribute at least Rs. 900 billion for these levies.
• The total collection by imposing unified sales tax on goods and services as did by India in 2017 can be 12 trillion as against the total collection of around Rs. 3099 billion by the FBR through sales tax on goods in 2023-24 and four provinces by sales tax on services cumulatively at Rs. 504 billion. The additional revenue collection of over Rs. 8 trillion will not only give fiscal space to the federal government to narrow down fiscal deficit but also more distribution for the provinces under the NFC Award. The slogan of ‘One nation, One Tax’ by India and Harmonised Sales Tax (HST) by Canadian is the way forward for Pakistan as well.
• In Customs, the massive evasion takes place due to under-invoicing and mis-declarations besides smuggling etc. The collection in 2023-24 of custom duties was 1104 billion.
• If revenue leakages are plugged as suggested in ‘Dismantle containers’ mafia’, Business Recorder, September 14, 2018, and flat rate of 5% is imposed on all goods, the collection can go to Rs. 2500 billion. The extra generation of Rs. 1500 billion under this head is possible, along with ending all sorts of malpractices.
• The loss in Federal Excise Duty (FED) due to illicit and smuggled cigarette sector alone is Rs. 300 billion a year. It can be plugged by trace (T&T) system and other tools [see detailed study by Huzaima & Ikram, Revenue Losses and illicit tobacco trade, 2020].

As evident from above, the revenue generation of not less than Rs. 36 trillion is possible in fiscal year 2025-26 at national level, if remedial measures and additional initiatives, as suggested above, are taken. In the next article, a paradigm shift in the outdated and anti-business tax policy and revamping of the crumbling tax system will be discussed in some details, highlighting why millions paying advance adjustable income tax do not file tax returns due to cumbersome and complicated processes and fear of harassment.

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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.