Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan’s budget-making season has once again begun with familiar rituals: consultations with International Monetary Fund (IMF), Federal Board of Revenue (FBR) target projections, and demands for “additional revenue measures.” But the more important question is not how much more to tax, but whom to tax, how to tax, and whether the present architecture itself has become economically counterproductive.
A recent World Bank discussion note, ‘Strengthening Government Revenues: Towards an Equitable, Efficient, and Sustainable Tax System’, offers a useful starting point for this year’s debate. The Policy Note 6 candidly admits what independent economists and tax scholars in Pakistan have argued for decades: the country suffers not merely from low tax collection, but from a structurally inequitable and distortionary fiscal regime that extracts disproportionately from a narrow and compliant segment of society while leaving large sectors undertaxed or entirely outside the net.
The report notes that Pakistan’s tax-to-GDP ratio has fallen from around 14 percent in the 1980s to nearly 10–12 percent today despite the economy possessing a tax capacity exceeding 22 percent of GDP. This contradiction lies at the heart of Pakistan’s fiscal crisis. The problem is not absence of taxable capacity; the problem is political unwillingness to tax privileged sectors combined with an extractive approach toward already documented businesses and salaried classes.
The World Bank correctly observes that Pakistan’s tax system is uniquely regressive. The poorest households, relative to their incomes, bear a heavier effective tax burden than the richest segments of society. This is an extraordinary indictment of the existing model. A country where indirect taxation dominates consumption, electricity, fuel, mobile usage and banking transactions cannot claim fiscal justice merely because nominal income tax rates appear progressive on paper.
Nothing illustrates this structural inequity better than the taxation of elite state officeholders vis-à-vis ordinary citizens. Publicly circulated calculations regarding superior judiciary remuneration reveal that a judge receiving around Rs. 690,000 per month reportedly pays approximately Rs. 62,000 in income tax—an effective rate of roughly 9 percent after exclusions and concessions. A private-sector salaried employee earning the same amount pays nearly Rs. 173,000 under the ordinary slab regime.
At the same time, a poor motorcyclist buying petrol pays around Rs. 117 per litre in petroleum levy and related indirect taxation irrespective of income level. The daily wage earner commuting to work thus faces a harsher effective tax burden on consumption than elite state officeholders do on income. This is not by chance or ignorantly. Pakistan’s oppressive tax structure has evolved into a system where politically influential and constitutionally insulated groups enjoy preferential treatment while the burden is shifted onto consumption, utilities, fuel and documented private-sector income.
No serious fiscal reform can succeed unless this dualism ends. A tax system loses moral legitimacy when those adjudicating constitutional equality themselves remain beneficiaries of fiscal inequality. The issue, therefore, is not merely low revenue collection. It is the collapse of horizontal and vertical equity within the fiscal structure itself. Until privileged exemptions and preferential treatments embedded within the state apparatus are dismantled, attempts to raise revenues through higher indirect taxes and petroleum levies will continue deepening both economic injustice and public distrust.
The Policy Note 16 of World Bank identifies several untapped areas: agricultural income taxation, urban land and property taxation, reduction of exemptions, harmonisation of federal and provincial taxes, and simplification of compliance. Much of this diagnosis is sound as highlighted frequently in these columns. However, the real challenge is that international institutions often treat Pakistan’s fiscal disease as a technical problem, whereas it is fundamentally a constitutional political economy problem.
Pakistan today operates one of the most fragmented and anti-growth tax systems in Asia. The FBR coexists with multiple provincial revenue authorities, overlapping agencies, different definitions, inconsistent rules, competing jurisdictions, and frequent legislative amendments. The World Bank acknowledges that Pakistan has FBR alongside twelve provincial revenue entities creating duplication, rent-seeking and compliance burdens. However, the institutional fragmentation is even worse in practice after the post-July 2025 provincial sales tax expansions where provinces began taxing nearly all services except specifically exempted categories while retaining contradictory rules inherited from older positive-list regimes.
This year’s budget should, therefore, not become another exercise in raising rates. Pakistan has already crossed the threshold where excessive taxation suppresses investment, exports and formalisation. The country instead requires structural redesign.
The first proposal for Budget 2026–27 should be the creation of a unified national tax coordination framework leading ultimately towards a federalised tax agency operating under constitutional guarantees for provincial autonomy. Pakistan cannot continue with competing sales tax systems on goods and services where the same transaction is vulnerable to multiple interpretations. Businesses spend more time defending classifications than expanding production.
Second, the government must begin rationalising withholding taxes that have transformed Pakistan into a presumptive and punitive tax regime. Nearly the entire federal revenue machinery today survives on taxes collected by banks, utilities, telecom operators, registrars and withholding agents rather than through genuine assessment capacity. This system punishes documentation because compliant sectors become easy extraction points while undocumented sectors remain politically protected.
Third, exporters must be removed from the present cycle of over taxation and refund paralysis. Pakistan cannot claim to support exports while simultaneously imposing advance taxes, super taxes, infrastructure levies, provincial sales taxes on services, energy surcharges and delayed refunds. The anti-export bias embedded within the current fiscal structure has become one of the principal causes of deindustrialisation.
Fourth, property taxation should indeed be rationalised, but not through constitutionally questionable experiments such as section 7E of the Income Tax Ordinance, 2001, declared ultra vires by the Federal Constitution Court (FCC) of Pakistan on May 7, 2026. It attempted to convert ownership into fictional income. Urban property taxation is constitutionally a provincial subject and should remain so. However, provinces must modernise valuation systems, digitise land records and impose progressive recurrent taxation on speculative urban land holdings rather than encouraging unproductive capital parking.
The World Bank is correct in identifying distortions created by low taxation of vacant urban land and speculative real estate investment. Pakistan’s elite political economy has historically preferred non-productive rent-seeking over industrial investment because real estate speculation remains fiscally privileged relative to manufacturing and exports.
Fifth, agricultural income taxation requires honesty rather than slogans. The present system taxes landholding size through outdated acreage formulas instead of actual income. The result is cosmetic taxation with negligible yield from absentee landowners earning millions by just renting out agricultural land. Reform must distinguish between subsistence farmers and absentee landowners or large commercial agricultural enterprises. Treating both identically would be economically irrational and politically destabilising.
The World Bank estimates that federal reforms, agricultural taxation and land taxation together could potentially generate between 5 to 6 percent of GDP in additional revenues over time. Nevertheless, sustainable revenue mobilisation cannot occur through extraction alone. Policy Note 6 wisely acknowledges that trying to squeeze more revenue from a stagnant economy eventually becomes counterproductive. This sentence deserves careful attention in Islamabad where policymakers often equate higher rates with higher revenues.
Pakistan’s real crisis is low productivity growth, declining industrial competitiveness and shrinking formal economic space. No tax system can remain sustainable where the documented economy is continuously burdened while the informal and politically protected economy expands.
The budget for 2026–27 should therefore move away from the IMF-era obsession with annual revenue patches and towards long-term fiscal reconstruction. Pakistan needs a low-rate, broad-based and harmonised tax regime that encourages investment, exports and documentation rather than criminalising productive activity.
If the coming budget merely raises existing rates again, expands withholding regimes further, and introduces new mini-budget style levies, the state may collect temporary revenues but at the cost of accelerating capital flight, industrial decline and public distrust. Fiscal sustainability cannot emerge from fiscal exhaustion. The real choice before policymakers is no longer between taxation and no taxation. It is between intelligent reconstruction and continued fiscal extortion.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers, 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 based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’.