Today (August 14, 2026), Pakistan completes 79 years as an independent state. Political sovereignty passed from Westminster in 1947. Fiscal sovereignty, understood as the capacity of citizens and their elected governments to raise resources, decide priorities and remain accountable for what they tax and spend, is still an unfinished project—for many a dream lost.
This distinction matters. Only a flag, currency, armed forces, central bank and membership of international institutions cannot measure sovereignty/freedom—it is myth of independence.
A country dependent upon recurrent borrowing to meet ordinary governmental expenditure, periodically negotiating its economic choices with external creditors, while its provinces depend substantially upon transfers from Islamabad and its local governments remain dependent upon provincial capitals, suffers from a deeper institutional weakness.
Political sovereignty exists; economic power remains excessively concentrated and fiscal responsibility badly fragmented. Pakistan did not create this structure from a clean slate. It inherited a highly centralised fiscal system whose roots lay in colonial governance.
The Government of India Act, 1935 permitted provincial autonomy and revenue sharing, but fiscal power remained heavily tilted towards the centre.
A recent World Bank study on Pakistan’s fiscal federalism also traces present arrangements to this centralised inheritance.
More importantly, colonial allocation of taxes had its own political economy. Customs, major excises and important income-tax bases remained associated with the centre, while difficult and politically visible taxes on land, agriculture, property and local transactions were left substantially to subnational governments.
Noted economist Ehtisham Ahmad and his co-authors, while revisiting this history, have argued that the 1935 arrangements split tax bases in ways designed around colonial interests and subsequently complicated development of modern, integrated tax systems in South Asia.
Independence should have provided an opportunity to reconstruct this structure around a completely different principle: finance should follow constitutional functions, and taxation should follow democratic accountability. Instead, successive constitutional arrangements altered the distribution without fully changing the underlying logic.
The result is visible in the federal budget for fiscal year (FY) 2026-27. Federal Board of Revenue (FBR) tax revenue is projected at Rs 15.264 trillion and non-tax revenue at Rs 5.336 trillion, producing gross federal revenue receipts of Rs 20.600 trillion.
After the budgeted provincial share of Rs 8.848 trillion, the Federation is left with net revenue receipts of Rs 11.751 trillion. Against this, federal expenditure is budgeted at Rs18.771 trillion, including current expenditure of Rs 17.495 trillion and interest payments alone of Rs 8.054 trillion.
The resulting federal deficit is Rs 7.020 trillion, to be financed overwhelmingly through domestic borrowing, supplemented by external financing and privatisation proceeds. These figures should make us reconsider what fiscal independence means.
Our recurring debate asks whether provinces receive too much under the Seventh National Finance Commission (NFC) Award or whether the Federation retains too little. That is the wrong starting point.
Constitutional Political Economy asks a prior question: who should perform a function, who should pay for it, and to whom should that authority be accountable? Unless these three are aligned, fiscal federalism degenerates into bargaining over shares.
The Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] attempted an important correction by transferring substantial functions to the provinces. The fiscal adjustment, however, remained incomplete.
The federal government continued spending in areas constitutionally devolved to provinces, while provinces acquired greater resources without developing their own tax bases to anything approaching their potential.
The World Bank’s recent assessment finds precisely this mismatch: federal expenditure failed to adjust sufficiently after devolution, provincial own-source taxation remained weak and local governments never received meaningful fiscal devolution.
This is not an argument for reversing the 18th Amendment or weakening provincial autonomy. Pakistan’s history, especially the 1971 tragedy, should have permanently settled the case against coercive centralisation. It is an argument for completing, rather than undoing, fiscal federalism.
The same study estimates provincial own-source tax revenue at only about 0.7 percent of GDP in fiscal year 2024. Urban immovable property tax produces around 0.13 percent of GDP, despite property being one of the most appropriate bases for subnational taxation. It also finds that the share of local governments in total government spending fell from around 10 percent in 2005 to approximately 4.7 percent in 2024.
This exposes Pakistan’s peculiar fiscal pyramid. Islamabad collects much of the major revenue, transfers a constitutionally determined share to provinces, provinces spend extensively but collect comparatively little themselves, while municipalities and districts—where citizens actually require water, sanitation, roads, schools, healthcare, waste disposal, planning and other everyday services—remain financially dependent. Such a system weakens accountability at every level.
A provincial government demanding a larger NFC share can avoid asking whether it adequately taxes agricultural income, urban property, luxury consumption and other constitutionally available bases.
A local government waiting for a Provincial Finance Commission transfer cannot credibly promise voters that better services will follow from locally raised revenue. Citizens consequently do not see a direct connection between taxes paid and services received. This is precisely the opposite of genuine fiscal democracy.
Article 140A of the Constitution requires provinces to establish local governments and devolve political, administrative and financial responsibility and authority to their elected representatives. The constitutional language is unmistakable. In practice, elected local institutions remain fiscally dependent, Provincial Finance Commission awards are irregular and own-source revenue is negligible.
The solution is not to create another centralised revenue bureaucracy that appropriates taxing sovereignty from provinces and municipalities. Nor should Pakistan multiply tax administrations and force businesses to navigate competing jurisdictions. Administration can be harmonised, technology integrated and collection coordinated while constitutional taxing powers and rate-setting autonomy remain with the appropriate governments.
China offers one useful administrative lesson: collection can be integrated without making every economic decision a matter for the centre. India, confronted with inherited fragmentation of indirect taxation, used constitutional reform to construct an integrated Goods and Services Tax structure. Pakistan requires its own model, respecting the constitutional autonomy of its provinces rather than copying either country mechanically.
The newly constituted 11th NFC [‘11th NFC Award: challenges, hopes & solutions—I’, Business Recorder, December 19, 2025] provides an opportunity. Article 160 envisages an NFC at intervals not exceeding five years, but Pakistan has continued for more than fifteen years under an Award originating in 2010. The 11th NFC held its inaugural meeting in December 2025. The discussion should move beyond another contest over percentages. A new fiscal compact must begin with functions [‘Corporate taxes & NFC formula’, Business Recorder, March 20, 2026].
The Federation should identify those responsibilities that are genuinely federal and withdraw, over an agreed transition, from expenditure in areas constitutionally belonging to provinces.
Provinces must accept responsibility for developing their own revenue capacity rather than regarding federal transfers as the principal measure of autonomy. Fiscal equalisation should protect poorer provinces and citizens without rewarding weak revenue effort or inefficient expenditure.
The third tier is even more important. Property taxation appropriately designed local charges and other municipal revenues should finance a significant part of local services. Citizens are far more likely to demand accountability when the authority collecting money is also responsible for the road outside their house, the water entering it and the waste being removed from their neighbourhood.
This is where Pakistan can learn from functioning federations such as Canada and Switzerland. Their institutional arrangements cannot simply be transplanted, but the underlying principle is valuable: decentralisation means little unless subnational governments possess both expenditure responsibility and meaningful revenue authority.
Our objective should ultimately be fiscal self-reliance at all three tiers—not fiscal isolation. Equalisation transfers will always be necessary in a federation containing unequal regions. National taxation will remain indispensable.
Common markets require harmonisation. National defence, debt obligations, interprovincial infrastructure and other federal responsibilities require substantial federal resources. What must end is the culture in which each tier spends money substantially raised somewhere else and then blames another tier for the consequences.
This requires a change in the way we think about taxation itself. Pakistan repeatedly measures success through FBR collections and tax-to-GDP ratios. CPE demands different questions: Which government is collecting; from whom; and for which constitutionally assigned function? Who decides the rate? Who receives the service? Who can the taxpayer vote out for failure?
Without answers to these questions, increasing taxation may enlarge government revenue without strengthening either democracy or development.
The struggle for independence ended colonial political rule in 1947. It did not automatically dismantle institutions, incentives and fiscal relationships created for a colonial state. Seventy-nine years later, Pakistan should stop treating this inheritance as immutable.
The 11th National Finance Commission [‘11th NFC Award: challenges, hopes & solutions—III’, Business Recorder, January 2, 2026] should become more than another revenue-sharing exercise. It should begin a transition towards a federation in which functions, finances and accountability coincide; provinces possess genuine economic autonomy; municipalities become viable governments rather than administrative appendages; and citizens can see where their taxes go.
Pakistan achieved the sovereignty of the State on August 14, 1947. The task before us is to translate it into the fiscal sovereignty of its people. That would constitute economic independence in the real sense.
Copyright Business Recorder, 2026
The writer is a 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)
The writer, an 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
The writer is a corporate lawyer based in the US with extensive expertise in financial regulations, including Virtual Asset Service Providers (VASPs), corporate governance, and global economic policies. He holds an LLM from Washington University in St. Louis and has completed the Management Development Program at the Wharton School. He has developed regulatory frameworks for North American and South American Financial Institutions and has consulted and trained bureaucrats of different regions. He can be reached at [email protected]
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