Pakistan’s debate on fiscal federalism has long been framed around one central question: how should the divisible pool under the National Finance Commission (NFC) be shared among the provinces? The discussion has almost always revolved around population shares, provincial needs and size of the divisible pool.
A far more fundamental issue has received little attention. Not all income taxes arise from the same economic reality. Personal income taxes and corporate income taxes originate from very different sources of economic activity. Treating them identically within NFC framework may no longer reflect the true structure of Pakistan’s economy.
The issue becomes particularly important when examining the structure of federal tax revenues. A striking feature of Pakistan’s tax system is the extraordinary concentration of revenue collection among a relatively small number of corporate entities.
Estimates often cited in business and policy circles suggest that around 80–85 percent of income tax, and sales tax collected by the Federal Board of Revenue (FBR) originates from roughly the top 1000 to 1200 large companies operating in Pakistan. Data periodically released by various organisations such as the Pakistan Business Council and other industry bodies points toward a similar conclusion: Pakistan’s tax system relies overwhelmingly on a narrow corporate base.
This concentration of revenue raises an important constitutional and fiscal question. The profits of these large corporations are not generated within the boundaries of a single province. Banks, oil and gas companies, telecommunications entities, airlines, multinational corporations and major industrial groups operate across the entire country. Their commercial activity is integrated and trans-provincial. Corporate profits emerge from nationwide markets rather than from localized economic activity.
Under the 1973 Constitution of Pakistan, taxation of income other than ‘agricultural income’ [as defined in Article 260 of the Constitution] falls within the federal domain. The Federal Legislative List (FLL) distinguishes between taxes on income and taxes on corporations [defined in Article 260 of the Constitution] through separate entries [Entry 47 and Entry 48, Part I of FLL].
Existence of two separate independent entries for personal and corporate income taxation reflects the constitutional recognition that these are conceptually exclusive, hence not interchangeable. Personal income arises from economic activity of individuals or unincorporated groups of individuals located within provinces. Corporate income, by contrast, arises from organized commercial enterprises operating across markets that in many cases transcend provincial boundaries. This distinction becomes even more visible when examining the geography of Pakistan’s corporate sector.
Many of the country’s largest companies maintain headquarters or principal commercial operations outside Punjab that get lion’s share from divisible pool because of sheer largest size of population. Financial services, port activity and corporate management functions remain heavily concentrated in Karachi, the capital of Sindh province. The biggest state-owned Oil and Gas Development Company Limited (OGCD) has its headquarters in Islamabad.
Oil marketing companies operate nationwide supply networks. Banks earn income from transactions conducted across the country but processed through centralised financial systems. Energy companies generate profits from extraction in one province, processing in another and consumption in a third.
A population-based formula under the NFC Award makes intuitive sense when distributing revenues derived from personal income taxation. Citizens reside within provinces and their economic activity contributes to provincial economies. Redistribution based on population therefore reflects the principle of distributive equity among citizens. Corporate taxation raises a different federal question. Profits of large corporations are produced by integrated commercial systems spanning multiple provinces. Assigning those revenues purely on demographic grounds may fail to reflect the economic structure that generates them.
Comparative experience from three other federations provides useful insight into how this problem has been addressed elsewhere.
The Constitution of the United States grants Congress authority to regulate interstate commerce under the Commerce Clause. Both federal and state governments levy corporate taxes. Constitutional doctrine imposes strict limitations on state taxation of interstate commerce to prevent multiple or discriminatory tax burdens on businesses operating across state boundaries. States must follow principles of nexus, fair apportionment and non-discrimination when taxing corporate income generated through interstate commerce.
Canada adopts a different approach based on administrative coordination. Corporations pay both federal and provincial corporate income taxes. Corporate income generated through operations in multiple provinces is allocated through formula-based apportionment rules. These rules distribute taxable income among provinces based on factors such as payroll and sales. The system recognizes that modern corporations operate across jurisdictions and that profits cannot be attributed to a single province without a structured allocation framework.
India offers perhaps the closest constitutional parallel to the argument emerging in Pakistan’s fiscal debate. Under the Constitution of India, corporation tax is placed explicitly within the Union List. Corporate income taxation therefore belongs to the central government. States do not impose their own corporate income taxes. This arrangement reflects the recognition that corporations operating across state boundaries require a unified taxation framework in order to preserve the national market’s integrity.
Pakistan’s constitutional structure already contains elements that support such reasoning. The Constitution recognizes the concept of inter-provincial trade and commerce.
The Supreme Court has repeatedly emphasized the need to avoid fragmented regulatory regimes for enterprises operating across provincial boundaries. Judicial reasoning in disputes involving levies such as contributions to the Workers’ Welfare Fund has highlighted practical difficulties that arise when multiple jurisdictions attempt to impose overlapping obligations on enterprises operating nationwide.
These constitutional and economic considerations suggest that Pakistan’s NFC formula debate may need to distinguish more clearly between two separate issues: the authority to levy corporate taxes and the formula used to distribute the proceeds of those taxes.
The federation may be best positioned to levy and administer taxes on trans-provincial corporate entities. Uniform administration prevents regulatory fragmentation, reduces compliance costs for nationwide enterprises and preserves the national market’s integrity. At the same time, proceeds of such taxation can still be shared among the provinces through NFC framework. The key question is how should that sharing formula be designed?
Population alone may not adequately capture the economic geography of corporate income generation. A revised NFC formula dealing specifically with corporate tax revenues could incorporate additional factors such as location of corporate headquarters, financial services concentration, infrastructure burdens, energy production zones, consumption patterns and industrial clusters. Such an approach by the 11th NFC would recognize the economic contribution of provinces hosting financial centers, ports, energy corridors and industrial hubs without fragmenting the national taxation system.
Karachi illustrates the relevance of this question. As Pakistan’s principal financial and commercial hub, the city processes a substantial share of the country’s banking transactions, corporate financing, stock market activity and international trade. Corporate headquarters located there coordinate nationwide operations, even when sales occur across multiple provinces. These realities rarely appear in fiscal formulas based solely on population.
The ongoing debate under the 11th NFC therefore presents an opportunity to revisit the underlying assumptions of Pakistan’s fiscal federalism. The objective should not be to weaken provincial autonomy or recentralize fiscal power. The objective should be to design a system that reflects the integrated character of Pakistan’s national economy.
Pakistan’s fiscal debates have too often been framed as a contest between federal authority and provincial rights. The real challenge is more complex. An integrated national market requires coordinated taxation of trans-provincial corporate activity. At the same time, provinces must receive a fair share of the revenues generated by that activity.
Recognising the distinct character of corporate income taxation may provide a path toward that balance. Personal income taxes can continue to be distributed largely on population principles. Corporate income taxes arising from trans-provincial enterprises may require a more sophisticated distribution formula consistent with Article 160 of the Constitution, reflecting the geography of modern economic activity.
The 11th NFC deliberations will inevitably focus on shares and percentages. A more productive discussion would examine the structure of the tax base itself. Corporate profits now overwhelmingly dominate federal tax revenues. Ignoring the economic character of those revenues risks repeating the limitations of earlier 7th NFC Award formula.
Pakistan’s constitutional framework already contains the foundations of a more rational fiscal federalism. What is required now is the intellectual courage to recognize that corporate profits generated through a national market cannot be treated as if they were provincial incomes of the nineteenth century.
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]
Comments