Coming budget and the new policy architecture
This year’s budget will also be watched for another reason. It is expected to be the first budget after the tax policy function has been shifted away from the FBR’s operational structure and placed under the Tax Policy Office in the Ministry of Finance. This separation is important in principle.
Tax policy and tax administration are not the same thing. Policy should ask what the tax system should look like, how the burden should be distributed, what distortions should be removed, how compliance can be simplified, and how revenue can be made sustainable.
READ MORE: Pakistan’s tax challenge: four conversations, one problem—II
Administration, on the other hand, must implement the law, collect revenue, enforce compliance and manage taxpayers.
When both functions are too closely merged, policy can become overly influenced by immediate collection pressures. A law may be designed not because it is the best long-term policy choice, but because it is the easiest short-term collection device. This is how withholding taxes multiply, transaction taxes expand, advance collections and coercive measures become routine and visible taxpayers remain the preferred source of revenue.
The creation of a separate Tax Policy Office therefore raises expectations. It creates the hope that tax measures will increasingly be guided by evidence, economic behaviour, household capacity, sectoral realities, documentation incentives and long-term reform goals rather than only by the arithmetic of the next revenue target. But expectations must also be realistic.
No tax policy office, however well designed, can reform Pakistan’s tax system in one budget cycle. The coming budget will still be framed under fiscal pressure. There are already reports of significant revenue expectations for FY 2026–27 and additional tax measures being discussed.
READ MORE: Pakistan’s tax challenge: four conversations, one problem
This means the real test of the coming budget may not be whether it solves everything. It cannot. The more realistic test is whether it shows a clearer direction. Does it begin reducing the excessive burden on those already visible? Does it indicate a move away from indiscriminate withholding and transaction-based taxation? Does it use data from the Economic Census, HIES and other administrative sources to classify economic activity more intelligently? Does it recognise the difference between subsistence activity, small enterprise, medium business, high-income informal activity and genuine commercial capacity? Does it begin to address agricultural income tax through provincial coordination and data-based segmentation rather than slogans? Does it simplify compliance? Does it reduce litigation triggers? Does it show that technology will be used for risk-based reform rather than automated harassment? Perhaps all of this cannot happen in one year. But even a few signals would matter.
A budget is not only a revenue statement. It is also a statement of policy direction. If the coming budget shows that the state wants to collect better, not merely collect more, it would be a meaningful beginning. The country does not need a budget that promises overnight transformation. It needs a budget that reveals a credible path.
What real reform should mean
Pakistan’s tax debate must therefore move beyond rates, slabs and annual targets. The real reform question is not simply: what new tax should be imposed? The real question is: how can the system become broader, simpler, fairer and more credible? If the Tax Policy Office is able to bring even some of this thinking into the budget process, that itself would be an important start. The task is too large for one fiscal year. But the direction can be set in one fiscal year by including some of the following steps:-
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Base broadening without repeatedly punishing those already compliant. Formalisation should not feel like walking into a trap. It should offer access to finance, legal protection, commercial credibility, simpler compliance and a predictable path to growth.
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Reducing excessive dependence on withholding taxes and transaction-based collection. Withholding may be useful, but it should not become the main architecture of the income tax system particularly by treating the same as minimum tax.
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To simplify compliance. Ordinary taxpayers and small businesses should not need a full advisory ecosystem merely to understand their basic obligations.
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Protecting documented businesses from unfair competition. If the formal supplier becomes more expensive only because he follows the law, while the informal supplier gains a price advantage by avoiding tax, the market will continue to reward informality.
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To improve federal-provincial coordination. After the 18th Amendment, provincial fiscal autonomy has constitutional value, especially in relation to sales tax on services and agricultural income tax. But businesses should not suffer avoidable duplication through different portals, procedures, definitions, interpretations and overlapping demands.
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Reducing litigation and uncertainty. Disputed demands are not the same as real revenue. Businesses can plan around a rate; they cannot easily plan around arbitrary interpretation, delayed refunds and years of appellate uncertainty with continued risk of coercive recoveries.
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To use technology with safeguards. The Economic Census, HIES, Agriculture Census, business registers, geo-tagging, digital invoicing and AI-based tools can help identify genuine economic capacity. But these tools must be used for segmentation, not indiscriminate pressure.
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To recalibrate the treatment of wealth and assets. Pakistan should not rely on constitutionally fragile or administratively blunt asset-based levies. But neither should it allow high economic capacity to escape meaningful taxation. The path lies in better income reporting, credible capital gains taxation, unexplained wealth rules, beneficial ownership transparency, information exchange, documented transfers and provincial coordination where the Constitution requires it.
Transparency as part of tax reform
Finally, the state must communicate better. If citizens are asked to pay more, they should also be shown how their contribution supports schools, hospitals, infrastructure, social protection, security and essential services. Transparency must also extend to the cost of government itself. Citizens are more likely to accept difficult taxation when they believe the burden is shared and public money is used responsibly.
This is especially important when the state asks citizens to enter the formal economy. Many small operators fear that documentation only means tax exposure. The state must show that documentation can also bring benefits: access to finance, legal protection, easier payments, commercial credibility, targeted support and a clearer path to growth.
A properly maintained business register can help identify clusters of small businesses needing credit, infrastructure, training, digital payment support or simplified registration. Similarly, agricultural data can help identify where rural households need support and where genuine commercial agricultural capacity should contribute more fairly.
In the end, trust does not grow only from collection. It grows from explanation, disclosure and visible fairness.
Collecting more, or collecting better?
Pakistan needs revenue. That is undeniable. But revenue collected without legitimacy has limits.
A tax system may meet short-term targets by raising rates, expanding withholding taxes or increasing enforcement pressure. But if these measures weaken trust, discourage documentation and reward informality, the long-term result may be counterproductive. The real test of tax policy is not only how much it collects this year. The real test is whether it builds a system that citizens consider fair, predictable and worth complying with.
This brings us back to the fourth conversation. The low-wage worker does not appear in tax debates in the same way as the salaried individual, the documented business or the informal operator. Yet in many ways, he has the most at stake. His aspiration to educate his children and improve their future depends on whether taxation translates into meaningful public services.
After the 18th Amendment, much of this responsibility rests with provincial governments. If education and health outcomes do not improve, then the redistributive promise of taxation remains incomplete not in theory, but in everyday life. If the system collects revenue but does not reduce these gaps, then the burden of aspiration shifts entirely onto the individual. Pakistan’s tax challenge, therefore, is not simply about collecting more. It is about collecting better.
Because in the end, taxation is not sustained by enforcement alone. It is sustained by the belief that the burden is shared fairly, the rules are applied consistently, and the state treats the compliant citizen not as an easy target, but as a partner in building the country’s fiscal future.
(This was the last part of a three-part series of articles carried by the newspaper on Saturday, Sunday, and today)
Copyright Business Recorder, 2026
The writer is a seasoned Chartered Accountant, based in Karachi, with over 23 years of post- qualification experience in taxation
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