The federal government in fiscal year (FY) 2024-25 spent Rs 2,193 billion on defence and Rs 8,887 billion on debt servicing and after transfer to provinces of Rs 6,854 billion under the 7th National Finance Commission Award (NFC), these two alone were Rs 1,134 billion higher than net revenue collection of the federal government.
This is Pakistan’s perpetual fiscal dilemma.
READ MORE: OPINION: 11th NFC: challenges, hopes & solutions—II
The following measures/steps are necessary to fix the outdated, oppressive and crumbling tax system and create a reliable national socio-economic registry for inclusive growth and prosperity for all citizens:
All adult individuals, whatever their level of income, should be facilitated to file simple and easy one-page income tax return, made available both in English and Urdu—incentive for filing return should be Rs 5,000 cash payback in the bank account/mobile wallet of the filer. It would enable the process of creating National Registry about households and their earning levels at national level.
Individuals earning below Rs 600,000 should be paid income support (negative tax) till the time the state provides them employment, instead of keeping them beggars for life.
For individuals, income tax rate exceeding taxable income of Rs 1.2 million should be 10 percent with alternate minimum progressive tax 1 percent to 2.5 percent of net wealth exceeding Rs 50 million (1 percent up to Rs 250 million, 1.5 percent from amount exceeding Rs 250 million to Rs 500 million, 2 percent from amount exceeding Rs 500 million to 900 million and 2.5 percent if total net worth exceeds Rs 900 million).For encouraging investment, local and foreign and discourage informal transactions, corporate income tax rate should be reduced to 20 percent.
All citizens should be given a chance to pay any past unpaid liability due to non-reporting or under-reporting by just paying 10 percent tax latest by June 30, 2026. After the deadline, stringent action including confiscation and imprisonment should be provided.
For the next five years, under a universal self-assessment scheme if any taxpayer pays more than 25 percent tax over the last year’s liability, no audit should be conducted. If definite information for underreporting or non-reporting of any income is received, the retrieval of tax should be made with penalty of 200 percent and minimum imprisonment of six months.
Simplified and unified sales tax on goods and services at a low rate of 10 percent by making recourse to Article 144 of the Constitution. The collection should be through federalized tax body (National Tax Council or National Tax Authority). However, the provinces would get respective shares according to the provisions of the Constitution/NFC Award.
Simplify Customs tariff with ‘One-Chapter One-rate’. Radiographic scanning of all inbound and outbound containers to plug revenue leakages.
Effective mechanism to counter unfair practices on the part of tax administrators—subject to punitive actions and pecuniary damages after the final fact-finding authority adjudges their actions arbitrary, excessive and beyond their assigned powers. The Federal Tax Ombudsman should be given the statutory power of awarding damages in such instances.
An efficient tax judiciary to help in removing impediments in the way of collection of genuine tax demands by the State and settling tax dispute within 12 months.
After merging federal Appellate Tribunal Inland Revenue, Customs Tribunal and all provincial tax tribunals, the new entity should be named National Tax Court (NTC) that should be placed directly under the Supreme Court, as is the case with Federal Service Tribunal. After one intra-court right of appeal with the National Tax Court, only the substantial questions of law should go to the Supreme Court by way of leave to appeal as provided in Article 185(3) or under Article 175F to the Federal Constitution Court of Pakistan, as the case may be.
Members for National Tax Court should be recruited in the same manner as judges of High Court. The pay, perquisites and salary structure of National Tax Court members and staff should be at par with that of High Courts.
Recovery of tax demand should be made only after decision of National Tax Court.
Expenditures by federal and provincial governments should be subjected to parliamentary oversight and restrictions to ensure public welfare as the topmost priority for which constitutional amendments should be made. The subordinate legislations cannot control/curtail discretionary and wasteful expenditure by the Executive.
Taxpayers’ Bill of Rights should be passed to guarantee, inter alia, budgetary allocations by national and provincial assemblies for fulfilment of fundamental rights and social security payments.
Taxpayers’ rights must be safeguarded and strengthened by giving adequate rights under Taxpayers’ Bill of Rights ensuring quality of treatment, guaranteeing privacy and confidentiality of their declarations, providing right to assistance by the State in tax matters, ensuring unfettered right of appeal through an independent National Tax Court and providing independent review of disputes with tax authorities.
In Pakistan under the repealed Income Tax Ordinance, 1979 (until assessment year 1995-1996), three specific characteristics were the hallmarks of advance tax, viz:
a. Advance tax was paid by the taxpayer based on last declared/assessed/estimated income for that assessment year;
b. Credit for any advance tax collected for an assessment year was accounted for in that year and not the year of collection; and
c. 6 percent mark-up on the amount retained as advance tax was paid to the taxpayer at the time of assessment thereby compensating his cost of funds or opportunity cost for the period his money remained with the government.
READ MORE: OPINION: 11th NFC: challenges, hopes & solutions —I
The above should be revived by suitably amending section 147 of the Income Tax Ordinance, 2001 that will help in ascertaining collection for the current tax year without accumulation of refunds after abolishing all regressive withholding tax provisions.
The way forward to sustain fiscal consolidation is low rate (10 percent) unified sales tax on goods and services, as is the case in many federations like ours. It should be collected under federalised National Tax Council/Authority, having representation of both federation and the federating units.
It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government, so that it can tax the rich absentee landowners.
The above two steps are indispensable to improve infrastructure, human resource, retire debts and bridge fiscal deficit These alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilization in Pakistan and rapid growth in Pakistan.
Punjab receives the largest share under the population-based formula. However, a truly equitable federation requires that deprivation, revenue effort, need, and geographic constraints should be weighted more heavily, that provinces strengthen internal resource mobilization, and that distributive equity be treated as a constitutional obligation, not political charity.
Local governments—constitutionally recognised under Articles 7, 32, and 140A—remain non-existent or fiscally starved. They lack fiscal powers to impose and collect local taxes, thus depend entirely on provincial transfers, and have failed to deliver essential municipal services. No modern federation can function when its grassroots tier remains financially crippled.
As per Article 161 of the Constitution, Balochistan should get full proceeds of federal excise on natural gas and Khyber Pakhtunkhwa on electricity. This can make them rich. Their present share in sales tax from Divisible Pool is as low as 9% and 15%, respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for valuable goods they produce. The same is the case for Sindh in respect of gas it produces.
The Centre has been brazenly encroaching upon provincial rights by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and Federal Excise Duty (FED) on several services. The Centre could have averted the present chaotic situation on fiscal front had it allowed provinces to generate their own resources through sales tax on goods.
As Pakistan has moved toward debating and finalising the 11th NFC Award by forming various committees and groups, policymakers must recognize that transfers from Divisible Pool to provinces alone cannot strengthen or even sustain in long-run fiscal federalism.
The provinces must enhance their revenue mobilization, rationalize expenditures, and build strong fiscal discipline. At the same time, the federation must broaden the tax base to reduce enormous tax rates, end reliance on indirect taxation, and address structural debt vulnerabilities.
Only then can Pakistan’s fiscal federalism evolve into a system that is equitable, sustainable, and true to constitutional federalism for national prosperity for all citizens through inclusive development.
Only an equitable, transparent, and reform-oriented NFC Award can reinforce provincial autonomy while safeguarding national stability. The numbers presented in this series—based on government’s own data—illustrate both the scale of the challenges and the urgency of genuine reforms. The 11th NFC must become a turning point, not another missed opportunity.
[Concluded]
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 abdulrauff@hotmail.com