Budget 2026–27 & fiscal justice

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”. However, the more important question is not how much more to tax, but whom to tax, how to tax, and whether the present tax system itself has become economically counterproductive.

A World Bank’s policy note of 2023, ‘Strengthening Government Revenues: Towards an Equitable, Efficient, and Sustainable Tax System’, offers a useful starting point for this year’s budget debate. 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 policy notes observes 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 identify 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 office-holders vis-à-vis ordinary citizens. Publicly circulated calculations regarding superior judiciary remuneration reveal that a judge receiving around Rs. 690,000 per month reportedly paid 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 paid 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.

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. 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 post-July 2025 provincial sales tax expansions where provinces began taxing nearly all services except specifically exempted categories while retaining contradictory rules inherited from the 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 tax 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 as such. 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.

Few sectors have the potential to offer Pakistan as clear a route to foreign exchange, jobs, and meaningful participation in the global digital economy as information technology sector. The numbers from fiscal year (FY) 2024-25 underscore the opportunity where IT service exports climbed to a record US$ 3.8 billion, i.e. an increase of 18% year-on-year.

As per the report by Asian Development Bank, Pakistan has the third-largest professional population in the global gig/freelancing work. This strong presence is also reflected in the statistics issued by the State Bank of Pakistan where earnings from freelancers and remote workers nearly doubled to US$ 779 million in FY 2024-25. The momentum continues to gain pace in the ongoing financial year where export receipt from ‘Freelance of Computer and Information Services’ reached US$ 856 million in first 9 months which is 51% higher as compared to the corresponding period of the last financial year.

However, despite this relevance/competitiveness with global players in financial terms remain negligible. For instance, India’s technology industry, by way of comparison, exported an estimated US$ 224 billion in 2024-25, and employed a workforce of around 5.8 million. In closing this gap, a progressive and futuristic tax policy can be pivotal working as a powerful lever for propelling this sector into its next phase of growth.

Under section 154A of the Income Tax Ordinance, 2001, IT export proceeds realized by Pakistan Software Export Board (PSEB) registered entities qualify for a concessionary final tax rate of 0.25%. However, this critical fiscal incentive is scheduled to expire on June 30, 2026. Extending this supportive policy is essential, as it acts as a primary growth catalyst for the IT sector’s ongoing expansion.

Further, after Eighteenth Constitutional Amendment the provinces separate administer sales tax on services regimes with different rates, exemptions, registration thresholds, and compliance procedure fragmenting the tax landscape and burdening businesses, therefore a coordinated federal and provincial effort is needed to bring coherence to the sales tax treatment of domestic IT services.

Budget FY 2026–27 should therefore move away from IMF-era obsession with annual revenue patches towards long-term fiscal reconstruction. Pakistan needs a low-rate, broad-based, predictable and harmonised tax regime that encourages investment, exports and documentation rather than criminalising productive activity.

In case 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 fiscal justice and continued fiscal extortion.

Copyright Business Recorder, 2026