A budget without a tax policy

The FY26/27 budget deserves credit for easing the disproportionate burden on Pakistan’s formal sector. Relief on selected withholding taxes, rationalisation of certain measures and the shift toward faceless tax administration all point in the right direction. They acknowledge that the formal economy cannot keep absorbing a rising share of taxation while competing with untaxed or under-taxed sectors.

But the budget also exposes an unfinished task: the absence of the mediumterm tax reform framework the Tax Policy Office (TPO) was created to deliver.

The TPO’s mandate goes beyond annual revenue targets. It was meant to design a phased programme that broadens the base, promotes formalisation, supports exports, creates jobs and gradually aligns Pakistan’s tax rates with competing developing economies. It was also intended to coordinate tax policy across ministries and governments, so taxation supports economic objectives rather than undermining them.

Its creation recognised that taxation is too important to be driven by yearly revenue exercises and to separate policy from collection of taxes. Tax policy should shape investment, formalisation, employment, exports and productivity. A country seeking sustained growth cannot redesign its tax system one budget at a time. Because the framework was not completed before the budget, the document offers useful measures but not yet a destination. And what gets measured determines what gets managed.

For decades, Pakistan has judged tax policy through taxtoGDP ratios, gross collections and compliance actions. These metrics are incomplete. A taxtoGDP target can be met by taxing those already in the net more heavily. Gross collections can rise by delaying refunds, hurting documented businesses. Revenue targets can be achieved even as investment stagnates and formal employment declines.

The real question is whether the tax system advances Pakistan’s broader economic goals: formalisation, investment, job creation, exports, foreign investment and productivity. A regime that raises revenue while suppressing activity ultimately defeats itself. It also destroys jobs and prevents reduction in poverty level.

Reform should begin with clarity on where Pakistan wants its tax system to be in five years. Investors need predictability, not annual surprises. A roadmap can be as valuable in restoring investor confidence as an immediate rate cut.

One objective should be gradually aligning tax rates with regional competitors. Pakistan’s corporate burden remains high even without super tax and other levies. Marginal rates on individuals and AOPs are among the region’s highest - more than twice India’s. Numerous withholding, advance and turnover taxes act as taxes on activity rather than on profit, discouraging investment and formalisation.

A mediumterm plan should phase in lower rates accompanied by measurable progress in broadening the base—an approach that has underpinned successful reforms in many emerging economies.

The challenge is not only enforcement. It requires integrated data, digitised transactions, improved land and property records and the political will to tax historically exempt sectors.

Here the TPO’s coordinating role is essential. Many distortions stem from fragmentation between federal and provincial jurisdictions. Property and agricultural taxation lie largely with provinces but directly affect federal revenues, investment and growth. A coherent reform agenda requires a shared framework.

Tax policy must also align with Pakistan’s growth strategy. If exports are the path to sustainable growth, taxation should reward competitiveness. If formal employment is a priority, the cost of hiring formally should not exceed that of informal competitors. If Pakistan seeks exportoriented local and foreign investment, the tax regime must be predictable and competitive. Removing super tax and advance tax on exporters is a good start but regional benchmarking leaves room for further cuts.

Success must be measured intelligently. Alongside taxtoGDP, Pakistan should track growth in active taxpayers, taxes collected from previously untaxed sectors, formal employment, private investment, export growth and refund payment times. These indicators reveal whether the base is broadening or the burden is simply deepening.

Pakistan does not lack taxes; it lacks tax policy. The FY26/27 budget offers useful relief and a more constructive direction. The task now is to complete the work the TPO was created to do: replace annual revenue firefighting with a coherent fiveyear strategy that broadens the base, lowers rates, promotes formalisation and supports investment, employment and exports.

Until then, Pakistan will keep measuring the wrong things—and taxing the wrong people.

Copyright Business Recorder, 2026