The heavy reliance on indirect taxes in the budget for 2026-27, regressive taxes whose incidence on the poor is greater than on the rich, raises serious concerns about the International Monetary Fund’s (IMF’s) programme design in general that included review of the budget documents in detail prior to its presentation to parliament and the administration’s economic strategy in particular.
Total tax collections by the Federal Board of Revenue (FBR) for 2026-27 has been budgeted at 15.264 trillion rupees against the downward revised target of 12.983 trillion rupees in the outgoing fiscal year from the budgeted 14.131 trillion rupees. Two factors need to be highlighted.
First, the revised estimates noted in the budget documents are no longer credible estimates, given that well-informed sources in the FBR, on condition of anonymity, informed Business Recorder that nearly a trillion-rupee shortfall is expected from the downward revised total taxes or, in other words, the revised estimates may well be in the range of around 12 trillion rupees.
And second, the higher the growth rate for the economy the higher the tax collections and for the outgoing year the government projected Gross Domestic Product (GDP) growth at 3.7 percent against the budgeted 4.2 percent – a rate that independent economists maintain overstates.
Muhammad Aurangzeb, the federal finance minister, in a spirited defence on the floor of the House insisted that GDP growth figures are calculated according to international standards – a statement that disturbingly indicates that he did not bother to peruse the detailed IMF’s 10 October documents that approved the Extended Fund Facility programme and which stated the following: “there are weaknesses in the National Accounts (NA) and Government Finance Statistics (GFS) that somewhat hamper surveillance…..important shortcomings remain in the source data available for sectors accounting for around a third of GDP, while there are issues with the granularity and reliability of the GFS.
The authorities are prioritizing addressing these weaknesses supported by Fund TA on the GFS and a new Producer Price index, and the Pakistan Bureau of Statistics will soon begin fieldwork for four major surveys ahead of the upcoming NA rebasing to FY26.” The TA’s scheduled completion has been postponed from 30 June 2026 till October after the IMF team suggested some appropriate recommendations. It is precisely for this reason that independent economists maintain that next year’s growth rate is an over-estimation based on the downward revisions expected after the TA recommendations are implemented – a downward revision premised on a very tight monetary and fiscal policy.
Direct taxes, based on the ability to pay principle, as per the budget documents is estimated at 7.613 trillion rupees for 2026-27, against a downward revised collection of 6.431 trillion rupees for 2025-26 as opposed to the budgeted 6.9 trillion rupees – a revision that is indicative of the unrealistic target set in last year’s budget.
Total budgeted collection under income tax, by far the largest component, for next fiscal year is 7480.5 billion rupees against the revised estimate of 6331.4 million rupees for 2025-26 with the budgeted amount of 6811.2 million rupees.
Income tax consists of 75 to 80 percent withholding taxes that are levied in the sales tax mode – a revenue source which should, in all honesty, be credited to sales tax rather than to income tax – noted and recommended by the Auditor General of Pakistan to the FBR but to no avail.
In other words, around 5610 billion rupees out of the total income tax collections are really sales tax, which is a regressive tax whose incidence on the poor is greater than on the rich.
Sales tax collections have been budgeted at 4.8 trillion rupees which together with the withholding tax in the sales tax mode shows reliance on indirect taxes to the tune of 10.4 trillion rupees.
Customs revenue budgeted at 1.6 trillion rupees and federal excise at 1.073 trillion rupees, both indirect taxes, brings total reliance on indirect taxes to 13 trillion rupees out of a total collection of 15.264 trillion rupees – or 83 percent. It is little wonder that poverty levels are rising and if calculated at the calorific value are estimated at an extremely disturbing 44 percent.
In line with the claim by the IMF that the GST compliance efficiency rate has declined from 27 percent to 22 percent the government in the Finance Bill 2026 envisages levy of sales tax on 21 additional items on the basis of their printed retail prices, including vegetable and cooking oil, sugar confectionary, insecticides, pesticides, milk, fat filled milk and infant preparations – items that would further erode the value of each rupee earned.
FBR has claimed that it will generate 400 billion rupees from enforcement measures in 2026-27, an achievable target as it generated 389 billion rupees from these measures in the outgoing year though in 2024-25 enforcement measures netted the Treasury 874 billion rupees.
However, the source of these measures is as follows: sugar 76 billion rupees, cement 102 billion rupees – indirect taxes passed on to consumers and reflected in the rise in the price of these two commodities. Another 255 billion rupees was generated through Dispute Resolution and 218 billion rupees under tax liability.
And, if these measures were not anti-poor the government has extended 360 billion-rupee worth of tax relief measures, including 115 billion rupees for the property sector–m withholding tax for purchasers reduced from 2.5 to 1.5 percent and on sellers from 5.5 to 2.7 percent (a sector known for whitening black money), income tax 52 billion rupees abolishment of super tax for those with income from 15 to 50 crore rupees; however, those with incomes above 50 crores would pay the reduced super tax of 8 percent from 10 percent, CVT would no longer be levied on overseas assets, zero tax on business class and first class tickets.
The pro-poor measure consists of subsidies mainly as tariff differential subsidy for electricity (a policy that favours the inefficient and is untargeted top boot) and the Benazir Income Support Programme that is grossly inadequate to meet the growing number of the poor.
To conclude, it is absolutely baffling as to why there was no debate on the lack of pro-poor policies in the finance bill and yet it was passed with relative ease.
Copyright Business Recorder, 2026