EDITORIAL: Sindh government spokesperson Sukhdev Hemnani’s recent observation that federal revenue shortfalls are affecting provincial finances and development is valid as far as it goes. But it also highlights a deeper problem: provinces have grown heavily reliant on transfers from the federal divisible pool while doing little to broaden their own revenue bases.
As Hemnani noted, provincial budgets are framed on federal revenue projections, while actual transfers depend on FBR collections, and any shortfall in the latter consequently reduces provincial budgetary resources.
The Sindh government’s complaint points to a wider fiscal dilemma: provinces receive 57.5 percent of the federal divisible pool under the NFC Award, which has meant that they have grown heavily dependent on these transfers, while doing little to broaden their own revenue bases.
They need to remember that any slowdown in their development spending also reflects their failure to discharge a basic responsibility of government: raising sufficient revenue to fund the services and development programmes under their charge. This chronic weakness leaves them vulnerable to every fluctuation in federal collections, turning a shortfall at the Centre into a development constraint for the provinces.
Provinces have jurisdiction over several sizeable tax bases, but their own-source revenues remain remarkably small. A recent IMF assessment has identified agriculture as Pakistan’s single-largest under-taxed sector, with real estate and business services also contributing substantially to economic activity relative to tax collection.
Agriculture is the clearest example of the provinces’ failure to raise revenue: it accounts for 24.6 percent of value-added across Pakistan, yet its effective tax rate is just 0.3 percent. Since agricultural income taxation falls within the provincial domain, this sharply illustrates the gap between the sector’s economic contribution and its contribution to provincial revenues.
Even the recent effort to bring agricultural incomes more fully into the tax net has been driven by IMF requirements rather than a recognition of its importance to fiscal responsibility.
Real estate is another glaringly underused source of revenue. Property values have risen substantially over the years, but property tax assessments and valuation mechanisms have often failed to keep pace. Sindh’s recent decision to expand its recorded urban property tax base from 397,000 properties to 2.15 million is therefore welcome, but the scale of the expansion illustrates how much revenue potential remained outside the tax net for years. There are numerous smaller sources that could also be tapped.
Fees and charges for provincial services, including commercial vehicle fitness certificates, should not be allowed to remain unchanged for years while the cost of providing those services continues to evolve. A systematic review of taxes, fees, licences and other non-tax revenues could cumulatively make a meaningful difference.
What is missing is a sustained institutional effort to identify and mobilise revenue. Provincial governments should establish revenue mobilisation commissions tasked with conducting comprehensive reviews of their tax and non-tax bases. These bodies should identify under-taxed sectors, assess collection gaps, review outdated valuations and rates, examine exemptions and concessions, and recommend measures to improve enforcement and compliance. Their recommendations should carry clear implementation timelines and be subject to regular public reporting.
We must remember that when the NFC Award mandated 57.5 percent share of the divisible pool to the provinces, it was meant as an important step towards correcting Pakistan’s historically centralised fiscal structure. But the reality on the ground is now much-transformed, and fiscal autonomy must be accompanied by fiscal responsibility. Provincial governments cannot continue to attribute every constraint on development spending to fluctuations in federal transfers while leaving substantial parts of their own tax bases untapped.
The time has come for provinces to rectify this by strengthening collections and shouldering a greater share of the cost of their own development.
Copyright Business Recorder, 2026