As debate continues on Budget 2026–27, the most concerning aspect is not the size of the budget, but the adherence to the same fiscal philosophy. The arguments are the same as in the last five budgets since 2021 – more taxes; more withholding; more pressure on the documented economy; and the same old repetition of broadening the tax base.
Nonetheless, the base remains narrow (10% tax-to-GDP since 2010), the burden remains concentrated and trust between taxpayers and the state continues to erode. It is time to face the uncomfortable truth that repeating the same prescription is not taking us anywhere, because our problem lies at the root of tax design, not tax collection.
Pakistan’s FY2026-27 federal expenditure now stands at Rs18.77 trillion, with an FBR target of Rs15.264 trillion. After Rs8.2 trillion in NFC transfers to provinces, the centre still faces a Rs7+ trillion financing gap, while the national fiscal deficit is set at around Rs5.23 trillion (3.6% of GDP), with a primary surplus of Rs2.83 trillion (2% of GDP).
Our tax-to-GDP ratio is still around 10.6%, considerably lower than India’s near 18%, Bangladesh’s 12% and the OECD average of around 34%. According to recent tax expenditure statements, Pakistan’s annual tax expenditures now exceed Rs5 trillion, nearly one-third of the total federal outlay, more than both the development and defence allocations. The tragedy is that while Pakistan is struggling to increase revenues, it is simultaneously giving away enormous revenue through SROs granting exemptions, concessions and preferential treatment.
Article 18 of the constitution expressively states that every citizen has the right to engage in lawful trade, business and profession. Therefore, the tax policy must facilitate enterprise rather than obstructing it. Tax reform does not mean tax leniency but tax fairness, constitutional balance, and economic logic. Real tax reforms are not about asking who pays more, but why the privileged class pays less.
Pakistan’s Income Tax Ordinance 2001 should have been a simplified tax code, but after so many amendments, it has become an annual patchwork of fiscal improvisation. For instance, Section 113 imposes minimum tax on turnover regardless of profitability – for example, a textile exporter with yearly turnover of Rs2 billion, facing rising electricity tariffs under Section 235, high financing costs, delayed refunds, and weak export demand may incur losses, but under Section 113 at 1.25% minimum tax, it still owes the tax of Rs25 million.
Pakistan’s withholding regime is even more problematic; for instance, under Section 153, local contractors, suppliers, and service providers face withholding deductions of 7% at source, while foreign contractors may face 8%. This revenue protection measure and taxing equal economic activity differently are deterring foreign investment, undermining competitiveness, discouraging technology transfer and cutting off Pakistan from the global supply chain. This discrimination reflects the government’s seriousness about FDI.
Our tax code has many of these problems, for instance: under section 236C, advance tax is charged on the sale of immovable property; under section 236K, tax applies on purchase; under section 236P, banking transactions by non-filers are taxed; under section 231A and 231B, banking instruments and cash withdrawals carry tax implications; under section 235, electricity consumption is treated as tax event. This is like our every economic activity has a friction tax, as it increasingly occurs before income, before profitability, and even before value creation. The UK has the PAYE system (pay as you earn); India has rationalised the TDS (tax deducted at source).
The salaried class is facing an all-time high burden. A salaried professional earning Rs500,000 per month can incur an effective tax rate of around 30%–35%, whereas the real estate sector continues to benefit from legal arbitrage. The property transaction cost is eased through reductions in Sections 236C and 236K, effectively reducing the tax cost of buying and selling plots, while still maintaining three separate property values: the FBR valuation, the DC rate and the actual market rate. A plot worth Rs50 million in the market may still be declared at Rs28–30 million under official tables. This undervaluation generates legal tax arbitrage and makes speculation look cheaper than production.
Visible effects are evident across the macroeconomy, as Pakistan’s Large-Scale Manufacturing (LSM) sector contracted by 1.5% in FY2024–25, whilst industrial output remained under pressure from high interest rates, energy costs, and weak domestic demand. Do not consider this a temporary fluctuation but a serious warning. The manufacturing sector is the backbone of exports, employment, and value addition, and is performing below capacity. The reason is simple: capital is increasingly migrating into plots and files. In India, new manufacturing units were granted a 15% corporate tax rate to stimulate industrialisation, while Pakistan still offers no incentives, as corporate taxation remains 29%, layered with super tax and compliance burdens.
Throughout Pakistan, businesses navigate nearly 47 separate taxes, levies, and contributions. Businesses are suffering not just a financial but also an administrative burden of taxation. In Punjab, they face approximately 37 separate payment compulsions annually, with over 500 hours per year on tax compliance and compliance itself has become a tax.
This complexity is further exacerbated by institutional fragmentation when a business has a nationwide operation, as it must deal not only with the FBR but also with provincial authorities such as the Punjab Revenue Authority, Sindh Revenue Board, Khyber Pakhtunkhwa Revenue Authority, and Balochistan Revenue Authority. Each with separate audits, separate returns, separate deadlines, and overlapping duplicated and redundant enforcement.
Then comes the Anomaly Committee. After the Finance Bill, the government constitutes it every year to identify drafting mistakes and sectoral distortions, but this committee is rather a proof of legislative weakness. Tax laws are an emergency patchwork, and Pakistan must replace this reactive mechanism with a permanent Tax Anomaly Commission, backed by statute, independent review, and public hearing.
Parliament must also do more to reclaim its constitutional role. This can be done by establishing a permanent parliamentary committee on taxation and economic reforms. This committee must review every Finance Bill before passage, conduct public hearings, and examine tax policy, expenditures, exemptions, SROs and sectoral burdens in detail.
Likewise, the Tax Policy Unit (TPU) under the Ministry of Finance must be given strong autonomy. The separation of Treasury (Tax Policy) and Exchequer (tax administration) is necessary because a collector seeks revenue, whereas a policymaker seeks growth. It is time for this principle to be fully recognised.
Finally, we need a New Income Tax Code 2027, a simple and consolidated code, unlike the patchwork amendments of the past. The new code must be drafted through an independent Tax Law Reform Commission, comprising constitutional lawyers, tax practitioners, economists, industrial representatives, provincial stakeholders, and parliamentarians. Public consultation, sectoral review and Parliamentary scrutiny must be held for at least 12 months before enactment. This is how serious and credible tax systems are enacted through a deliberated institutional design.
A smart tax system identifies and pursues aggressively those who conceal wealth, hide assets and engage in unlawful financial flows. Impunity and tax amnesties cannot be classified as reforms, as fairness demands broadening the tax base or squeezing more from those already in the tax net.
The ultimate challenge, however, remains cultural, i.e., an outdated colonial mindset which often treats businessmen as presumptive evaders rather than engines of national growth. We are criminalising enterprise, and yet we still dream of industrialisation in Pakistan. In the GCC or across emerging economies, enterprise is seen as a generator of employment, exports and innovation.
The question we are facing in Budget 2026 is therefore larger than fiscal arithmetic – a strategic choice between a tax partnership state and a tax extraction state. We must abolish minimum turnover taxation for manufacturers, rationalise withholding taxes, close real estate valuation loopholes, harmonise federal and provincial systems, protect salary earners through equitable burden-sharing, and incentivise productive capital over speculative capital.
Countries fail not because they tax too little, but because their tax system loses fairness, logic and legitimacy. The New Income Tax Code must place productivity before property, enterprise before extraction and reform before repetition.
The writer is a political economist, public policy commentator and advocate for principled leadership and regional cooperation across the Muslim world.
Disclaimer: The viewpoints expressed in this piece are the writer’s own and don’t necessarily reflect Geo.tv’s editorial policy.
Originally published in The News
2026-07-13 09:08:00
