Are Pakistan's tax expenditures delivering results?

Every budget season, public debate revolves around two familiar questions: how much revenue the government should raise and how it should spend it.

Far less attention is paid to a third question: how much revenue the state voluntarily chooses not to collect, and whether the economic benefits justify that cost.

According to the Pakistan Economic Survey 2025-26 and the statement of estimated tax expenditure accompanying the federal budget, tax expenditures amounted to approximately Rs2.35 trillion. This is equivalent to around 16.6 per cent of the Federal Board of Revenue's (FBR) annual tax revenue target.

More strikingly, it is more than twice the federal Public Sector Development Program allocation, more than double the pension bill, and nearly twice the size of federal subsidies. Yet despite its scale, tax expenditure remains one of the least debated elements of Pakistan’s fiscal framework.

A significant portion of these revenue losses arises from exemptions, concessions, reduced rates and preferential treatments embedded in sales tax, customs duties and income tax provisions. Many were introduced over time to encourage investment, support specific sectors, facilitate trade, promote exports or provide targeted economic relief.

While these objectives may be valid, the cumulative fiscal cost highlights the importance of periodically reassessing their effectiveness.

Tax expenditures refer to revenue forgone through exemptions, concessions, reduced tax rates, credits and other preferential treatments embedded within the tax system. Unlike direct government spending, they do not appear as expenditure in the budget.

However, their economic effect is often similar. Revenue that is not collected is, in effect, public support delivered through the tax system rather than through budgetary allocations.

This is why Pakistan’s fiscal debate remains incomplete. It focuses heavily on taxation and spending while largely overlooking a third dimension: revenue forgone.

To be clear, tax incentives are neither unusual nor inherently undesirable. Governments around the world use them to attract investment, support exports, encourage innovation, promote regional development and stimulate economic activity. Pakistan is no exception.

The real question is not whether tax expenditures should exist. The real question is whether they are achieving their intended objectives.

Are tax concessions generating new investment? Are they expanding exports and improving competitiveness? Are they encouraging innovation, productivity and job creation? Or have some incentives simply become permanent features of the tax system without periodic assessment of their effectiveness?

These questions matter because Pakistan continues to face significant fiscal constraints. The country requires resources for education, healthcare, infrastructure, climate resilience, technology adoption and social protection.

Every rupee forgone through a tax concession carries an opportunity cost. It represents revenue that could otherwise be used for national development, debt reduction or fiscal consolidation.

To Pakistan’s credit, transparency has improved significantly. The FBR now publishes annual tax expenditure Reports, while statements of estimated tax expenditures are included in federal budget documents. Policymakers therefore have a clearer picture of the scale and composition of revenue forgone through exemptions and concessions.

The challenge now is not transparency, but accountability.

Knowing how much revenue is forgone is important. Knowing whether that forgone revenue is producing adequate economic returns is even more important.

International experience offers useful lessons. Many countries periodically review major tax expenditures to assess whether they continue to meet their intended objectives, and in some cases introduce sunset clauses or structured reviews before renewal.

The lesson is straightforward: incentives should not become permanent entitlements. They should be judged by outcomes, measured against clearly defined objectives and periodically reviewed to ensure that public resources are used effectively.

Pakistan needs investment, exports, industrial expansion and employment generation. Well-designed tax incentives can contribute to these goals. However, effective policy requires evidence. Incentives that generate investment, create jobs and enhance competitiveness should be retained and strengthened. Those that no longer serve a meaningful economic purpose should be reconsidered.

A practical way forward would be to institutionalise an annual performance review of major tax expenditures alongside the budget process, similar to the scrutiny applied to budgetary expenditures.

Every significant exemption, concession and preferential treatment should be assessed against clearly defined objectives and measurable outcomes. Such an exercise would not weaken economic incentives; it would strengthen their credibility and effectiveness.

It could also help broaden the tax base without necessarily increasing tax rates. For years, Pakistan’s tax debate has revolved around finding new sources of revenue. Yet improving the effectiveness of existing concessions may be just as important as introducing new taxes.

Pakistan’s economic challenge is not simply to collect more revenue or spend more efficiently. It is to ensure that every public resource, whether spent directly through the budget or forgone through the tax system, contributes to growth, productivity and national development.

For too long, fiscal debates have revolved around two questions: how much revenue the government raises and how much it spends. There is a third question that deserves equal attention: whether the revenue the state chooses not to collect is generating sufficient value for the economy.

At a time when Pakistan is searching for fiscal space to finance development, reduce borrowing and strengthen economic resilience, the challenge is not merely to collect more taxes. It is to ensure that every rupee spent or forgone serves a clear economic purpose.

The future of fiscal reform may depend as much on evaluating tax expenditures as on collecting taxes.