Budget 2027 & fiscal illusion
The principal reason for low revenue collection in Pakistan is weak fiscal management and a policy framework designed to appease tax evaders while burdening the already documented sectors. In 2026, while the numbers have become astronomical, the underlying disease remains unchanged.
The Federal Board of Revenue (FBR) is still missing targets, relying excessively on withholding taxes, manipulating figures through indirect levies, blocking refunds, coercing compliant sectors, and shifting the entire burden of fiscal failure onto salaried classes, consumers, withholding agents and documented businesses.
The latest figures expose the gravity of the crisis. During July-April of fiscal year 2025-26, the FBR reportedly collected around Rs10.25 trillion against a target of Rs10.90 trillion, leaving a shortfall of nearly Rs683 billion.
Income tax alone missed the target by around Rs210 billion, sales tax by Rs382 billion, customs duty by Rs79 billion and federal excise duty by Rs14 billion. In May 2026, the situation has not improved much, and the gap is now well over Rs750 billion.
Despite this alarming situation, the IMF-supported framework for Budget 2026-27 envisages an unprecedented FBR target of nearly Rs15.3 trillion coupled with a petroleum levy target of Rs1.73 trillion. This is nothing but another exercise in fiscal engineering.
What makes the situation more painful is the fact that the government continues to celebrate percentage growth figures while concealing structural failure. Inflation, currency depreciation and higher petroleum prices automatically increase nominal revenues, but this does not represent genuine tax reform or broadening of the tax base. The real test is sustainable collection through proper assessment, voluntary compliance and documentation of untaxed sectors. On this count, the FBR continues to fail miserably.
The same old methods are being employed again. Advance taxes are collected prematurely, refunds are unlawfully withheld, arbitrary assessments are raised to create artificial "demand", and indirect levies are enhanced to bridge gaps. Petroleum levy has now become the favourite instrument of fiscal manipulation because it does not form part of the divisible pool under Article 160 of the Constitution. Provinces are deprived of their rightful share in general sales tax (made zero since March 1, 2022) while citizens suffer unprecedented fuel inflation. This is constitutional evasion masquerading as fiscal prudence.
The federal government has virtually substituted divisible-pool taxation with non-divisible levies, especially petroleum levy, thereby undermining fiscal federalism guaranteed under the Constitution and National Finance Commission (NFC) Awards. The irony is painful. Even before parliament debates the Finance Bill, negotiations with the IMF have already concluded around how much additional burden could be imposed on citizens through indirect taxation and petroleum levy. This is precisely why Budget 2027 increasingly appears less a sovereign fiscal exercise and more a compliance document prepared under external supervision.
The most disturbing aspect, however, remains the structure of tax collection itself. According to official data, nearly 90% of income tax collection now comes through withholding and advance taxes. Salaried persons, contractors, electricity consumers, telecom users, importers, exporters, bank account holders and corporate entities continue to finance the state through forced deduction regimes. FBR's own contribution through audit, enforcement and recovery remains negligible.
The latest Revenue Division Year Book itself demonstrates this failure. Withholding taxes alone contributed over Rs3.38 trillion during FY2024-25. Salaried individuals paid over Rs605 billion, registering more than 55% increase compared to the previous year. Retailers, wholesalers, speculative traders, real estate tycoons, absentee landlords and large segments of the undocumented economy continue to remain either undertaxed or entirely outside the effective tax net. The burden is, thus, concentrated on those already visible to the system.
This is not taxation based on social contract; it is extraction through compulsion. The plight of withholding agents remains one of the most ignored constitutional and economic injustices in Pakistan. Banks, telecom companies, electricity distributors, corporate entities, exporters and numerous businesses perform the sovereign function of tax collection on behalf of the state without any compensation. They bear enormous compliance costs in terms of infrastructure, manpower, software, audits, reconciliations and litigation. However, the state treats them as unpaid tax machinery. This forced outsourcing of sovereign power violates both economic logic and the spirit of Article 11(3) of the Constitution prohibiting forced labour.
FBR also continues to misrepresent the concept of "taxpayer". It still equates return filers with taxpayers. This is factually incorrect and intellectually dishonest. Tens of millions of Pakistanis pay taxes indirectly or through withholding regimes. Mobile phone users, electricity consumers, vehicle owners, banking customers, petrol consumers and property purchasers all pay taxes in various forms. If databases of National Database & Registration Authority, banks, utility companies and telecom operators were genuinely integrated, Pakistan could easily identify over 100 million economically active persons within a unified fiscal framework.
The issue, therefore, is not absence of data. The issue is absence of political will, institutional capacity and a coherent reform strategy. Successive governments have deliberately avoided genuine structural reforms because the existing fragmented system serves entrenched interests. A modern digitised National Tax Authority capable of integrating federal and provincial taxes, as repeatedly proposed, would substantially reduce corruption, litigation, leakages and administrative duplication.
Such a federalised autonomous tax agency would also facilitate genuine documentation and social protection. However, meaningful reform threatens rent-seeking networks thriving within the existing system. Pakistan's real tax potential today is not less than Rs30 trillion annually if the informal economy, speculative transactions, real estate, agricultural income, wholesale-retail sectors and untaxed wealth are properly documented within a fair, low-rate and predictable tax regime.
However, instead of undertaking structural transformation, governments continue to overburden the already compliant sectors. This approach is economically suicidal. The present tax system imposes some of the highest effective rates in the region while simultaneously producing one of the weakest tax-to-GDP ratios among comparable economies. The problem is not low rates; the problem is selective enforcement, fragmentation, multiplicity of taxes, policy instability and institutional incompetence.
Budget 2026-27 presents an opportunity to abandon this failed model. Pakistan needs simplification of tax laws, harmonisation between federal and provincial jurisdictions, abolition of excessive withholding provisions, compensation for withholding agents, restoration of constitutional fiscal federalism, digitisation of revenue administration, broadening of local government taxation, and a transparent social contract linking taxes with delivery of education, healthcare, social security and infrastructure.
Without such reforms, Budget 2027 will merely produce another cycle of figure manipulation. FBR will again announce growth, miss targets, squeeze documented sectors, block refunds, celebrate coercive recoveries and seek more powers. The IMF will praise "revenue efforts" while citizens bear the burden of inflation and indirect taxation.
The tragedy is not that the FBR continues to fail. The real tragedy is that the state has institutionalised this failure as fiscal policy.
The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences, member Advisory Board and Visiting Senior Fellow of PIDE