Pakistan's invisible tariff walls
Pakistan's policymakers routinely lament low investment, weak exports, declining industrial competitiveness and the high cost of doing business. Yet, while governments announce investment facilitation councils, export incentives and industrial support packages, they simultaneously erect new barriers that make economic activity more expensive and less efficient.
Among the most neglected examples is the proliferation of provincial infrastructure development cess regimes that increasingly resemble internal customs duties imposed within a federation that constitutionally guarantees freedom of trade and commerce.
The latest manifestation appears in the Khyber-Pakhtunkhwa Finance Act, 2026, which significantly expands the powers available under the Khyber-Pakhtunkhwa Infrastructure Development Cess Act, 2022. The amendments authorise the government to prescribe cess rates based on the value of goods, weight, distance travelled, category of vehicle and virtually any other criterion considered appropriate. Simultaneously, the amended law imports extensive enforcement powers from provincial sales tax legislation, including audit, investigation, adjudication, recovery, prosecution and tax-fraud proceedings.
Far from being a limited levy to recover infrastructure costs, the cess is evolving into a comprehensive provincial revenue instrument. The constitutional and economic implications deserve serious examination because the issue extends far beyond Khyber-Pakhtunkhwa.
Sindh enforced the infrastructure cess through the Sindh Development and Maintenance of Infrastructure Cess Act, 2017, extensively amended in 2026, targeting goods entering the province through Karachi ports. It followed Punjab that promulgated the Punjab Infrastructure Development Cess Act, 2015, and immensely expanded its scope in 2026. Following Sindh, Balochistan notified the Balochistan Infrastructure Development Cess Act, 2019. Khyber-Pakhtunkhwa has now reinforced its law. The cumulative effect is the gradual emergence of fiscal barriers within Pakistan itself. The 1973 Constitution envisages Pakistan as a single economic union. Article 151 is specifically designed to ensure freedom of trade and commerce throughout the country. This Article is not merely an aspirational declaration. It embodies a fundamental constitutional principle that economic integration is essential to national integration.
The framers understood a lesson that economic history repeatedly confirms: federations cannot function efficiently if constituent units are permitted to erect fiscal barriers against one another. Political unity without economic unity eventually produces fragmentation, inefficiency and conflict.
In comparative constitutional jurisprudence, this principle is often described as the "commerce clause" doctrine. The United States Constitution expressly protects interstate commerce from state interference. The European Union spent decades dismantling internal trade barriers to create a common market. India introduced the Goods and Services Tax in 2017 precisely because fragmented state-level taxation had become a major obstacle to economic growth. Pakistan, however, is moving in the opposite direction.
Consider the practical consequences. A textile manufacturer in Faisalabad imports raw materials through Karachi, transports them to Punjab for processing and subsequently markets finished products throughout the country. A pharmaceutical company based in Lahore distributes medicines across all provinces. A logistics company carries goods from Karachi to Peshawar and onwards to border regions. A food-processing enterprise sources agricultural inputs from multiple provinces before selling products nationwide. These businesses do not operate within isolated provincial economies. They function within a national market. Every additional cess, levy, charge or procedural requirement imposed upon movement of goods increases compliance costs, delays supply chains, raises transportation expenses and ultimately inflates consumer prices.
The economic damage extends far beyond the amount collected. Businesses incur administrative costs, legal expenses, valuation disputes, documentation burdens and uncertainty regarding future liabilities. The result is a hidden tax on productive activity itself.
The constitutional challenge begins with a deceptively simple question: what exactly is the infrastructure development cess? Governments often defend such levies by arguing that they are neither taxes nor customs duties but compensatory charges imposed to recover the cost of infrastructure development. However, constitutional validity cannot be determined merely by nomenclature. Courts have consistently examined the true nature and substance of a levy rather than the label attached to it.
A genuine fee or cess ordinarily bears a reasonable relationship to the services provided to the payer. The amount collected should possess some nexus with the benefit received. If a levy is imposed merely because goods enter, leave or pass through a province, while collections are absorbed into general revenues and rates are determined by commercial value, transportation patterns or categories of goods, the distinction between a compensatory charge and a tax begins to disappear. Indeed, the above-mentioned 2026 amendments by provinces strengthen this concern. When the executive is empowered to prescribe cess rates according to the value of goods, distance travelled or type of vehicle, the levy increasingly resembles a tax on commerce rather than a charge for identifiable infrastructure services.
This raises a second constitutional issue. Taxing powers in Pakistan are allocated through a carefully constructed federal framework. Neither the federation nor the provinces enjoy unlimited taxing authority. Every tax must be traceable to a constitutional source. The mere desire to generate revenue does not create constitutional competence.
Infrastructure cess, therefore, invites scrutiny not only under Article 151 but also under broader principles governing fiscal federalism. If provinces are permitted to impose revenue measures that effectively burden inter-provincial trade, the constitutional promise of a common economic market becomes increasingly illusory.
The economic consequences are particularly troubling for export competitiveness. Pakistan already suffers from some of the highest logistics costs in the region. Energy prices remain elevated. Compliance burdens continue to increase. Multiple tax administrations operate simultaneously. Businesses routinely confront federal income tax, federal sales tax, provincial sales taxes, customs duties, withholding taxes, regulatory duties, advance taxes and numerous para-fiscal charges. Infrastructure cess adds another layer to an already fragmented fiscal landscape.
Each additional levy may appear insignificant in isolation. Collectively, however, they create a cumulative burden that discourages investment and reduces competitiveness. Investors evaluate total costs rather than individual taxes. Supply chains respond to aggregate burdens rather than legal classifications.
The irony is difficult to ignore. Governments repeatedly emphasise regional connectivity, trade corridors, export-led growth and investment promotion while simultaneously permitting the emergence of internal fiscal barriers that move policy in the opposite direction. No major economy has achieved sustained industrialisation through the multiplication of internal trade barriers. Successful federations have generally moved towards greater harmonisation and market integration. Pakistan appears to be institutionalising fragmentation.
The issue is not whether provinces require resources. They undoubtedly do. Infrastructure development is essential. Roads, bridges, industrial zones, logistics networks and urban facilities require substantial investment. The question is whether provincial infrastructure should be financed through mechanisms that burden the free movement of goods and increase the cost of doing business across provincial boundaries. A federation seeking economic growth should be dismantling internal barriers, not creating new ones. The time has arrived for a comprehensive constitutional review of infrastructure development cess regimes across Pakistan. Courts, policymakers, chambers of commerce and constitutional scholars must examine whether these levies are compatible with Article 151 and whether they undermine the constitutional vision of a unified economic market.
Pakistan's economic future depends not merely on collecting more revenue but on creating conditions that encourage production, investment and commerce. Invisible tariff walls may generate short-term collections, but they impose long-term costs on national prosperity.
The Constitution promised Pakistan a federation united by free commerce. That promise cannot coexist indefinitely with provincial fiscal barriers that increasingly resemble internal customs duties. Economic integration remains one of the country's greatest untapped assets. It should be strengthened, rather than taxed.
The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences, member Advisory Board and visiting Senior Fellow of PIDE