(Macroeconomist)
THERE is a budget Pakistan needs, and there is the budget Pakistan is likely to get. The first would cut tax rates on the formal economy, enforce heavily against the informal one and use the resulting base-broadening to fund a credible, multi-year investment recovery. In an environment where Pakistan’s economy is weighed down by an abysmal investment-to-GDP ratio of 12 per cent, all efforts should be made to increase it rather than suppress it further.
The second will squeeze an already-compressed formal sector for another Rs700-800 billion, call it reform and wonder why growth refuses to accelerate. It is like Groundhog Day, but with 240 million people, rather than Bill Murray, stuck in a loop.
The tragedy is that the IMF, which most politicians blame for the squeeze, has explicitly endorsed the first approach. The government simply hasn’t taken it.The structural problem is not insufficient taxation; it is its distribution, which is catastrophically uneven. Agriculture contributes 24.6 per cent of Pakistan’s value added and pays an effective tax rate of 0.3 per cent. Petroleum products, a production input that flows through every supply chain in the economy, carry an effective rate of 166 per cent, cascading into freight costs, food prices and manufacturing competitiveness. The salaried class paid over Rs425 billion in income tax, while retailers paid roughly one-thirteenth of that. A manufacturer with Rs1 billion in profits faces an effective burden approaching 40-45 per cent once minimum taxes, advance taxes, withholding on inputs, and the 10 per cent super tax are stacked, leaving barely any incentive to actually invest in the economy. This leads to an exodus of capital from the formal to informal sector, because rational capital seeks higher returns, not higher taxes.
This is not a revenue-optimising system. It is a compliance-destroying one and it signals to every economic agent that the rational strategy is to resist formalisation. Pakistan’s GST efficiency has declined from 27.4 per cent to 22.8 per cent over a decade, despite an 18 per cent standard rate; barely one quarter of the theoretical base is taxed. Raising efficiency to just 35 per cent -- still well below Turkiye, Morocco and Indonesia -- would generate Rs2.1 trillion in additional GST revenue annually. That is the entire additional revenue target for FY27, with change to spare for rate relief elsewhere.
The IMF’s programme requires 2.0 per cent of GDP primary surplus in FY27 and an FBR revenue floor of approximately Rs15.3 trillion. These are non-negotiable. But neither prescribes where the revenue comes from. Every rupee the FBR collects from agriculture, from real-estate transactions and from non-filing retailers is a rupee that does not need to come from a salaried worker or a manufacturing company already paying at punishing rates. The budget’s job is to execute that swap.
First, phase down the super tax on a legislated, three-year schedule, 10 per cent to 7.0 per cent in FY27, funded by removing the GST exemption on residential property sales above Rs10 million, and by removing other exemptions. There is also an opportunity to allow accelerated depreciation for companies investing that tax amount in actual productive capacity, effectively doing a tax-to-investment swap.
Second, eliminate advance income tax on raw material imports and manufactured goods. This provision forces companies to pre-pay tax regardless of profitability, locking up Rs300-400 billion in productive-sector working capital annually while the FBR sits on Rs390 billion in refund arrears. Replace it with genuine audit enforcement through a compliance and risk management system. The revenue is equivalent, but the growth effect is transformative.
Third, raise the salaried tax zero-rate threshold from Rs600,000 to Rs900,000, a partial adjustment for inflation since it was last set. Fund it by enforcing the non-filer surcharge against six-plus million identifiable potential taxpayers visible through NADRA, property records, and vehicle registrations. Set the non-filer enforcement target as a binding budget conditionality, not a footnote KPI, which is a nice-to-have metric.
Fourth, enforce provincial agricultural income tax with quarterly-reported collection targets by province. The accountability is missing. Every rupee collected from landowners reduces the burden on Karachi’s office workers and Lahore’s factory owners.
All institutional prerequisites for this budget already exist. There is enough data out there to create detailed income and wealth profiles of businesses and individuals. The inability to actually use the data is the problem, not the raw data itself.
The question Pakistan faces on budget day is not whether it can afford to reduce rates on the formal economy. It is whether it has the political courage and the will to collect from those who have avoided taxation for decades in exchange. The IMF programme, correctly read, does not prevent this trade, but it actually requires it.
The budget that fails to make this swap is not fiscally conservative but fiscally self-defeating, extracting ever more from a shrinking compliant base, suppressing the investment that would expand it and arriving at the next budget cycle with the same shortfall and the same excuses. Here’s to yet another Groundhog Day.
