The Finance Bill, 2026 reveals a familiar pattern in Pakistan’s fiscal governance: whenever confronted with structural weaknesses, the state chooses easier extraction over difficult reform.
The rhetoric accompanying the budget speaks of relief, competitiveness and economic revival, yet the underlying architecture remains anchored in the same paradigm that has produced low growth, stagnant productivity and a shrinking formal sector.
The first striking feature of the Finance Bill 2026 is what it does not do. It does not undertake any meaningful restructuring of Pakistan’s tax system. There is no move towards a broad-based and low-rate tax regime. There is no roadmap for integrating federal and provincial tax administrations. There is no serious attempt to eliminate the jungle of withholding taxes that has transformed taxation from a system of assessment into a mechanism of advance collection.
The government has highlighted reductions in tax rates for salaried individuals. Such relief is welcome, especially after years during which documented wage earners became the easiest target for revenue collection. However, the relief remains modest when viewed against the broader reality. Salaried employees continue to bear a disproportionately high share of direct taxation while large segments of wealth, agricultural rent, speculative gains and privileged sectors remain lightly taxed or untaxed altogether.
The second and perhaps more troubling aspect is the persistence of the revenue-maximisation approach. Pakistan’s fiscal authorities continue to view taxation primarily through the lens of annual collection targets. Economic growth, investment formation and business expansion remain secondary considerations.
This approach has already produced damaging results. Despite repeated increases in tax rates over the last decade, Pakistan’s tax-to-GDP ratio remains disappointing. The formal corporate sector has become increasingly concentrated. A small number of documented taxpayers shoulder the overwhelming burden while the informal economy expands beyond regulatory reach. The lesson should have been obvious by now. Higher rates imposed on a narrow base do not produce sustainable revenue. They merely punish compliance.
The tax expenditure statement accompanying the Finance Bill provides another revealing insight. According to official estimates, federal tax expenditures for FY2024-25 amount to Rs2.35 trillion. More importantly, the methodology has been revised substantially.
Several exemptions previously counted as tax expenditures are now reclassified as structural features of the benchmark tax system. These include sovereign income under section 49, provincial social security institutions, pension funds, constitutional arrangements and treaty obligations. While methodological refinement is defensible, it also highlights a deeper problem. The public debate on tax expenditures often assumes that every rupee of revenue foregone can be converted into actual revenue by withdrawing exemptions.
The report itself expressly cautions against such assumptions, noting that behavioural responses and economic consequences may significantly alter outcomes. Unfortunately, policymakers frequently ignore this warning. The largest share of tax expenditure continues to arise from sales tax concessions, accounting for over half of total federal tax expenditure. The pharmaceuticals, agriculture and food sectors remain major beneficiaries.
Critics may view these concessions as distortions, but the real question is whether Pakistan can afford additional taxation on medicines, food and agricultural inputs when inflation, poverty and food insecurity remain persistent challenges.
A more fundamental weakness of the Finance Bill lies in its continued neglect of fiscal federalism. The federal government remains trapped in a cycle in which debt servicing consumes the bulk of its revenues, while provinces accumulate cash surpluses. The constitutional architecture established after the 18th Amendment demands coordination and rational sharing of fiscal responsibilities. Yet the budget offers no serious discussion of harmonisation between federal and provincial tax systems.
The absence of reform in this area is especially problematic because many of Pakistan’s untapped revenue sources now lie within provincial domains. Urban immovable property, agricultural income and local government finance remain underutilised. Instead of addressing these areas, federal authorities continue to rely on squeezing already documented sectors.
Equally concerning is the absence of a growth strategy. Economic history demonstrates that successful states collect more revenue because they create prosperity first. Pakistan has reversed this sequence. The result is predictable. Businesses face increasing compliance costs. Investors confront uncertainty. Entrepreneurs are treated as potential tax evaders rather than partners.
The Finance Bill also continues the tradition of excessive reliance on indirect taxation. Although some relief has been granted to salaried individuals, the broader structure remains heavily dependent on consumption-based taxes and advance collection mechanisms. Such measures are economically regressive.
Perhaps the most disappointing aspect is the lack of institutional reform. The FBR remains essentially unchanged despite years of evidence demonstrating that enforcement alone cannot deliver sustainable revenues. A fragmented tax administration, overlapping jurisdictions and complex legislation continue to impose enormous costs on taxpayers. Pakistan does not suffer from a shortage of tax laws but from a shortage of coherent tax policy.
The Finance Bill, 2026 therefore represents continuity rather than change. It may satisfy immediate fiscal targets and reassure external creditors, but it does little to alter the structural weaknesses that have constrained Pakistan’s economic potential for decades.
A genuine reform agenda would look very different. It would broaden the tax base by bringing untaxed incomes into the system rather than further burdening compliant taxpayers. It would simplify the tax code, reduce rates, eliminate distortive withholding regimes and integrate federal and provincial tax administrations. Most importantly, it would recognise that growth is not the by-product of taxation; taxation is the by-product of growth.
Pakistan’s challenge is no longer merely fiscal. It is intellectual. The country is running out of revenue because it is running out of growth. No Finance Bill can solve that problem unless it first addresses the ideas that created it.
The writer is an advocate of the Supreme Court, adjunct faculty at LUMS and a member advisory board of PIDE.
