There is a general consensus that Pakistan needs comprehensive structural reforms in all areas of governance and institutions if it is to achieve high, equitable and sustainable growth of seven percent and above, assuring prosperity for all citizens—PIDE Reform Agenda for Accelerated and Sustained Growth (Pakistan Institute of Development Economics (PIDE), April 2021). This level of growth is, however, not possible unless fundamental reforms are made in the existing tax structure, as highlighted in Towards Broad, Flat, Low-rate, and Predictable Taxes (PRIME Institute, Islamabad, Third Edition, November 2024).
There are numerous studies and models presented by local economists, authors and researchers for tax reforms facilitating higher growth, but successive governments considered none. Reliance on the International Monetary Fund (IMF) and prescriptions by the World Bank and others for reforming the outdated and oppressive tax system have failed to yield desired results, as highlighted in Tax Reforms in Pakistan: Historic & Critical View (PIDE, 2020).
Presently, all broad-based and buoyant sources of revenue are with the federal government. The contribution by all provinces of Rs. 978.6 billion in total national tax revenues of Rs. 12.722 trillion for fiscal year (FY) 2024-25 was pathetically low, only 0.9% of GDP. It was merely 5.2% in the overall national revenue base (tax and non-tax revenue) of Rs. 17,997.45 billion, 15.7% of GDP, against the total national expenditure of Rs. 24,494.3 billion, 21.4% of GDP. The share of provinces in national expenditure was 5.1% of GDP. All provinces together generated non-tax revenues of only Rs. 313.59 billion against the GDP of Rs. 114,692 billion.
The federal government in FY 2024-25 spent Rs. 2,193 billion on defence and Rs. 8,887 billion on debt servicing. After transfer to provinces of Rs. 6,854 billion under the 7th National Finance Commission (NFC) Award, these two alone were Rs. 1,134 billion higher than the net revenue collection of the federal government. This is our real and perpetual fiscal dilemma.
While the federal government is accumulating debts, the provinces, though heavily dependent on transfers from the NFC Award, are spending huge funds ruthlessly. What makes the situation more disturbing is the fact that the right of provinces to levy sales tax on services is encroached upon by the federal government through the levy of presumptive/minimum taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telecommunication services, as well as excise duty on several services. In 2025, the provinces also encroached upon the right of Parliament by imposing sales tax on rent as a service!
Before independence, provinces had the exclusive right to levy sales tax on goods and services within their respective physical boundaries. The subject of sales tax was on the Provincial Legislative List at Serial No. 48 in the Government of India Act, 1935 and was described as “Taxes on sale of goods and on advertising”. In the Constitution, 1956, “tax on sales and purchases” was mentioned at Serial No. 26 of the Federal Legislative List, and therefore, for the first time, it became a federal subject. This position was maintained in the 1962 Constitution.
In the 1962 Constitution, “tax on sales and purchases” was part of the Federal Legislative List as clause (j) at Serial No. 43 in the Third Schedule. In the 1973 Constitution, as originally adopted, “tax on sales and purchases” was kept on the Federal Legislative List at Serial No. 49, Part I of the Federal Legislative List given in the Fourth Schedule. The item was, however, completely substituted by the Constitutional Fifth Amendment Act, 1976, with effect from 13 September 1976, which read, “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”.
The Ministry of Finance (MoF), for July 2024 to June 2025, shows that even part of defence spending is now funded by borrowing
The second half of the amended entry appears to have been taken from the amendment made in the Sales Tax Act, 1951, by the Finance Ordinance, 1960. Through that amendment, the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption”—see details in WAPDA v. Collector of Central Excise and Sales Tax [(2002) 85 TAX 346 (H.C. Lah.)] and also in Pakistan through Chairman FBR and others v. Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak).
The best solution to revamp the prevalent fragmented sales tax structure is to move towards a unified sales tax on goods and services. By imposing a unified sales tax on goods and services, total collection can reach around Rs. 9,000 billion, as against the collection of sales tax on goods at Rs. 3,901 billion by the Federal Board of Revenue (FBR) in FY 2024-25 and the collection of sales tax on services at Rs. 612 billion cumulatively by all provinces. The additional revenue collection of a little over Rs. 5,000 billion will not only give fiscal space to the federal government to narrow down the fiscal deficit but would also enhance distribution amounts to the provinces that would be strictly as per the Constitution of the Islamic Republic of Pakistan [“the Constitution”].
The retail sector alone has the potential of nearly US$15 billion, if not more. In the Retail Sector $15 billion Tax Potential [Friday Times, 25 May 2025], it is shown how low-rate sales tax on retailers with fool-proof point-of-sale (POS) connectivity can bring prices down and yield higher revenues. It has potential to accelerate growth if fundamental structural reforms are made and taxation rights between the federation and its units are reconsidered to make Pakistan a self-reliant entity.
The potential of the retail sector has yet not be fully tapped by FBR through POS connectivity, as the target to register all the outlets is still a far cry, as admitted at page 19 of its Annual Performance Report 2023-24. The idea of harnessing the Retail Sector $15 billion Tax Potential, as a pilot project, was elaborated in detail along with other tax policy and administrative reforms in Towards Broad, Flat, Low-rate, and Predictable Taxes (PRIME Institute, Islamabad, Third Edition, November 2024), but no one paid heed. Thus, revenue generation at the federal level remains short of annual current expenditure, let alone meeting development outlays. Provinces are also not meeting their constitutional obligations towards the citizens, even after getting larger shares under the NFC Award, courtesy of the improvement in the collection of FBR.
Pakistan has been facing grim challenges on the fiscal front, as the Summary of Consolidated Federal and Provincial Fiscal Operations, 2024-25 (Provisional), available on the website of the Ministry of Finance (MoF), for July 2024 to June 2025, shows that even part of defence spending is now funded by borrowing. It is more than a fiscal fiasco, a serious cause for concern threatening the economic viability and national security of the country.
The negative impact of mindless and costly borrowing, both external and internal, resulted in debt servicing of Rs. 8,887 billion with fiscal deficit reaching Rs. 6.16 trillion. In the wake of the devastating floods of 2025, it is bound to increase.
It is worth mentioning that planning, in the period following the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment], which received assent of the President on 20 April 2010, should have been federalised rather than centralised. However, even after a lapse of 15 years, nobody has raised this issue, let alone implemented it in letter and spirit.
It is imperative that the right to collect tax on income, including agricultural income, should be given to the Centre through dialogue and in a democratic way under Article 144 of the Constitution
The 18th Amendment redefined the National Economic Council (NEC) on the pattern of the Council of Common Interests (CCI). NEC forms part of Chapter 3 of the Constitution entitled Special Provisions. In view of Article 167(4), the role of the NEC has become very important, though the Centre and provinces have not yet realised it.
Debts needed by provinces and their servicing plus repayment should be borne by provinces to relieve the federal government of the enormous amount that takes away a major portion of tax and non-tax revenues. Article 167 of the Constitution, after the addition of clause (4) by the 18th Amendment, reads as under:
“Borrowing by Provincial Government
167. (1) Subject to the provisions of this Article, the executive authority of a Province extends to borrowing upon the security of the Provincial Consolidated Fund within such limits, if any, as may from time to time be fixed by an Act of the Provincial Assembly, and to the giving of guarantees within such limits, if any, as may be so fixed.
(2) The Federal Government may, subject to such conditions, if any, as it may think fit to impose, make loans to, or so long as any limits fixed under Article 166 are not exceeded give guarantees in respect of loans raised by, any Province, and any sums required for the purpose of making loans to a Province shall be charged upon the Federal Consolidated Fund.
(3) A Province may not, without the consent of the Federal Government, raise any loan if there is still outstanding any part of a loan made to the Province by the Federal Government, or in respect of which guarantee has been given by the Federal Government; and consent under this clause may be granted subject to such conditions, if any, as the Federal Government may think fit to impose.
(4) A Province may raise domestic or international loans, or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council.”
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50% ownership of hydrocarbon petroleum resources to the provinces. The federal government earlier held the subject. There still exist legal and administrative bottlenecks for implementing this provision.
Presently, many economists and politicians are arguing that the 7th NFC Award and the 18th Amendment are harming the fiscal stability of the federation. Their argument needs consideration. The issue of the NFC Award vis-à-vis provisions of the 18th Amendment must be examined holistically.
The performance of provinces in collecting taxes from the rich and mighty, e.g. agricultural income tax from the affluent absentee landowners, is extremely appalling. This is a common issue both at the federal and provincial levels, arising from the absence of political will to collect income tax from the rich. The meagre collection of agricultural income tax, less than Rs. 5 billion by all provinces and the federal government in fiscal year 2024-25, is lamentable.
It is imperative that the right to collect tax on income, including agricultural income, should be given to the Centre through dialogue and in a democratic way under Article 144 of the Constitution, which says:
Power of Majlis-e-Shoora (Parliament) to legislate for one or more Provinces by consent
144. (1) If one or more Provincial Assemblies pass resolutions to the effect that Majlis-e-Shoora (Parliament) may by law regulate any matter not enumerated in the Federal Legislative List in the Fourth Schedule, it shall be lawful for Majlis-e-Shoora (Parliament) to pass an Act for regulating that matter accordingly, but any Act so passed may, as respects any Province to which it applies, be amended or repealed by Act of the Assembly of that Province.
In the same manner, the Centre and provinces should jointly levy a unified sales tax on goods and services. The distribution of taxes should be strictly according to the formula agreed under Article 160 of the Constitution. It will ensure that the collection becomes efficient, and citizens/taxpayers have a single-window facility to pay their due taxes. This will help the State to collect taxes of Rs. 34 trillion as per actual potential details available in Towards Broad, Flat, Low-rate, and Predictable Taxes. This is the only way to meet the emergent economic challenges faced by the State. It will also ensure durable fiscal stabilisation in Pakistan, without disturbing the 18th Constitutional Amendment, and achieve the cherished goal of self-sustainability.