ISLAMABAD:
“At the beginning of a dynasty, taxation yields large revenue from small assessments. At the end, taxation yields small revenue from large assessments” – Ibn Khaldun.
Ibn Khaldun wrote these lines centuries ago, long before the arrival of missions of the International Monetary Fund (IMF), quarterly review meetings and “mini-budgets”. He nevertheless understood something that modern fiscal bureaucracies still struggle to learn: when a state loses confidence in growth, it begins taxing survival instead of prosperity. Another IMF team is in Islamabad for discussions on the federal budget for fiscal year 2026-27 under the ongoing $7 billion 37-month Extended Fund Facility (EFF). One can almost predict the choreography in advance.
Revenue target of the Federal Board of Revenue (FBR) will rise heroically (more than Rs15 trillion!) with additional taxes of Rs250 billion plus. Tax-to-GDP projections will become optimistic again. Additional withholding taxes will appear disguised as documentation measures. New levies will be described as temporary necessities. The formal sector will once more be congratulated for its patriotism while being prepared for another round of extraction.
Pakistan does not need confrontation with the IMF. It needs something far more difficult: the confidence to present a credible reform plan capable of achieving primary surplus targets without strangling the productive economy.
For nearly two decades, fiscal policy has followed a remarkably consistent philosophy: if revenue falls short, raise rates; if growth slows, impose additional withholding taxes; if documentation weakens, burden those already documented. This approach has produced the strange spectacle of a country trying to achieve growth by systematically exhausting the very sectors capable of generating it. The outcome is visible everywhere. Investment remains weak, industrial expansion slows, exporters struggle to remain competitive and the informal economy continues to flourish with admirable immunity from official enthusiasm for taxation. Pakistan’s fiscal crisis is no longer simply about insufficient revenue. It is about an outdated tax structure built for extraction rather than growth.
The existing system resembles an administrative federation of tax notices. The federation collects income tax, customs duties, federal excise and sales tax on goods. Provinces collect sales tax on services, agricultural income taxes, property-related levies and numerous other charges.
Businesses operating nationwide navigate multiple registrations, overlapping audits, conflicting definitions and competing jurisdictions. A taxpayer operating across Pakistan often requires more energy to understand tax administration than to run the actual business. The state then expresses surprise at the persistence of informality.
This fragmentation imposes enormous economic costs. Compliance becomes expensive, litigation multiplies and documentation loses its attraction. Pakistan has gradually developed a taxation structure that penalises formalisation while rewarding invisibility.
The burden falls overwhelmingly on a narrow segment of the economy. Estimates frequently cited in business and policy circles suggest that nearly 80-85% of federal income tax and sales tax collection originates from roughly the top 1,000 to 1,200 corporate entities. Banks, telecom companies, oil and gas firms, organised manufacturers and exporters continue carrying the fiscal system on their backs while vast undocumented sectors remain comfortably outside meaningful taxation.
No country can sustainably tax the same compliant sectors into permanent prosperity. Even a milking cow eventually develops constitutional objections. The solution lies not in additional taxation but in structural reform. Pakistan requires a simplified federalised tax system based on coordination, harmonisation and lower rates rather than administrative fragmentation and fiscal extortion. This does not require dismantling the provincial autonomy or reversing the 18th Amendment. Constitutional federalism and administrative coordination are not enemies. Modern federations function precisely through integrated tax administration while preserving subnational fiscal rights.
Canada offers one example. Federal and provincial tax systems operate through harmonised compliance arrangements that minimise duplication. Australia relies on coordinated federal-state fiscal administration to reduce compliance costs and preserve market integration. Even the United States, where states possess extensive taxation powers, constitutionally restricts fragmented taxation that could disrupt interstate commerce.
Pakistan’s economy today is far more integrated than its taxation structure. Banks operate nationally. Telecom companies function through nationwide networks. Oil and gas companies move through integrated supply chains. Logistics firms, airlines and industrial groups operate across provincial boundaries as unified commercial enterprises. Fragmented taxation in such an economy functions like internal customs barriers disguised as administrative procedure.
A federalised tax administration model could substantially reduce these distortions. The federation and provinces would retain their constitutional taxation powers, but administration would become integrated through a jointly governed institutional mechanism. Taxpayers would interact through unified registration systems, harmonised definitions, coordinated audits and shared databases. The beauty of such reform is that it creates space for what Pakistan desperately needs: lower and simpler taxes. Pakistan’s current tax structure increasingly resembles punishment for visibility. Corporate taxation becomes punitive once super tax, minimum taxes, workers’ welfare obligations and indirect levies are combined. Sales tax rates remain among the highest in Asia despite the absence of Scandinavian welfare structures, Scandinavian public services or Scandinavian governance. Only the tax ambitions occasionally resemble Northern Europe.
High rates imposed on a narrow base inevitably encourage evasion, underreporting and capital flight. Lower and simpler taxes imposed across a broader base create more sustainable outcomes. Asia’s successful economies understood this long ago. China, Japan, Singapore, Malaysia, Indonesia and Vietnam pursued growth-oriented taxation strategies centred on moderate rates, administrative simplicity and export competitiveness. Their systems were designed to encourage investment and documentation rather than maximise short-term extraction from already compliant sectors or exorbitant levies on petroleum products.
Pakistan, by contrast, drifted toward a taxation regime increasingly dependent on withholding taxes deducted at source regardless of profitability. These taxes were originally designed as collection tools. They gradually evolved into substitute taxes imposed on transactions instead of actual income. Low-margin businesses and sometimes even loss-making enterprises are taxed as though they were extraordinarily profitable. Meanwhile, large undocumented sectors continue their patriotic contribution to the national economy through moral support. Agricultural income taxation remains politically paralysed despite repeated promises. Property taxation remains underdeveloped despite massive speculative gains in real estate. Informality expands while documented sectors finance the state with admirable consistency and diminishing enthusiasm.
Technology alone cannot solve these problems. Digitalisation imposed upon a structurally irrational system merely accelerates irrationality. Sustainable reform requires simplification, legal certainty and administrative coordination. The IMF’s primary concern is fiscal sustainability, not the preservation of dysfunctional tax structures. Pakistan therefore possesses an opportunity to present a credible alternative model capable of achieving programme targets through growth, documentation and integration rather than perpetual rate increases.
The upcoming budget can either repeat the familiar cycle or begin structural reform. One path leads toward higher rates, lower growth and deeper dependence. The other requires political courage but offers the possibility of expansion, competitiveness and fiscal stability. Pakistan does not need a larger extraction machine. It needs a taxation system capable of supporting growth within a modern federal economy.
The writer is the Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences, member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics
