• Many goods, services will now be taxed at higher rates
• Lower rates for digital payments versus cash transactions set to replace distinction between filers, non-filers
• Some relief expected for salaried persons earning around Rs100,000 per month
ISLAMABAD: Facing limited room for fresh tax measures, the Shehbaz Sharif-led coalition government has resorted to rebranding taxation — shifting from “broadening the tax base” to pursuing “equity” — in an effort to justify higher taxes on lower-income segments. This transition comes as the government eyes a record revenue target of nearly Rs14 trillion for FY26, a 22 per cent increase over projections for the outgoing fiscal year.
Tied to its commitments under the International Monetary Fund (IMF) programme, the government estimates autonomous revenue collection at Rs12.845tr, based on 4.2pc GDP growth and 7.5pc inflation.
To meet the ambitious target, the government will need an additional Rs655 billion in new tax measures and another Rs400bn through enforcement — figures expected to be finalised in Tuesday’s cabinet meeting ahead of Finance Minister Muhammad Aurangzeb’s budget speech.
The Federal Board of Revenue (FBR) faces significant challenges in meeting its tax collection targets, as doubts persist over its ability to enforce existing tax laws effectively.
Despite concerns about sluggish field operations, no substantial measures have been introduced to bolster enforcement in recent years. An initiative to provide operational vehicles to field officers was also withdrawn following backlash.
Meanwhile, Ministry of Finance officials continue to present optimistic projections, seemingly hoping for a tax windfall without acknowledging economic headwinds. Large-scale industries remain in decline, while sectors like real estate and consumption goods bear the brunt of excessive taxation, further dampening economic activity.
With key industries contracting and consumer confidence fading, the feasibility of achieving ambitious revenue targets remains highly questionable in the next fiscal year.
The government’s proposed tax-to-GDP ratio target for FY26 is 12.3pc, comprising FBR’s share (10.6pc of GDP), provincial collections and the petroleum development levy (PDL).
Moreover, revenue collection could face further setbacks due to a lower-than-expected allocation for the federal Public Sector Development Programme (PSDP), which includes fewer new projects. The federal PSDP also remains notably smaller than those of Punjab and Sindh.
Compounding the issue, the federal government is now seeking financial contributions from Punjab and Sindh to fund dam construction, an unusual move that underscores fiscal limitations at the Centre. These factors create added pressure, as the federal government struggles to balance tax collection efforts with a constrained development budget.
From broadening to equity
Officials involved in tax policy formulation indicate that the government is now moving from tax broadening measures to a new approach centred on equity. This shift means lower tax rates on a wide range of goods and services will be raised, a move the FBR anticipates will generate maximum revenue.
Under the earlier broadening strategy, exemptions were systematically withdrawn, even on essential products like food, stationery items and books, to expand the tax base.
Now, in the second phase, the FBR is introducing “equity” as a justification for increasing lower tax rates across various sectors. This approach will result in a series of hikes in withholding tax rates, targeting dividends, stock markets and other financial transactions.
It is also proposed to levy taxes at the Thresher Unit Level, which would require the use of larger machines to improve the quality of tobacco processing — an effort aimed at increasing revenue collection from the tobacco sector.
At the same time, the FBR intends to implement a new concept of transactions using banking instruments, applying lower tax rates to digital transactions and higher rates to cash-based ones.
This concept will replace the current distinction between filers and non-filers.
However, the real test lies ahead — whether these increased tax rates will bolster revenue collection or further stifle economic activity, particularly as key industries and investment sectors struggle under mounting financial pressures. As part of its proposed new tax measures, the FBR is preparing to introduce a new tax on solar panels, processed food items and a carbon tax, signalling an effort to expand revenue streams amid fiscal constraints.
The tax measures are likely to spark concerns among consumers and businesses, particularly in the renewable energy sector. A tax on solar panels could dampen incentives for clean energy adoption at a time when Pakistan faces mounting electricity costs and energy shortages. Similarly, additional taxation on processed foods may lead to higher consumer prices, affecting household budgets.
However, in a move to provide temporary relief to the agricultural sector, the government has secured an exemption from the IMF on fertilisers and pesticides.
This exemption, extended for another year, will alleviate cost pressures on farmers struggling with rising input prices and uncertain market conditions.
While the government tightens fiscal measures in other sectors, some relief is expected for the salaried class in lower tax slabs. Officials indicate that the exemption limit may be further raised, alongside a lower tax rate for individuals earning around Rs100,000 per month.
Fiscal challenges
While this move aims to stimulate domestic manufacturing and enhance production capacity, it comes at a cost to government revenue. The reduction in import duties will significantly lower tax collection at the import stage, creating further fiscal challenges for an already strained revenue system.
The government is also considering extending the tax measures to former Fata and Pata members, who are exempt until June 30, 2025. This will be another area where the government plans to include tax measures in the budget. However, the Sindh government has asked the federal government to avoid all taxes, including the agriculture income tax on farm products.
Former FBR chairman Dr Irshad Ahmed criticised the government’s persistent reliance on policy measures, arguing that new tax measures alone would not resolve systemic revenue challenges. According to him, such additional revenue merely increases the burden on existing taxpayers while failing to expand the tax base effectively.
Dr Ahmed stressed that the core issue lies in enforcement, which requires a complete overhaul of the FBR’s field formations. He pointed out that officers remain confined to their offices with little access to potential taxpayers, rendering tax collection efforts ineffective.
He also recalled a previous attempt to establish strong tax offices at the district level, an initiative that was ultimately blocked by bureaucratic resistance.
Despite possessing extensive taxpayer data, FBR lacks the capacity to analyse it effectively and identify tax evaders. Addressing these gaps requires significant investment in capacity-building, infrastructure and operational enhancements — elements currently missing from the government’s strategy.
Without a robust enforcement framework, new revenue measures will provide only a temporary financial boost, while those outside the tax net continue to evade their dues.
Published in Dawn, June 10th, 2025
