Editorial
Finance Minister Mohammad Aurangzeb on Tuesday presented a Rs 17.573 trillion federal budget for FY 2025–2026, projecting total revenue receipts of Rs 19.278 trillion. Of this, Rs 8.206 trillion will go to the provinces under the NFC Award, while the Federal Board of Revenue (FBR) has been tasked with collecting Rs 14.131 trillion. An additional Rs 5.147 trillion is expected from non-tax revenue sources.
The government appears to have exercised a degree of fiscal discipline. Despite a 10% increase in federal employee salaries and a 7% rise in pensions, current expenditure has been slightly reduced to Rs 16.286 trillion, down from Rs 16.390 trillion in the revised estimate for the outgoing fiscal year. This reduction is largely due to lower debt servicing costs, which are projected to fall from Rs 8.945 trillion to Rs 8.207 trillion.
Yet, beyond these fiscal adjustments, the budget does not live up to the promise of being “bold.” Instead, it maintains the status quo—relying heavily on the already-taxed segments of society while avoiding politically sensitive reforms that could have helped widen the tax net and ensure greater equity.
There are, however, some efforts toward fiscal consolidation. Subsidies have been reduced from Rs 1.378 trillion to Rs 1.186 trillion, a move consistent with IMF guidelines. But any benefits from such discipline may be undermined by the lack of significant privatization activity. Expected proceeds from state asset sales amount to only Rs 87 billion—a number too small to signal meaningful reform.
The budget remains anchored in indirect taxation. The emphasis on sales tax, income tax, withholding tax, and advance tax continues as the primary tool for revenue mobilization. While digitization and electronic transaction monitoring are proposed to curb leakages, the impact will depend heavily on implementation and institutional capacity. Legal amendments—such as defining ‘abettor’ in tax fraud cases and proposing stronger enforcement mechanisms—may deter evasion, but the focus on enforcement without complementary structural reform can breed resentment and distrust.
A particularly contentious measure is the phased withdrawal of tax exemptions for industrial units in the former FATA and PATA regions. While the misuse of these exemptions by units operating outside these areas needs to be addressed, imposing taxes incrementally over four years (10%, 12%, 14%, 16%) may provoke political backlash in economically vulnerable regions still adjusting post-merger. Whether the government can withstand such pressure remains to be seen.
More troubling, however, is the regressive taxation on savings and investments. The proposed increase in tax on profit from debt—from 15% to 20%—and the removal of the Rs 5 million exemption cap for individuals and AoPs under the final tax regime, undermines financial inclusion. In a country with one of the lowest savings rates in the region, such measures are counterproductive. They especially hurt retirees and middle-class savers who depend on these returns for financial security.
Similarly, raising the tax on dividends to 25% and to 15% on mutual fund earnings discourages investment in the capital markets. These steps risk pushing savings into speculative and informal avenues like real estate and bullion, further hampering the development of Pakistan’s financial sector.
Equally disconcerting is the complete omission of any serious taxation strategy for the large and powerful retail and wholesale sectors. This segment of the economy has long resisted formalization and remains shielded by political patronage. The assumption that stricter enforcement of sales tax will naturally bring these businesses into the income tax net is overly optimistic. Experience suggests that documentation efforts alone are insufficient without direct tax measures and political will.
In the end, this budget feels more like a cautious balancing act than a serious effort to reform Pakistan’s economic structure. It increases the burden on compliant taxpayers—especially salaried individuals and formal businesses—while continuing to avoid confrontation with entrenched interests. The tax base remains narrow, indirect taxation remains dominant, and the informal economy continues to flourish untaxed.
The government may argue that the budget aims to stabilize the economy. But without meaningful steps to broaden the tax base, rationalize expenditure, and promote formalization, this stabilization will be superficial at best. Real reform requires political courage: taxing untaxed elites, reducing waste, and offering relief to those who have long shouldered a disproportionate burden.
This year’s budget was an opportunity to take such a step. Unfortunately, that opportunity has been missed once again.
