Zafar Iqbal
Pakistan’s annual budget exercise has become a ritual of diminishing returns. The government raises taxes, misses its revenue targets, sets more ambitious targets for the following year, and repeats the cycle. What this pattern reveals is not a revenue problem in the conventional sense. It is a structural failure: the state is extracting more and more from a shrinking pool of compliant taxpayers while leaving vast reservoirs of untaxed economic activity entirely undisturbed. The consequences of this approach are now accumulating faster than any stabilization policy can absorb them.
This will be the fifth consecutive budget under the current Prime Minister and the third under the current Finance Minister. The economy remains unable to achieve meaningful stability. GDP growth has fallen short of the four percent target this year, and prospects for reaching that mark next year appear equally uncertain. The government’s stated priority remains stabilization, yet after five years the stabilization itself remains elusive. At some point, persistence becomes indistinguishable from paralysis.
The most immediate casualty of this failure is the formal sector and the salaried class. These are the taxpayers who cannot hide, cannot negotiate, and cannot opt out. Their incomes are documented, their transactions are traceable, and their tax obligations are enforced with mechanical precision. The burden placed on them has reached a point where patience is not merely wearing thin but giving way to something more dangerous: stabilization fatigue. History offers a clear warning here. Several previous governments, facing precisely this kind of public exhaustion, abandoned IMF programmes and pivoted to artificial growth stimulation. The short-term relief those decisions produced was invariably followed by economic crises of greater severity. Pakistan cannot afford to repeat that sequence. The bullet must be bitten, and it must be bitten now.
The fundamental problem is one of distribution, not quantum. Pakistan does not necessarily need to collect more taxes in aggregate as urgently as it needs to collect taxes from those who currently pay nothing or next to nothing. The government needs additional fiscal space. The overtaxed formal sector desperately needs relief. Both objectives are achievable, but only through one mechanism: genuine broadening of the tax base. There is no other credible path.
When federal officials are pressed on this issue, the standard response is to invoke provincial jurisdiction. Agriculture is the most cited example. Officials argue that agricultural income taxation falls under provincial authority and that the federal government’s hands are tied. This argument does not withstand scrutiny. Livestock alone constitutes more than half of the agricultural sector, and the Federal Board of Revenue has itself acknowledged that livestock falls within its own tax domain. The evidence of inaction is stark. Eid-ul-Azha has just passed, during which tens of billions of rupees worth of livestock changed hands across the country. Thousands of animals are sold daily at abattoirs. Yet meaningful tax collection on these transactions or on the income earned by sellers is virtually nonexistent. The federal government cannot simultaneously claim jurisdictional limitation and acknowledge that the FBR’s own domain includes livestock, while collecting almost nothing from it.
The case of traders and retailers is equally revealing. For over a decade, the government has attempted to bring this sector into the tax net through a succession of simplified tax schemes. More than a dozen such initiatives have been announced, each failing to produce meaningful results because traders and retailers have consistently refused to comply, calculating correctly that the state lacks either the will or the capacity to enforce consequences. The proposed fixed tax of twenty-five thousand rupees per month for retailers in the upcoming budget continues this pattern of inadequacy. It is a number that signals the government’s unwillingness to treat the issue with the seriousness it demands rather than a genuine attempt at base broadening.
The minimum tax regime deserves particular attention because it illustrates how the state’s response to evasion has inadvertently created new distortions. Where the FBR cannot accurately assess actual income, it resorts to taxing deemed income, meaning revenues rather than profits. In some cases the effective burden rises as high as fifteen percent of turnover. What began as a presumptive tax arrangement has evolved into a minimum tax system payable regardless of profitability. An enterprise making no profit still owes tax. This is structurally unjust, and its effects are predictable: investment in affected sectors weakens, economic activity contracts, and the growth that stabilization was supposed to enable becomes harder to achieve. The minimum tax regime is, in this sense, self-defeating. It raises some revenue in the short term while corroding the economic base from which future revenue must come.
The solution requires the government to think in a fundamentally different register. Relief and reform must be pursued simultaneously rather than sequentially. The formal sector and salaried class require meaningful reduction in tax rates, and that reduction must be credible and sustained rather than cosmetic. The government should present a clear three to five year roadmap for reducing corporate and non-corporate income tax rates, alongside a firm commitment to phasing down and ultimately eliminating the super tax and various surcharges that have accumulated over successive budgets. These levies were introduced as emergency measures but have acquired the permanence of structural policy. Their continuation signals that the government regards the formal sector as a source of extraction rather than a partner in growth.
The revenue gap created by rate reductions must be filled by bringing into the tax net those who have operated outside it for decades. Agriculture, livestock, retail, real estate, and the informal economy collectively represent an enormous untapped fiscal base. Capturing even a modest share of this base would transform Pakistan’s fiscal position without imposing additional burdens on those already compliant.
The deeper point is this: stability without growth is not stability. It is stagnation with better optics. Pakistan has a large and growing labour force entering the market every year. Without genuine economic growth, those entrants find no employment, and unemployment at scale is not a fiscal problem but a social and political one. No IMF programme, however faithfully implemented, resolves that equation. Only a broader, fairer, and more honest tax system, combined with an environment that rewards investment rather than punishing it, can begin to do so.
