Tax Reform Struggle
Tax Reform Struggle: For more than a decade, Pakistan has presented similar budgets. Governments make small changes and introduce new revenue measures, but they do not change the overall approach. The FY27 budget will likely follow the same pattern.
Failed Tax Reforms
The main problem is the lack of serious tax reform. Many years ago, Pakistan stopped pursuing major reforms. Since then, governments have relied on tax amnesty schemes, point-of-sale machines, and other short-term measures to increase revenue. These measures have not solved the underlying problem.
Service Tax Gap
The services sector has grown rapidly since the 1980s. It now contributes nearly 60 percent of Pakistan’s GDP. However, it provides less than 40 percent of total tax revenues. In contrast, manufacturing contributes a much larger share.
Outdated Tax System
Governments have failed to update the tax system to match changes in the economy. They collect most service-sector taxes from banking and telecommunications. Large parts of the services economy remain undocumented and untaxed.
Failed VAT Strategy
For many years, policymakers viewed Value Added Tax (VAT) as a solution. VAT could help document economic activity and improve tax collection. Pakistan passed VAT-related laws, but governments never fully implemented them. In 2008, efforts to modernize VAT failed. After that, the IMF stopped promoting it as a key reform.
Governments then tried other methods. They launched tax amnesties, expanded withholding taxes, taxed banking transactions of non-filers, used databases to track taxpayers, and installed point-of-sale systems. They also tried to register retailers manually. These efforts achieved limited success.
Revenue Struggles
As a result, Pakistan’s tax-to-GDP ratio stayed low. Government spending continued to rise, but revenues did not keep pace. To cover the gap, governments cut exemptions, increased fuel taxes, and printed more money.
These policies showed the state’s struggle to raise resources. Instead of fixing the tax system, governments relied on temporary solutions.
Budget Constraints
The same challenge now shapes the upcoming budget. The government faces limited options. Salaried workers need relief, and industries face severe pressure. The government cannot easily increase fuel or electricity taxes further.
Officials aim to collect additional revenues equal to about 0.6 percent of GDP. They plan to achieve this through fewer tax exemptions, stronger audits, better monitoring, and reforms in the Federal Board of Revenue (FBR). However, these measures already faced difficulties this year.
Need for Reform
The next budget will likely focus on revenue collection. If the government avoids major tax reforms again, Pakistan may remain stuck with weak revenues, limited resources, and growing economic pressure.
Published in Dawn, 4th June 2026
