Every month, a salaried employee in Karachi receives a payslip showing income tax deducted before the salary reaches the bank account. A farmer earning substantial taxable income may face a different administrative system, where provincial authorities struggle to verify earnings. Both forms of income can be taxable. The difference is how reliably the state measures income and collects what the law requires.
I have followed Pakistan’s annual budget debates for years. The FBR announces a target. The government searches for additional receipts. But why does Pakistan continue to struggle to collect taxes from parts of its economy already within the law? The World Bank’s July 2026 analysis of fiscal federalism provides an institutional explanation.
Meeting a tax target does not mean fixing the tax system
Provisional figures reported for July–September 2026 placed FBR collections at Rs3.083 trillion against a Rs3.053 trillion target, approximately one percent above plan. Meeting a quarterly target does not establish whether the tax base has become fairer. Revenue can rise through inflation, higher rates or additional payments by existing taxpayers. The relevant test is whether previously underreported taxable income enters the system and whether collections are sustainable.
Agriculture exposes the gap
The IMF’s April 2026 assessment used historical sectoral data and estimated that agriculture represented 24.6% of value added but faced an effective tax rate of about 0.3%. These are different measures. The effective rate is not an individual farmer’s statutory income tax rate, and the historical estimate does not measure the effect of recent reforms. Many small agricultural producers have limited taxable income. Still, the disparity points to weaknesses in administration and enforcement.
Agricultural income tax laws have changed
Agricultural income taxation falls under provincial authority. During 2025, provinces revised their laws under the IMF-supported programme to align taxation more closely with other forms of income. The IMF reported in April 2026 that implementation delays and enforcement weaknesses held revenue below expectations. The principal impact of revised rates was expected in FY2027. New laws cannot collect revenue by themselves. Provincial administrations need reliable income information and lawful assessment and appeal procedures. Acreage alone is not proof of taxable profit.
Property taxation reveals another gap
The World Bank’s July 2026 fiscal federalism analysis put urban property tax collections at approximately 0.13% of GDP, below a comparison range of 0.3–0.6%. Outdated valuations and incomplete records can weaken assessments. A fair reform should distinguish a retired owner living in an inherited home from an investor holding several income-producing properties. Better valuation should come with transparent relief and appeal rules.
Fiscal federalism changed the distribution of money
The 18th Constitutional Amendment and Seventh NFC Award in 2010 increased provincial autonomy and transferred major responsibilities. Provincial shares of federal divisible-pool taxes increased, yet federal spending did not decline by a corresponding amount. The World Bank identifies overlapping expenditure and mismatched responsibilities as fiscal weaknesses. That does not mean devolution itself caused Pakistan’s debt problem. It means governments must align spending authority with the functions each level actually performs.
Why provincial own-source revenue matters
The World Bank reported provincial own-source tax revenue at around one percent of GDP. Transfers are necessary to help provinces with different economic capacities, but heavy reliance on federal receipts can weaken incentives to develop provincial tax administration. A future NFC formula should recognise needs and realistic revenue effort. Rewarding only the provinces with the largest existing tax bases would be unfair to poorer regions.
Fragmented sales tax rules raise costs
Federal sales tax on goods and provincial sales taxes on services involve different authorities. Businesses operating across jurisdictions may face inconsistent definitions and filing requirements. The World Bank recommends harmonisation and common digital systems. The IMF’s estimated GST C-efficiency ratio declined from 27.4% to 22.8% over the decade it examined. Its modelled Rs2.1 trillion revenue potential from raising C-efficiency to 35% is a scenario, not money already collected.
Where does the money go?
The World Bank found that more than 80% of provincial spending in FY2023 was recurrent expenditure, and that local governments’ share of total public spending declined from around 10% in 2005 to below 5% in 2024. Recurrent costs are not automatically waste: teachers and medical workers must be paid. The question is whether budgets respond to actual district needs and improve public services.
A fairer system requires institutional change
Provinces should assess agricultural income according to actual taxable earnings and modernise property valuations with appropriate protections. Sales tax authorities should simplify cross-border compliance. Fiscal transfers should be accompanied by transparent reporting of revenue effort and service outcomes. The goal is not to make every household pay more. It is to prevent comparable taxable incomes from receiving radically different treatment merely because they arise in different sectors.
Pakistan’s next fiscal test
An annual FBR target measures collections against a plan. It does not tell citizens whether provincial tax systems have become more effective or whether additional money reaches schools and hospitals. Pakistan has spent years negotiating how public money should be divided. The next challenge is making every level of government answer for the revenue it has the power to collect and the expenditure it controls.
Related reading: Pakistan Keeps Raising Taxes. Why Does It Still Need to Borrow?
Sources
- World Bank: Strengthening Fiscal Federalism in Pakistan (July 2026)
- IMF Pakistan Country Report (April 2026)
- Pakistan Ministry of Finance