- Tax collections are expected to increase through expanding the tax net, not burdening taxpayers
The budget for the fiscal year 2025-26 was presented with a total outlay of Rs17.573 trillion and an ambitious 4.2 per cent growth target. This is exactly the budget one can expect under the IMF programme. While the increase in defense expenditures was already anticipated keeping in view the regional situation, tax collections are also expected to increase but this should come via an increase in the size of the tax net rather than increasing the burden on those already in the tax net.
Most of the policy measures regarding taxation revolve around meeting revenue targets. Rationalization of the tariff regime was a signal of opening the economy and pushing the industry to modernize and innovate. Tax simplification was another very important aspect, as tax filing in Pakistan was complicated for layman. Another good thing is eliminating the non-filer category.
There are various contradictions in the budget. On one hand, the government says they want to formalize the economy and increase financial inclusion, but they have increased taxes on withdrawing money from banks for non-filers from 0.6% to 1%, which may discourage financial inclusion. The budget makes no mention of under-taxed sectors such as wholesale, retail, or any commitment to ensure enforcement of agriculture income tax laws in provinces.
While the finance minister highlighted the government’s intention to raise the tax-to-GDP ratio, he overlooked the critical issue of the imbalance between direct and indirect taxes. Reduced tax bill for real estate sector will encourage speculative investments and it also does not improve the external sector picture. 10% salary increase for civil servants may be a welcome move for its recipients, but its impact was limited given the small proportion of the population it benefited.
Even with the relief, the government is still expecting to collect more in direct taxes in FY2025-26 as compared to the previous fiscal, Rs6.9 trillion for FY26 versus Rs5.8 trillion for FY25. More importantly, there has not been much relief regarding indirect taxation. The petroleum development levy (PDL) will now be imposed on furnace oil, in line with IMF commitments, the GST on autos below 850cc will be raised to 18% from 12.5% and a carbon tax of Rs2.5/litre has been imposed on petrol, diesel and furnace oil for FY26.
Solar panel imports, which were exempt from taxes, will now also be taxed at 18%. Overall, revenue collection from indirect taxes is expected to rise to Rs7.2 trillion from around Rs6 trillion. For Pakistan’s salaried majority, indirect taxation and steep utilities bills and tariffs have often been a bigger concern than income taxes, so it is debatable how much relief this budget really provides.
One must also keep in mind that the inflation target for FY26 has been raised to 7.5% from the revised target 5% for FY25, so things are likely to get more expensive too. The budget is essentially projected to be export-oriented. For this purpose, tariff slabs have been revised, and new mechanisms have been put forward to determine the customs levy on the items sent out of the country. There is also an emphasis on providing raw materials at better rates to industries and corporations to boost exports.
However, austerity and consolidation is the primary aim when it comes to the fiscal front. IMF guidelines call for a primary surplus of 2.4% of GDP for FY26, which this budget achieves and the federal deficit has been kept at 5% of GDP. In this context, what the people of Pakistan really need is growth.
And while the budget targets growth of 4.7% of GDP, this seems highly optimistic. Growth for FY25 was at just 2.7% and many have called this estimate too high. One can only hope that the government actually meets its targets this time. Much depends on the how effectively the finance and planning teams are able to achieve this.
This is especially important as far as tax collection and export-oriented measures go, with new measures also taken to bring freelancers and those engaged in online work into the tax net. If the government is serious about reforms, it must pair its fiscal discipline with policies that tangibly ease the burden on ordinary citizens. Otherwise, even a well-balanced budget may fall short of delivering meaningful change.
The FY26 budget is yet another disappointing example of policy driven more by debt obligations than by economic reality. The debt servicing burden is dictating national priorities. Without a serious, coordinated fiscal compact — including debt restructuring and binding safeguards against future debt mismanagement — Pakistan will remain stuck in a vicious cycle of low growth, rising inequality and deepening social pain.