A tax cut financed by another unpaid bill offers relief with a concealed expiry date. The bill eventually returns as borrowing, a higher levy, an interrupted public service or money withheld from someone entitled to receive it. Pakistan needs lower and predictable burdens on productive activity. It also needs an honest account of how the transition will be financed. Otherwise, reform merely changes the route by which the citizen pays.

Part VI proposed tests of fiscal justice based on households, firms and services. Those tests now have to confront the budget. A government cannot abolish receipts on Monday and spend the expected benefits of formalisation on Tuesday. New taxpayers take time to identify, property assessments attract objections, and investment responds to more than taxation. A credible programme must survive the interval between changing the law and collecting the promised revenue.

The International Monetary Fund’s (IMF) October 2026 Fiscal Monitor discussion is instructive. It warns of growing debt, higher interest costs and persistent spending pressures. Its accompanying analytical work examines how removing tax distortions can support growth without sacrificing revenue. This creates room for a serious argument about better taxation. It does not certify that any proposed rate reduction will immediately finance itself.

Begin with the financing requirement. Publish revenue net of refunds, essential non-interest expenditure, interest payments and debt falling due. A primary surplus excludes interest; it does not mean the government has stopped borrowing. Refinancing maturing principal is also different from financing a new deficit. Both matter because a government can improve its annual balance and still face a dangerous concentration of repayments.

Debt dynamics depend on the existing debt stock, the interest rate relative to economic growth, the primary balance and other changes, including exchange-rate valuation effects. Currency depreciation can increase the rupee value of foreign-currency debt without an equivalent new cash loan. Guarantees can become obligations. A reform forecast should therefore show what happens when growth disappoints, interest rates rise or the exchange rate weakens, rather than relying on one reassuring projection.

Consider a purely illustrative transition. Suppose permanent rate reductions initially cost Rs. 500 billion annually, while verified additional receipts and recurring expenditure savings provide Rs. 350 billion. The remaining Rs. 150 billion must be financed, the reductions phased, or further durable savings identified. Borrowing that amount at an illustrative 12 percent creates Rs. 18 billion of annual interest once outstanding for a full year, before compounding and refinancing effects. Neither the gap nor the interest disappears because the reform has worthy objectives.

The expenditure review must begin where privilege is easiest to defend and hardest to justify. Require each federal activity to establish its function, cost and continuing necessity, particularly where responsibilities have been devolved. Review concessions, poorly appraised projects and recurring support to enterprises whose losses have become routine.

Protect staff transition and service continuity. Closing an office without reallocating its necessary work is administrative theatre; retaining every office because reform is difficult is equally indefensible.

The World Bank’s 2026 assessment identifies inadequate adjustment of federal expenditure after devolution alongside stagnant revenue collection. That finding strengthens the case for examining retained federal functions. It does not justify assuming that all provincial spending is efficient.

Provinces must disclose their own concessions, administrative costs and allocation choices. Moving a fiscal burden between governments is no substitute for reducing its consolidated cost or improving the service it purchases.

Tax expenditures require the same scrutiny as direct expenditure. Every concession should have an identifiable purpose, estimated cost, beneficiary category and review date. The IMF’s Fiscal Transparency Code calls for regular disclosure and management of revenue forgone through tax expenditures. 

However, the estimated cost of an exemption is not automatically cash available upon repeal. Behaviour changes, provisions interact and some relief protects essential consumption. Count only defensible additional receipts, with distributional effects shown openly.

Refunds must be part of that accounting. Withholding a valid repayment may improve the treasury’s cash position while forcing a business to borrow for wages and inputs. The IMF’s guidance on value-added tax (VAT) refunds warns that poor management can distort deficit measurement and accumulate arrears. 

Publish refunds claims by age and status, fund verified repayments and investigate suspect claims through proper procedures. An unpaid liability does not become a saving when it is omitted from a celebratory collection statement.

Lower consumption taxation can reduce prices, but the size and duration of the effect need careful explanation. If a tax-exclusive price remains Rs. 100, reducing the rate from 18 to 8 percent lowers the fully passed-through consumer price from Rs. 118 to Rs. 108: a reduction of about 8.47 percent, not 10 percent. Actual transmission depends on competition, costs and margins. This is a change in the price level; it does not ensure that prices thereafter stop rising.

Persistent inflation requires examination of demand, supply constraints, energy costs, exchange rates, expectations, impact of higher taxes like petroleum levey and monetary conditions. A tax reduction accompanied by an unfunded expansion of spending can work against its intended relief.

Equally, cutting maintenance, health or productive infrastructure may impair supply and deepen future costs. Fiscal adjustment must distinguish avoidable expenditure from services and investment that sustain livelihoods. Across-the-board restraint is convenient for accountants and often expensive for society. Nor should reduced interest costs be booked before they materialise. Lower policy rates affect government financing through the maturity and repricing of its debt; they do not instantly change every existing obligation.

Longer maturities may reduce refinancing risk while carrying a price. Foreign borrowing may appear cheaper until currency risk is considered. Debt management should publish these trade-offs instead of presenting the cheapest current coupon as the cheapest long-term financing, as being done and defended by Ministry of Finance these days.

Zakat and Ushr can strengthen social protection, but earmarked receipts cannot be treated as unrestricted money for any budgetary purpose. If formal collections merely redirect assistance previously delivered directly, the increase in government receipts overstates the increase in resources available to society. Record additional collection, administrative costs and actual beneficiary support separately. The IMF’s 2026 volume on Middle Eastern and North African taxation discusses Zakat within a wider fiscal landscape, rather than establishing a universal replacement for taxation.

The transition should proceed in published stages. First establish the true cash position, refund liabilities and essential-service commitments. Then widen effective coverage, remove demonstrably unjustified concessions and undertake property-assessment pilots.

Introduce affordable rate reductions against verified gains, with clearly limited financing for any temporary gap. If collections disappoint, explain the shortfall and revise the next stage. Do not retrieve the money silently through delayed transfers or fresh deductions from the same compliant taxpayers.

Pakistan’s debt problem will not be solved by asking working households to finance every failure of the state. Nor will it be solved by announcing relief unsupported by accounts. Fiscal justice requires the politically powerful to surrender unjustified advantages and government to demonstrate what it costs to serve the public.

The final instalment will bring these obligations together: a fiscal compact whose promises citizens can understand, whose costs they can inspect and whose breach they can challenge.

Endnotes

International Monetary Fund, “IMF/Fiscal Monitor Report Annual Meetings, 2026,” official briefing summary, 14 October 2026; see also Fiscal Monitor, October 2026, chapter 1, “Taxing Better to Boost Growth.” The briefing distinguishes fiscal-risk management from efficiency-enhancing tax reform. Neither constitutes a Pakistan-specific estimate of the yield from the author’s proposed rates.

IMF, Fiscal Monitor, October 2024, chapter 1, Online Annexes, debt-dynamics methodology. A simplified consistent accounting identity is d(t) = [(1+i)/(1+g)]d(t−1) − pb(t) + sfa(t), where d is debt/GDP, i the effective nominal interest rate, g nominal GDP growth, pb the primary surplus/GDP, and sfa stock-flow adjustments/GDP. Exchange-rate valuation and other debt-creating flows must be incorporated consistently. This is an accounting framework, not an estimated Pakistani model.

Author’s hypothetical illustration: Rs. 500 billion − Rs350 billion = Rs. 150 billion annual gap; Rs.150 billion × 12% = Rs. 18 billion interest for a full year. These are assumed amounts and a deliberately illustrative borrowing rate, not current Pakistani budget estimates or market quotations. Repeated annual borrowing would add further principal and interest.

World Bank, “Pakistan: Strengthening Fiscal Federalism to Drive Development,” 1 July 2026, accompanying Strengthening Fiscal Federalism in Pakistan. The release discusses federal expenditure adjustment, revenue mobilisation, coordination and predictable local transfers. The sequencing and safeguards proposed here are the author’s assessment.

International Monetary Fund, The Fiscal Transparency Code (2019), Pillar I, including principles 1.1.4 on tax expenditures, 1.2 on frequency and timeliness, and 1.4 on integrity. The reporting arrangements proposed in this article apply these general principles to Pakistan.

Mario Pessoa, Andrew Okello, Artur Swistak, Muyangwa Muyangwa, Virginia Alonso-Albarran and Vincent de Paul Koukpaizan, How to Manage Value-Added Tax Refunds, IMF How To Note 2021/004, 10 May 2021. DOI: 10.5089/9781513577043.061. The note addresses refund policy, administration, treasury management, fiscal statistics and the risks of arrears accumulation. Source

Author’s price arithmetic, assuming full pass-through and an unchanged Rs. 100 tax-exclusive price: (118−108)/118 × 100 = 8.4746%. The statutory rate falls by 10 percentage points; the consumer price falls by about 8.47%. Partial pass-through, input-cost changes and the duration of the tax change alter the observed effect. No Pakistani pass-through coefficient is estimated.

Mario Mansour and Shafik Hebous, eds., Taxation in the Middle East and North Africa: Prospects and Possibilities (IMF, 2026), chapter 3, p. 46, note 13, and chapter 4, p. 74, note 6. References to Zakat concern particular fiscal arrangements and earmarking; they do not establish a Zakat-only financing model for Pakistan.

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.