Revisiting Pakistan’s fiscal federalism

The World Bank’s recent publication [Strengthening Fiscal Federalism in Pakistan] has revived an important debate on the effectiveness of Pakistan’s fiscal framework in the wake of Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment]. Rather than questioning the principle of provincial autonomy, the report examines whether Pakistan’s fiscal institutions have evolved in a manner that allows both the federation and the federating units to discharge their constitutional responsibilities efficiently.

The World Bank report concludes that though the constitutional transition towards decentralization has largely been completed on paper, the accompanying fiscal architecture has not kept pace with the redistribution of responsibilities, resulting in persistent structural differences that continue to place pressure on Pakistan’s public finances.

The 18th Amendment remains one of the most significant constitutional reforms in Pakistan’s history. The amendment fundamentally altered the relationship between the centre and the provinces by devolving numerous subjects, including education, health, agriculture, social welfare, rural development and several regulatory functions, to provincial governments.

The amendment also reinforced the constitutional position of local governments, strengthened intergovernmental coordination mechanisms and sought to establish a more balanced federal structure that reflected Pakistan’s diverse political and administrative realities. The amendment represented a broad political consensus that greater provincial autonomy would improve governance, enhance accountability and enable public services to be delivered closer to the people.

The constitutional framework supporting fiscal federalism extends beyond the National Finance Commission, Seventh National Finance Commission Award [7th NFC Award] and even18th Amendment itself.  Articles 153 and 154 of the Constitution designate the Council of Common Interests as the principal institution responsible for resolving disputes relating to subjects shared between the centre and the provinces.

Article 156 of the Constitution establishes the National Economic Council as the country’s highest forum for national economic planning and coordination, whereas Article 160 provides the constitutional basis for the National Finance Commission, which determines the distribution of taxes (divisible) pool revenues between the Federation and the provinces.

Similarly, Article 167 of the Constitution further regulates provincial borrowing, however, Article 164 provides a constitutional mechanism through which provinces may make grants to the Federation under specified circumstances. Constitutional design therefore envisages a cooperative model of fiscal federalism based on consultation, coordination and shared responsibility rather than institutional competition.

The implementation of these constitutional reforms was accompanied by 7th NFC Award, which substantially increased the provincial share in federally collected revenues. The award represented a historic redistribution of fiscal resources and significantly strengthened provincial financial capacity.

The expectation was that as provinces assumed responsibility for devolved functions, the federal government’s administrative footprint and expenditure obligations would reduce correspondingly. The constitutional logic underlying both the amendment and the 7th NFC Award was straightforward. The functions would move to the provinces, the resources would follow those functions, and the federal government would focus primarily on national responsibilities including defense, foreign affairs, macroeconomic management, debt servicing and matters requiring national coordination.

The World Bank report argues that though financial resources were successfully transferred, expenditure responsibilities were never fully realigned. The financing moved, but many functions remained partially or entirely within the federal administrative structure. The result has been the development of a persistent vertical fiscal inequality in which the Federation continues to finance responsibilities despite receiving a declining share of overall revenues after NFC transfers. The report identifies this mismatch as one of the principal structural weaknesses of Pakistan’s current fiscal framework.

The fiscal outcomes presented in the report provide considerable evidence supporting this assessment. The overall revenue collection of Pakistan has remained largely stagnant for more than a decade despite repeated foreign-funded tax reforms. The 7th NFC Award envisaged federal tax revenue reaching 13.25 percent of GDP by fiscal year (FY) 2015 and provincial tax revenue increasing to 1.15 percent of GDP during the same period.

The actual outcomes fell significantly short of these targets. The Federal Board of Revenue increased federal tax collection from approximately 7.9 percent of GDP in FY2009 to only 8.5 percent in FY2015 and approximately 8.8 percent by FY2024 and less than 11 percent both in FY2025 and FY2026. The provincial governments recorded comparatively faster growth in own-source revenues, but provincial tax collection increased only from around 0.3 percent of GDP to approximately 0.7 percent of GDP during the same period, well below the intended target. In FY 2025, it was 0.9% of GDP.

The stagnation becomes even more significant when viewed in the broader context of Pakistan’s fiscal capacity. The total national revenue, including both tax and non-tax receipts, averaged only around 12.5 percent of GDP between FY2009 and FY2024. The figure remains considerably lower than many comparable developing economies. It reached 15.7 percent of GDP in FY 2025.

The World Bank notes that Pakistan’s average tax-to-GDP ratio during FY 2010-2025 stood at approximately 9.9 percent, compared with 10.3 percent for Indonesia, 12.6 percent for Egypt and Mexico, 14.3 percent for Vietnam, 16.8 percent for India and 17.5 percent for Türkiye. The comparison demonstrates that Pakistan’s fiscal challenge is not merely the distribution of revenue between different tiers of government, but the overall inability of the state to mobilize sufficient domestic resources.

The report further observes that though total revenue remained largely stagnant, transfers from the centre to the provinces increased substantially after implementation of the 7th NFC Award. The average NFC transfers increased from approximately 3.2 percent of GDP during FY2002-09 to around 5.1 percent of GDP during FY2010-24. In FY 2025, it was Rs. 9946.703 billion (8.7 of GDP). The federal government’s net revenues after these transfers consequently declined from approximately 4.7 percent of GDP to around 4.2 percent of GDP. The shift significantly adjusted the fiscal position of both tiers of government and increased pressure on the federal budget.

The widening fiscal disparity has been compounded by expenditure patterns that have moved in the opposite direction from those originally anticipated under the constitutional reforms. The federal government continues to carry substantial expenditure obligations that have expanded rather than contracted over time.

The interest payment alone increased from approximately 3.5 percent of GDP in FY2010 to nearly 8 percent of GDP by FY2024. The expenditure burden associated with national defense, energy subsidies, national infrastructure, pensions and other sovereign responsibilities has continued to grow simultaneously. The constitutional transfer of functions therefore occurred without a proportionate reduction in federal spending commitments, producing a structural deficit that successive governments have tried to contain.

The World Bank estimates that the federal primary fiscal deficit widened significantly after devolution. The average federal fiscal deficit increased from approximately 3.2 percent of GDP during FY2002-09 to about 6.2 percent of GDP during FY2010-25.

Perhaps the most striking finding presented by the report is that the reduction in federal revenues resulting from increased provincial transfers, estimated at around 1.9 percent of GDP, closely mirrors the increase in the federal primary deficit of approximately 1.7 percent of GDP after devolution.

The correlation does not suggest that provincial autonomy itself created Pakistan’s fiscal crisis. The finding instead indicates that fiscal decentralization was implemented without a comprehensive restructuring of expenditure responsibilities and revenue mobilization across all levels of government.

The report also raises legitimate concerns regarding the pace of administrative federalization. The expectation following the 18th Amendment was that federal institutions performing devolved functions would gradually transfer personnel, assets and administrative structures to provincial governments. The evidence presented suggests that this transition remains incomplete.

The number of federal employees engaged in functions allocated for devolution has remained broadly unchanged since FY2009, while employment within non-devolved federal sectors increased by approximately 85 percent between FY2009 and FY2024, representing a net increase of more than 191,000 employees. The expansion has largely been attributed to growth in non-military security personnel, but the broader implication remains that the federal administrative footprint has not contracted in proportion to the constitutional redistribution of responsibilities.

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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws.  He holds an LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.

He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation.  He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).

He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024),  Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).

He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).

He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.

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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan.

His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).

Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.

His notable publications are Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.

His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .

The recent publication, coauthored by these writes with Huzaima Bukhari is:                       

Pakistan Tackling FATF: Challenges & Solutions, available at:

https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35

https://www.amazon.com/dp/B08RXH8W46