Tax expenditure & myth of fiscal deficit—II The hidden budget of the elite

The federal budget for 2026-27 will be presented on June 10, 2026 with the customary emphasis on fiscal discipline, revenue mobilisation and compliance

The federal budget for 2026-27 will be presented on June 10, 2026 with the customary emphasis on fiscal discipline, revenue mobilisation and compliance. Policymakers argue that the country’s fiscal constraints leave little room for alternatives. New taxation measures are defended as unavoidable. The underlying message remains unchanged: Pakistan needs more revenue and taxpayers must contribute more.

Part I of this series demonstrated that the debate is incomplete. Official tax expenditure reports reveal that the state voluntarily foregoes revenue amounting to trillions of rupees every year through exemptions, concessions, preferential rates, exclusions, credits, allowances and special tax regimes. Before asking who should pay more taxes, Parliament and the public are entitled to ask a simpler question: who is already paying less, and why?

This question is rarely addressed because tax expenditures are largely invisible in public discourse. When the government allocates funds through the Public Sector Development Programme, subsidises a commodity or finances a welfare scheme, the expenditure appears in budget documents and is debated in Parliament.

Tax expenditures operate differently. The benefit is delivered through the tax code rather than through an expenditure line. Economically, however, the result is often identical. Revenue that would otherwise have accrued to the public exchequer is transferred to specific sectors, activities or groups or insttutions.

Tax expenditure is a hidden budget. It distributes economic benefits without appearing as expenditure in the conventional sense. In many cases, the beneficiaries remain unidentified, the objectives are vaguely defined and the outcomes are never independently evaluated.

According to Tax Expenditure Report 2025 at the website of federal Board of Revenue(FBR), revenue foregone during fiscal year 2023-24 was estimated at Rs. 2.435 trillion. The figure itself is staggering. The more important question concerns its composition and beneficiaries.

Income tax concessions constitute one component of this hidden budget. These include reduced rates, sector-specific incentives, preferential treatment for selected activities and special tax regimes. Many of these measures were originally introduced with legitimate objectives such as encouraging investment, promoting exports or supporting particular sectors.

The difficulty arises when temporary incentives become permanent entitlements. Once granted, concessions develop influential constituencies that resist their withdrawal regardless of whether the original objective has been achieved. The issue is not unique to Pakistan. Governments across the world use tax incentives to influence economic behaviour.

Successful countries, however, periodically evaluate whether such incentives produce measurable benefits. Tax expenditures that fail cost-benefit analysis are modified or withdrawn. Our experience has generally been different. Incentives often survive for decades, long after their effectiveness becomes questionable.

The coexistence of high statutory tax rates and extensive concessions illustrates this contradiction. Pakistan’s documented businesses frequently face some of the highest effective tax burdens in the region. Banks, large corporations and formal enterprises are subject to multiple layers of taxation, advance taxes and withholding obligations.

Simultaneously, preferential treatment continues through numerous special provisions. The result is a fragmented tax system that combines high rates with selective privileges rather than broad-based and equitable taxation.

Sales tax expenditures represent an even larger component of the hidden budget. Exemptions, zero-rating and special schedules have accumulated over time, creating a system far removed from the original principle of a broad-based value-added tax.

Every exemption narrows the tax base and shifts the burden elsewhere. To compensate for revenue losses, governments rely increasingly on higher rates, indirect taxation and administrative measures imposed upon compliant sectors.

Not every sales tax exemption is undesirable. Basic food items, medicines and socially sensitive goods may justify special treatment. The problem arises when exemptions proliferate without transparent justification or periodic review. A tax system designed around numerous exceptions inevitably creates opportunities for rent-seeking, lobbying and unequal treatment.

Customs duty concessions constitute another major category of tax expenditure. Historically, such concessions were justified on the grounds of industrialisation, export promotion and technological modernisation.

The success of East Asian economies is often cited to support targeted incentives. What is frequently overlooked is that successful industrial policies were accompanied by strict performance requirements. Incentives were linked to exports, productivity gains and technological upgrading. Firms that failed to deliver lost preferential treatment.

Pakistan followed a different trajectory. Concessions intended as temporary support frequently evolved into permanent privileges. Protected sectors became dependent on favourable treatment while competitiveness remained weak. Instead of encouraging innovation, many concessions merely reduced competitive pressure.

The debate becomes particularly important in the context of persistent fiscal deficits. Successive governments have justified additional taxation by pointing to resource shortages. Yet official tax expenditure reports reveal substantial revenue foregone through policy choices. This does not mean that every concession should be abolished. It does mean that every concession should be subjected to rigorous scrutiny.

A fundamental question remains unanswered: who benefits from these concessions? Tax expenditure reports quantify revenue foregone but generally do not identify the principal beneficiaries.

Parliament can examine allocations made through the budget. Comparable transparency is often absent when benefits are distributed through the tax system. Citizens therefore know how much is spent on development projects and subsidies but remain largely unaware of who receives the largest tax preferences.

The lack of transparency weakens democratic accountability. Public expenditure is debated, audited and scrutinised. Tax expenditure frequently escapes equivalent examination despite its substantial fiscal cost. This asymmetry creates an environment in which privileges can persist without meaningful public debate.

The issue is not whether every tax concession is unjustified. Many may serve legitimate economic and social purposes. The issue is whether benefits worth trillions of rupees should continue without systematic evaluation.

Every tax expenditure should be accompanied by a clear statement of purpose, identification of beneficiaries, quantification of revenue costs and independent assessment of outcomes. Concessions that fail to achieve their stated objectives should automatically expire unless renewed through parliamentary approval.

The conventional narrative presents fiscal deficit as evidence that citizens are not paying enough taxes. The evidence suggests a more complex reality. Fiscal deficits are influenced not only by what governments collect but also by what they deliberately choose not to collect. Tax expenditures therefore deserve the same level of scrutiny as ordinary public expenditure.

The hidden budget of the elite cannot remain hidden indefinitely. Before governments ask citizens to bear additional fiscal burdens, they must explain why trillions continue to be distributed through exemptions, concessions and special regimes whose effectiveness often remains unproven. Fiscal responsibility requires scrutiny of both sides of the ledger.

The next Part of this series examines the largest and most controversial component of this hidden budget: sales tax zero-rating on petrol, high speed and light diesel and kerosene since March 1, 2022, the rise of petroleum levy and the implications of these policies for fiscal federalism and provincial rights under Article 160 of the Constitution.

[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 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.