Tax expenditure & myth of fiscal deficit—V Roadmap for self-reliance

The federal budget for fiscal year 2026-27 is now expected on June 12, 2026. The date has changed twice, but the script remains familiar. Fiscal deficit is being cited as justification for additional taxation, IMF targets are shaping fiscal choices, and the easiest burden will once again fall on documented businesses, salaried persons, electricity consumers, petroleum users and withholding agents. This concluding part of the series argues that Pakistan does not need another budget built on extraction from the already taxed. It needs a roadmap for self-reliance and surplus budgeting.

The preceding articles established the central point. Pakistan’s deficit is not merely a result of inadequate revenue. It is also produced by deliberate foregone revenue, exemptions, concessions, tax expenditures, weak provincial taxation, petroleum levy outside the divisible pool, and refusal to tax economic rent. A country voluntarily foregoing trillions cannot honestly claim that its only option is more taxation of the compliant.

The first step towards surplus budgeting is a legally binding tax expenditure review. Every exemption, concession, reduced rate, exclusion, credit and special regime must be placed before Parliament with five disclosures: beneficiary class, legal basis, revenue cost, policy objective and measurable outcome. No concession should survive beyond three years unless Parliament renews it after public cost-benefit review. Tax expenditure should be treated as public spending through the tax code.

The second step is restoration of honesty in petroleum taxation. If petroleum levy is non-tax revenue, as shown in federal budgets approved by Parliament, then GST forgone on petroleum products remains tax expenditure. It must be included in official tax expenditure reports. More importantly, the practice of replacing divisible-pool GST with non-divisible petroleum levy must be reviewed in the light of Article 160 and Article 160(3A) of the Constitution. Fiscal consolidation cannot be achieved by weakening provincial rights through accounting innovation rather fraud.

The third step is taxation of economic rent without burdening small cultivators. Agricultural rent, large landholdings, peri-urban gains, change-of-use windfalls and land value appreciation created by public infrastructure must contribute to provincial revenues. This is not taxation of subsistence farming. It is taxation of unearned rent. Provinces should adopt progressive agricultural rent and land value taxes, protect small farmers, and use digital land records to tax capacity rather than acreage alone.

The fourth step is a provincial revenue compact. Provinces cannot demand constitutional autonomy while leaving their own tax bases underused. Urban immovable property, agricultural rent, services, motor vehicles, environmental levies and local government finance must be modernised. A realistic target should be to raise provincial own-source revenue gradually to at least 3 percent of GDP in the medium term and higher thereafter. This would reduce dependence on federal transfers and restore meaning to fiscal federalism.

The fifth step is replacement of withholdingisation with real taxation. Pakistan’s tax system has become dependent on withholding agents. Banks, employers, companies, utilities and service providers collect taxes for the state, while the tax machinery avoids serious assessment, audit and base expansion. Withholding taxes should be reduced to genuine advance tax instruments. Final, minimum and punitive withholding regimes must be phased out. Documentation should be achieved through integration of databases, not through arbitrary transactional taxation.

The sixth step is a broad, flat, low-rate and predictable tax structure. High rates encourage evasion, litigation and informality. Low, uniform and predictable rates encourage compliance. Corporate taxation should be rationalised. Multiple rates, special regimes and distortionary provisions should be reduced. Sales tax should move towards one lower harmonised rate with minimum exemptions and full input adjustment. The objective should be to tax more people fairly, not the same people repeatedly.

The seventh step is a national tax agency with provincial participation. Fragmented federal and provincial tax administrations create duplication, disputes and compliance costs. Pakistan needs a federalised tax agency operating through a common database, single registration, single return portal, harmonised audit selection and shared revenue accounting. Provinces must remain constitutionally autonomous, but administration can be integrated by consent. Taxpayers should not suffer because governments cannot coordinate.

The eighth step is expenditure discipline. Self-reliance is impossible without reducing waste, duplication and elite privileges in public expenditure. Non-development spending, loss-making state-owned enterprises, untargeted subsidies, excessive administrative costs and overlapping federal-provincial functions must be reviewed. Development expenditure should prioritise water, agriculture, energy efficiency, logistics, education, health, climate resilience and export capacity. Surplus budgeting cannot come from revenue alone; it also requires spending discipline.

The ninth step is debt reduction through primary surpluses. Pakistan must commit to a rolling five-year fiscal rule. The rule should require primary surplus, transparent treatment of contingent liabilities, limits on non-tax levies, parliamentary approval for major tax expenditures and publication of a tax expenditure statement with every budget. Debt sustainability cannot depend on IMF waivers and rollovers. It must be achieved through domestic fiscal discipline.

The tenth step is export-led self-reliance. Revenue reform cannot be separated from growth. Pakistan needs policies that support productivity, value addition, digital exports, agro-processing, engineering goods, minerals, IT services, regional trade and small enterprise formalisation. Tax policy should reward investment, employment, exports and innovation rather than speculation in land and protected rent-seeking.

A surplus budget is not impossible. It requires political courage. Rationalising even part of annual tax expenditures, restoring GST transparency on petroleum products, taxing economic rent, strengthening provincial revenues, reducing wasteful expenditure and broadening the base through low-rate compliance can create fiscal space far greater than repeated increases in withholding taxes and levies.

The real obstacle is not technical capacity. It is political economy. Every serious reform touches a protected interest. Exemptions have beneficiaries. Untaxed rent has owners. Non-divisible levies have fiscal convenience. Weak provincial taxation has political protectors. Withholdingisation benefits a tax machinery that prefers easy collection over real reform.

Pakistan’s fiscal crisis will not end through another ritualistic budget. It will end when the state stops treating compliant citizens as the only available revenue source. It will end when tax expenditure is scrutinised like public spending, when economic rent is taxed, when provinces use their constitutional powers, when petroleum taxation respects fiscal federalism, and when public expenditure is disciplined.

Self-reliance is not a slogan. It is a fiscal design. A surplus budget is not achieved by crushing the economy. It is achieved by ending privileges, taxing capacity, spending wisely and restoring constitutional discipline. Pakistan has lived too long under the myth that deficits are unavoidable. The evidence examined in this series points to a different conclusion: deficits are manufactured when the state refuses to collect what is justly due and borrows to finance what it chooses not to reform.

[Concluded]

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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.