With limited room for fresh tax measures, the Shehbaz Sharif-led coalition government is set to redefine its taxation strategy in the upcoming fiscal year 2025-26 budget. A shift from “broadening the tax base” to prioritizing “equity” will see higher taxes imposed on a wider range of goods and services, aimed at justifying increased taxation across various income segments. The government is eyeing a record revenue target of nearly Rs14 trillion for FY26, representing a substantial 22 percent increase over projections for the outgoing fiscal year.
Enforcement Challenges and Optimistic Projections
The Federal Board of Revenue (FBR) faces significant challenges in meeting its tax collection targets, as doubts persist over its ability to effectively enforce existing tax laws. Despite concerns about sluggish field operations, no substantial measures have been introduced to bolster enforcement in recent years. An initiative to provide operational vehicles to field officers was also reportedly withdrawn following backlash.
Meanwhile, Ministry of Finance officials continue to present optimistic revenue projections, seemingly hoping for a tax windfall without fully acknowledging prevailing economic headwinds. Large-scale industries remain in decline, while sectors like real estate and consumption goods continue to bear the brunt of excessive taxation, further dampening overall economic activity. With key industries contracting and consumer confidence fading, the feasibility of achieving such ambitious revenue targets in the next fiscal year remains highly questionable.
The government’s proposed tax-to-GDP ratio target for FY26 is 12.3%, comprising FBR’s share (10.6% of GDP), provincial collections, and the petroleum development levy (PDL). Furthermore, revenue collection could face additional setbacks due to a lower-than-expected allocation for the federal Public Sector Development Programme (PSDP), which includes fewer new projects and remains notably smaller than those of Punjab and Sindh. Compounding these fiscal challenges, the federal government is now seeking financial contributions from Punjab and Sindh to fund dam construction, an unusual move that underscores the Centre’s fiscal limitations.
From Broadening to Equity: A New Tax Paradigm
Officials involved in tax policy formulation indicate that the government is now transitioning from a focus on tax broadening measures to a new approach centered on “equity.” This significant shift means that lower tax rates on a wide range of goods and services will be raised, a move the FBR anticipates will generate maximum revenue.
Under the earlier broadening strategy, exemptions were systematically withdrawn, even from essential products like food, stationery items, and books, to expand the tax base. Now, in what is being termed the second phase, the FBR is introducing “equity” as the justification for increasing lower tax rates across various sectors. This approach will likely result in a series of hikes in withholding tax rates, specifically targeting dividends, stock markets, and other financial transactions.
It is also proposed to levy taxes at the Thresher Unit Level, which would require the use of larger machines to improve the quality of tobacco processing — an effort aimed at increasing revenue collection from the tobacco sector.
Digital Payments to Replace Filer-Non-Filer Distinction
At the same time, the FBR intends to implement a new concept for transactions involving banking instruments. This will see the application of lower tax rates to digital transactions and higher rates to cash-based ones. Crucially, this new concept is intended to replace the current distinction between filers and non-filers, marking a significant change in how tax compliance is incentivized.
As part of its proposed new tax measures, the FBR is preparing to introduce a new tax on solar panels, processed food items, and a carbon tax, signaling an effort to expand revenue streams amid ongoing fiscal constraints. These tax measures are likely to spark concerns among consumers and businesses, particularly in the renewable energy sector, where a tax on solar panels could dampen incentives for clean energy adoption. Similarly, additional taxation on processed foods may lead to higher consumer prices, affecting household budgets.
However, in a move to provide temporary relief to the agricultural sector, the government has reportedly secured an exemption from the IMF on fertilizers and pesticides. This exemption, extended for another year, is intended to alleviate cost pressures on farmers struggling with rising input prices and uncertain market conditions.
Salaried Class Relief and Remaining Fiscal Challenges
While the government tightens fiscal measures in other sectors, some relief is expected for the salaried class, particularly those in lower tax slabs. Officials indicate that the exemption limit for salaried individuals may be further raised, alongside a potentially lower tax rate for those earning around Rs100,000 per month.
The reduction in import duties, while aiming to stimulate domestic manufacturing, is also expected to significantly lower tax collection at the import stage, creating further fiscal challenges for an already strained revenue system. The government is also considering extending tax measures to former Fata and Pata members, who are exempt until June 30, 2025. This will be another area where the government plans to include tax measures in the budget. However, the Sindh government has asked the federal government to avoid all taxes, including the agriculture income tax on farm products.
Former FBR chairman Dr. Irshad Ahmed has criticized the government’s persistent reliance on policy measures, arguing that new tax measures alone would not resolve systemic revenue challenges. According to him, such additional revenue merely increases the burden on existing taxpayers while failing to expand the tax base effectively. Dr. Ahmed stressed that the core issue lies in enforcement, which requires a complete overhaul of the FBR’s field formations. He pointed out that officers remain confined to their offices with little access to potential taxpayers, rendering tax collection efforts ineffective. He also recalled a previous attempt to establish strong tax offices at the district level, an initiative that was ultimately blocked by bureaucratic resistance.
Despite possessing extensive taxpayer data, Dr. Ahmed noted that the FBR currently lacks the capacity to analyze it effectively and identify tax evaders. Addressing these critical gaps requires significant investment in capacity-building, infrastructure, and operational enhancements — elements currently missing from the government’s strategy. Without a robust enforcement framework, new revenue measures will likely provide only a temporary financial boost, while those outside the tax net continue to evade their dues, making the feasibility of achieving ambitious revenue targets highly questionable.
