Taxation to stagnation

Budget 2025-26, tabled in the National Assembly on June 10 and nearly drowned out by opposition slogans, has dominated talk shows and tax seminars ever since.

Two professional gatherings – the ICAP post-budget conference on June 13 and ICMAP’s national seminar a day later – allowed practitioners and policymakers to probe it line by line. Across both halls one message was clear: the fiscal playbook punishes productivity, over-taxes the documented and ducks the reforms that could finally let the economy climb.

The Finance Bill orders the Federal Board of Revenue to collect Rs14.13 trillion next year, about 19 per cent more than it will raise this year in a stagnant economy. Cash-only retail, speculative property and most large farms remain outside the net, so the extra haul must come from salaried workers, exporters, banks, telecoms and a shrinking pool of compliant SMEs.

Roughly Rs400 billion in fresh levies – dearer fuel, wider and harsher withholding – fill the gap. Effective tax burdens already top 40 per cent once the super-tax, WPPF, WWF are counted together 18 per cent indirect tax GST, while dozens of withholding lines turn compliance into a minefield.

Now a new blow to confidence looms. Draft amendments give FBR officers sweeping police powers: arrest without warrant (Section 37AA), detention for 14 days (37B) and on-the-spot closure of premises (14AE). When tax staff recovers a fraction of the trillions they assess, arming them with quasi-criminal authority without due process signals a collapse of safeguards, not the widening of the tax base. Fear and discretion will chase away capital faster than any single surcharge. If compliance is the goal, trust and accountability must come first.

Costs do not end with taxes. Industrial power averages Rs40/kWh, significantly higher than the South-Asian mean, yet the budget slaps 18 per cent GST on imported solar panels, stretching pay-back periods for factories and homes hoping to escape the grid. Almost half of the Rs17.5 trillion federal outlay – some Rs8.2 trillion – goes straight to interest despite steep rate cuts; defence rises 17 per cent to Rs 2.55 trillion; and the development programme falls below one per cent of GDP. Fewer than six rupees in every hundred will be spent on development projects. No surprise total investment languishes at 13-14 per cent of GDP, one of the lowest in the world, while Bangladesh, India and Vietnam get over 30 per cent.

Growth numbers echo the fiscal stance. Over the past three years, real GDP has averaged barely 1.4 per cent. Large-scale manufacturing shrank again; agriculture eked out just 0.6 per cent – and only because livestock data are extrapolated from a 15-year-old census. Pakistan may be the only 21st-century economy where livestock’s share of GDP (15 per cent) exceeds that of all manufacturing (11 per cent). Private investment is stuck, poverty hovers near 45 per cent, youth unemployment around 20 per cent, and real wages are about a quarter lower than in 2022.

To be fair, stabilisation gains are real. Headline inflation has dipped below five percent after 24 per cent and 38 per cent inflation in previous two fiscal years; the policy rate is down to 11 per cent after a 1 100-basis-point cut; reserves exceed $11 billion; the current account shows a $1.9 billion surplus; and default risk has eased. Yet this stability rests on import compression, shrinking consumption and a development freeze – it keeps the aircraft on the runway but without engines.

Budget papers also gloss over awkward gaps. The official unemployment rate of 6.3 per cent still stems from the 2020-21 Labour Force Survey; Dr Hafeez Pasha’s 22 per cent estimate sits outside the narrative. Industrial output uses SME benchmarks last updated more than a decade ago. Such statistical props make GDP look healthier than the landscape of shuttered mills.

Debt magnifies the risk. Public stock has climbed from Rs71.3 trillion in June 2024 to an estimated Rs77.5 trillion and will top Rs82 trillion next year unless the deficit narrows sharply. External debt-service above $20 billion a year virtually guarantees another IMF package once the current one ends.

Why, after dozens of Fund programmes, has Pakistan’s human-development rank slid to 168? Chronic under-investment is one culprit; a dysfunctional energy sector weighed down by a Rs2.2 trillion circular-debt iceberg is another. Education plus health get under three percent of GDP, which are also largely frittered away by weak governance. Fiscal rules exist on paper, yet ministries overspend and seek supplementary approval later. Foreign direct investment barely reached $1 billion last year; domestic capital quietly migrates abroad.

Breaking the loop means thinking again. Five bold moves can reset the trajectory. One, cut and simplify taxes. Abolish the super-tax now; collapse withholding to a handful; cap the tax rate for businesses and individuals to 20 per cent. Two, scrap police-style FBR powers. Build compliance on digital trails, third-party data and quick dispute resolution, not arrests and sealed premises.

Three, repair energy economics. Target subsidies strictly to lifeline users, privatize distribution companies under an effective and smart regulator and suspend GST on solar panels. Four, double human-capital spend together with initiatives to improve outcomes through better governance. Lift education and health to 6.0 per cent of GDP within three years and tie provincial transfers to measurable gains in literacy, nutrition and primary care.

And, five, bind the budget to reality. Publish a cash-release dashboard each quarter; and give standing finance committees teeth to monitor and track outcomes, not just allocations.

None of this is a giveaway. Lower, predictable taxes and transparent accounts are prerequisites for the investment surge needed to fund schools, hospitals, digital networks and climate resilience without endless borrowing. Multilateral loans can lengthen the runway; lift-off demands productivity and trust. Until policy stops punishing compliance and starts rewarding growth – while incentivising the informal sector to come in the net – Pakistan will keep taxing today to fill holes dug yesterday, while tomorrow’s prosperity drifts further away.

Macro-stability is hollow if it results in closure of factories, shrinking incomes and citizens who doubt the state’s capacity to deliver. The choice is stark: keep squeezing the documented and accept stagnation, or redesign the fiscal model so investment and innovation can soar. Pakistan urgently needs the second path. The first has already brought us here.

The writer is a former managing partner of a leading professional services firm and has done extensive work on governance in the public and private sectors. He tweets/posts @Asad_Ashah