As Fiscal Year 2025 concludes and the nation anticipates the Federal Budget for FY26, a profound sense of expectation permeates the air. The weight of this anticipation rests heavily on authorities, for this budget has the potential to be more than just a collection of numbers — it can serve as a bold, transformative blueprint, seizing the opportunity to fundamentally reshape our macro-fiscal framework.
The Federal Budget FY26 must meticulously design Pakistan’s fiscal framework based on a trio of foundational pillars: Good for Growth Reforms, Comprehensive Expenditure Reforms, and Equitable Domestic Resource Mobilisation (DRM) Reforms.
This integrated approach has the capacity to cultivate a fertile ground for private sector investment. As the state’s footprint gradually recedes, this strategy will plant the seeds of sustainable growth and widespread prosperity. This blueprint should guide the nation toward a future where DRM is a shared journey, fostering a fairer, simpler, and more business-friendly Pakistan.
Good for Growth Reforms: In the context of Federal Budget FY26, Good for Growth Reforms must primarily focus on measures designed to stimulate economic activity, attract both domestic and foreign investment, enhance productivity, improve competitiveness, and promote sustainable development, while simultaneously addressing underlying structural imbalances.
Formalizing Pakistan’s economy is paramount, yet progress has been limited as a substantial cash economy, estimated at nearly Rs9,400 billion, continues to flourish. Pakistan must pivot from punitive measures to a robust, incentive-based approach to instigate this crucial transformation.
A key initial step is to significantly promote digital government payments, such as poverty alleviation funds, through RAAST (Inter-Bank Fund Transfer) and digital wallets in FY26, which can substantially enhance financial inclusion. To further embed this shift, authorities should aim for a large number of active RAAST QR codes, debit and credit cards, supported by a preferential GST rate of 10% for digital transactions versus 18% for cash. This clear distinction will actively steer the economy towards formal participation.
National Tariff Reform, a critical lever for enhancing Pakistan’s economic competitiveness, can systematically dismantle the intricate web of Additional Customs Duties and Regulatory Duties and significantly reduce the myriad of customs duty slabs. This strategic recalibration will effectively lower input costs, foster industrial growth, curb the pervasive issue of smuggling, and cultivate a transparent and more equitable trade landscape.
To boost formal business compliance, Budget FY26 should boldly incentivize registered sales tax filers and companies to also file income tax returns, thereby fostering a culture of comprehensive tax compliance. Simultaneously, it must bring large sectors such as wholesale, retail, real estate, and services into the tax net by entirely eliminating the non-filer category, thus ensuring a broader and fairer revenue base.
Prioritizing economic documentation and digitalization, the budget should leverage advanced data analytics and a robust track-and-trace system to expose hidden economic activity and clamp down on illegal trade, thereby strengthening fiscal transparency and overall revenue mobilization.
Embracing the “Keep It Simple and Straightforward” principle, Budget FY26 should diligently eliminate distortions, streamline tax procedures, and digitize business licensing and registrations. Through these integrated reforms, the budget will cultivate predictability and transparency, transforming the tax and trade system from a source of friction into a potent catalyst for economic growth, unlocking untapped investment potential and formalization across all sectors. Furthermore, a decisive climate and clean energy initiative must be propelled by a well-designed incentive-based strategy.
Comprehensive Expenditure Reforms: Recognizing that expenditure reform is often misconstrued as mere austerity, Budget FY26 must present a clear, forward-looking vision focused on two primary goals: firstly, radically transforming current and development spending for enhanced efficiency and optimized resource utilization; and secondly, elevating social welfare from simple handouts to transformative initiatives that actively promote distributive justice, sustainable job creation, and lasting societal impact.
Expenditure reforms should systematically reduce unnecessary federal government expenditure on devolved subjects, thereby streamlining responsibilities and empowering provincial governments. A key element involves sharing the projected Rs715 billion poverty alleviation expenditure with provincial governments, ensuring more localized and effective outreach programs.
Direct subsidy management should also undergo a fundamental overhaul, transitioning from an inefficient electricity utilization-based system to a truly equitable income-based subsidy regime. This transition will ensure that support reaches those who need it most, without distorting crucial market signals.
Crucially, substantial savings in markup spending will naturally accrue through a reduced policy rate, which can be further complemented by strategic debt re-profiling efforts, potentially yielding hundreds of billions of rupees in fiscal benefits.
A comprehensive approach further entails a swift move to a Treasury Single Account for optimizing cash flows, completing the implementation of a contributory pension system, and monetizing perks associated with housing and cars for government officials — these steps are vital for modernizing public finance. Finally, the budget must prudently accommodate necessary upward revisions in defence spending, meticulously balancing fiscal discipline with national imperatives.
Equitable DRM Reforms: Let equity, encompassing both vertical and horizontal dimensions, serve as the unwavering compass guiding our DRM, a hallmark to be etched into the very soul of our tax policy. Our vision must be one of expansive embrace, broadening the tax base not through coercive measures, but by cultivating a pervasive culture of shared responsibility and voluntary compliance.
We must dare to lower the burden of tax rates, recognizing that a lighter load inherently encourages greater participation and compliance.
Thoughtful withdrawal of the often cumbersome web of major withholding provisions will pave the way for fairer and more direct revenue collection at both federal and provincial levels. A key element in this strategy is the gradual reduction of the corporate tax rate to a regionally competitive level over five years and the complete elimination of the super tax within three years, thereby fostering long-term business investment and igniting robust economic growth.
Budget FY26 should undertake comprehensive reforms to the Personal Income Tax system to effectively ease inflationary pressures, particularly for the middle class. Avenues to achieve this include increasing the taxable income threshold to Rs1.0 million for all individuals, implementing appropriate slab reductions for higher incomes, and abolishing the 10% salary surcharge within two years — all designed to enhance disposable income and stimulate demand.
In the realm of indirect taxation, a phased reduction of sales tax on goods to 12-15% will align Pakistan with regional averages, significantly enhance competitiveness, and help curb inflation. The budget must include concrete steps for expediting the harmonization of federal and provincial sales tax rates, thereby eliminating distortions and complexities for easier compliance and more effective DRM.
Authorities should clearly signal their intent to move beyond an over-reliance on regressive transactional taxes — typically levied on economic activities like sales, imports, or services — towards a more equitable system that predominantly taxes actual income and newly created wealth.
Finally, Budget FY26 must provide the right impetus to effectively include capital gains tax, inheritance tax, and the burgeoning e-commerce sector, all of which currently remain largely outside mainstream taxation, thereby ensuring a more comprehensive and equitable revenue framework.
The substantial imprint of provincial development budgets, totaling Rs2,800 billion, underscores the imperative for a restricted and software-focused federal Public Sector Development Program, compelling the federal government to concentrate exclusively on areas strictly within its constitutional domain.
As provinces assume greater responsibility for key social sector efforts and their associated funds, they are no longer peripheral actors but pivotal agents of change, promising a brighter tomorrow. The ultimate success of our growth, expenditure, and DRM reforms hinges critically on their ability to mobilize vital revenues — particularly from agriculture and property — efficiently manage these resources, and deliver essential services that directly uplift the lives of citizens.
