Khurram Schehzad, Advisor to the Finance Minister of Pakistan, has challenged the narrative that Pakistan’s provinces are outperforming the federal government in tax collection, presenting data from the Federal Board of Revenue that suggests provincial revenues remain significantly below their potential despite constitutionally assigned tax bases.
In a post on X on Friday, Schehzad said that a growing perception claims provincial tax performance has been stronger than federal efforts and that this should settle debates around fiscal federalism and resource allocation. However, he argued that the available data points to a different conclusion. According to figures he shared from the FBR for fiscal year 2025, the federal government collected more than Rs13 trillion in taxes and levies, equivalent to 11.3 percent of gross domestic product. He noted that federal tax collections are on a trajectory to reach around 15 percent of GDP by June 2028.
In contrast, combined provincial tax collections amounted to just Rs979 billion, or 0.85 percent of GDP. Schehzad said this figure falls well short of the roughly 3 percent contribution expected from provinces or states in comparable federal systems at a similar level of development. He emphasized that the debate over fiscal federalism should be grounded in outcomes rather than perceptions, stating that the core issue is not the size of the tax base but the revenue actually generated from it.
Schehzad explained that for countries at Pakistan’s stage of development, the benchmark tax-to-GDP ratio is around 18 percent. Of this, approximately 15 percent is typically expected from federal taxes, with the remaining share coming from provincial or state-level taxation. While federal collections are gradually moving closer to this benchmark, he said provincial revenues would need to more than triple by fiscal year 2028 to reach their expected share.
He further pointed out that provincial governments have access to large constitutionally assigned tax handles, yet collections remain far below what the underlying economic base would suggest. A sector-wise breakdown of FBR data, shared by Schehzad, highlighted significant disparities in tax collection efficiency between federal and provincial domains.
The services sector, which falls under provincial jurisdiction, has an estimated taxable base of around Rs29 trillion. Despite this, provinces collected only Rs650 billion from services, translating into a yield of approximately 2.2 percent. By comparison, the federally administered goods sector, with a similar taxable base of about Rs30 trillion, generated Rs3.9 trillion in revenue, reflecting a yield of around 13 percent.
The gap is even more pronounced in agricultural income tax, another subject assigned to provinces. Despite an estimated taxable base of Rs3.7 trillion, provincial governments collected only Rs8.4 billion, resulting in a yield of just 0.2 percent. Property-related taxes, including stamp duties and urban immovable property tax, also remain significantly underutilised. Against an estimated real estate asset base of Rs21.7 trillion, provincial collections stood at only Rs66 billion, or about 0.3 percent.
Schehzad said that while federal collections have already reached 11.3 percent of GDP and are moving toward benchmark levels, provincial collections remain far below expectations despite substantial tax bases in services, agriculture, and property sectors. He stressed that provincial revenue potential remains largely untapped and that progress requires a balanced reform agenda with stronger revenue efforts at every level of government.
He concluded that federal and provincial governments must act as partners rather than competitors. According to Schehzad, closing provincial tax gaps alongside continued federal reform is essential for improving public services, reducing fiscal stress, and building a fairer and more sustainable federation.
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