Pakistan’s tax performance continues to highlight a significant and persistent gap between federal and provincial revenue collections, raising concerns about fiscal federalism and the sustainability of public finances. While the federal government has demonstrated steady progress in improving tax collection, provincial tax efforts remain well below their estimated potential, limiting the overall effectiveness of the country’s revenue framework.
In the fiscal year 2025, the federal government collected more than Rs13 trillion in taxes and levies, equivalent to 11.3% of gross domestic product (GDP), which stood at Rs114.7 trillion. This performance reflects continued improvements in federal tax administration and policy reforms aimed at broadening the tax base and enhancing compliance. For countries at Pakistan’s level of economic development, a tax-to-GDP ratio of around 18% is generally considered healthy, with approximately 15% expected to come from federal collections. Based on current trends, the federal tax system is projected to reach the 15% of GDP benchmark by June 2028.
In contrast, provincial governments collectively raised only Rs979 billion during the same fiscal year, representing just 0.85% of GDP. This figure falls significantly short of the commonly cited target of 3% of GDP for provincial tax collections. The disparity underscores structural weaknesses in provincial tax policy, administration, and enforcement, despite provinces having jurisdiction over several high-potential tax bases.
According to Khurram Schehzad, writing on his X platform, the focus of tax analysis should shift from headline collection numbers to the actual revenue yield from the existing taxable base. This approach highlights inefficiencies in tax effort and enforcement, particularly at the provincial level, where large segments of the economy remain undertaxed despite clear legal authority to tax them.
The revenue gap is especially evident across key sectors under provincial taxation. The services sector, which is constitutionally a provincial subject, has an estimated taxable base of Rs29 trillion. However, provincial governments collected only Rs650 billion from this sector, translating into a yield of just 2.2%. This contrasts sharply with federal tax performance on goods, where collections reached Rs3.9 trillion, equivalent to around 13% of the estimated tax base.
Agricultural income tax presents another stark example of underperformance. Despite an estimated taxable base of Rs3.7 trillion, provincial collections from agricultural income amounted to only 0.2% of this base. This reflects longstanding challenges in taxing agriculture, including political resistance, weak assessment mechanisms, and limited enforcement capacity at the provincial level.
Property-related taxes also remain significantly underutilized. Stamp duties and urban immovable property taxes together generated revenue equivalent to just 0.3% of an estimated real estate asset base of Rs21.7 trillion. This level of taxation is considerably lower than that of several regional peers, despite rapid urbanization and rising property values in major cities.
Overall, federal tax yields exceed 17% of their estimated tax base, while provincial yields remain far below potential across most major revenue heads. This imbalance places additional pressure on federal finances and limits the resources available to provinces for public service delivery, infrastructure development, and social spending.
Addressing provincial tax gaps alongside continued federal reforms could significantly improve public service provision, reduce fiscal stress, and support a more balanced system of fiscal federalism. Analysts increasingly argue that discussions on resource allocation and intergovernmental fiscal arrangements should be grounded in measurable revenue outcomes rather than perceptions of inequity.
Strengthening tax performance at both federal and provincial levels is widely seen as central to unlocking Pakistan’s economic potential. Without meaningful improvements in provincial revenue mobilization, the benefits of federal tax reforms may remain constrained, underscoring the need for coordinated and outcome-focused fiscal policy across all tiers of government.
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