Provincial Budgets

The linkage between the federal and the provincial budgets, as dictated by the International Monetary Fund (IMF) in the third review documents of the ongoing programme dated May 2026, maintains that provincial tax revenue targets must aim to contribute an additional 0. 3 percentage points of Gross Domestic Product (GDP) to the tax revenue ratio and corresponding primary surplus targets. The projected nominal GDP for 2026-27 is 452 billion dollars therefore the contribution of provinces is estimated at 1. 356 billion dollars or around 398 billion rupees at 290 rupees to the dollar – the rate projected for next fiscal year. The document further notes that “provinces will mobilize revenue by continuing to steadfastly expand the enforcement of the GST on services to gradually cover all sectors of the economy. New agricultural income tax rates will be applied to FY26 agricultural income (with the revenue impact materializing in Fiscal Year 2027). The provinces have made important contributions to domestic revenue mobilization. Provincial tax revenues have been increasing well above nominal GDP growth rates, reflecting largely the tax base expansion of GST on services and stronger enforcement efforts. However, revenues from agricultural income tax fell short of expectations because of delays in the application of revised rates and other implementation challenges. ” Two observations are critical. First, provinces have been unable to build capacity to this day to administer subjects devolved under the eighteenth constitutional amendment (that would have ended the federal budget’s outlay on these subjects), dating back to 2010 – a major rationale behind the 2010, Seventh National Finance Commission (NFC) award’s decision to raise the provincial share of the divisible pool taxes to 57. 5 percent. And, second, the sustained failure of the Federal Board of Revenue (FBR) to increase tax-to-GDP ratio by one percent each year that would have enabled the Centre to generate sufficient revenue to meet its expenditure requirements. The FBR tax to GDP ratio in 2009-10 was 10. 9 percent as per government data while in 2025 it had risen marginally to 11. 2 percent and has been projected at 11. 1 percent in 2025-26. The governments of all three national parties since 2010 began to rely on two revenue sources to generate revenue to meet its needs apart from borrowing heavily domestically and, as and when the current account balance became unsustainable to seek IMF programme loan – in 2008, 2013, 2019, 2023, and 2024: (i) a provincial surplus that has risen from 150 billion rupees in 2010-11 to 1. 79 trillion rupees budgeted for 2026-27; and (ii) petroleum levy placed under Other Taxes that are not part of the divisible pool even though it is a sales tax that ought to be credited under FBR’s subheading sales tax. The levy in 2010-11 budget was 135 billion rupees though the actual collection was 82. 75 billion rupees. The budgeted amount for 2026-27 is 1. 67 trillion rupees. The IMF notes that “petroleum products carry an effective tax rate of 166 percent, leaving revenues heavily reliant on fuel taxation and vulnerable to shocks. ” The irony is that while the political parties that framed the eighteenth constitutional amendment and the seventh NFC award have been in government since 2010, with the exception of three and a half years during the Khan administration, yet in all their dealings with the IMF they have argued that the NFC award needs to be adjusted that would require a constitutional amendment, allowing for a downward revision of the provinces’ share. Some may attribute this approach to the fact that both PML-N (in government in the Centre at present) and the PPPP appointed a technocrat as finance minister with no buy-in for the amendment; however, even Ishaq Dar, representing Punjab in the run-up to the seventh NFC award, and with very close ties to his party’s leadership, has privately and publicly expounded the need for a fairer distribution of FBR revenue. And this is what accounts for periodic comments by the IMF team that there must be a balance in revenue sharing either through a constitutional amendment that would allow the provinces’ share to be scaled back (a decision that the Finance Minister stated has been deferred for next year) and/or increase the provinces own-resources. The Letter of Intent signed by the Finance Minister and Governor State Bank of Pakistan dated April 2026 states that “all provinces agree that they will not introduce any policy or action which could be considered to undermine or run against any of the commitments or policies outlined in this letter or the attached Memoranda of Economic and Financial Policies. ” Total provincial surplus in the federal budget is 1. 79 trillion rupees for next year: Punjab has budgeted a surplus of 910 billion rupees, higher than the total provincial receipts of 749 billion rupees, more than its share of 51. 74 percent in the divisible pool. And budgeted a raise in tax collections on services to 521 billion rupees next year against 363 billion rupees in the revised estimates of the outgoing year – a rise of 44 percent; Sindh budgeted a deficit of 36. 9 billion rupees envisaging an increase in sales tax collections to 456 billion rupees in 2026-27 against the revised estimates of 362 billion rupees in 2025-26 – a rise of a more realistic 26 percent, raising questions as to whether Punjab’s target is doable; Khyber Pakhtunkhwa (KPK) budgeted a deficit of 48 billion rupees with sales tax on services budgeted to rise from the revised 57 billion rupees estimates in the outgoing year to 80 billion rupees next fiscal year – a rise of 40 percent. Balochistan budget has yet to be uploaded on the department’s website and details of tax collection on services are not available. What all four provinces did not implement was the Agriculture Income Tax (AIT) levy that was even remotely commensurate to the tax paid by the salaried. Punjab budget envisages a paltry 12. 5 billion rupees for next year under this head against 3. 99 billion rupees collected in the outgoing year (though the budgeted amount was 10. 5 billion rupees), Sindh budgeted 8 billion rupees in the outgoing year but revised estimates show collection of only 2 billion rupees while next year’s budget estimates a collection target of 6 billion rupees. KPK’s revised estimates for the outgoing year reveal collections of 130 million rupees with next year’s target set at 160 million rupees. Balochistan’s data is not available. The foregoing shows that like the federal budget the provinces’ reliance on indirect taxes has risen, a tax whose incidence on the poor is greater than on the rich, coupled with specific sector subsidies to presumably retain their popularity ratings in their constituencies, while resisting raising the rate of levy on AIT as that would apply to over 80 percent of the provincial and national assembly members. To conclude, if the Centre’s focus is on implementation of the eighteenth constitutional amendment and the seventh NFC award the severe resource constraints facing successive governments may be dealt with. Copyright Business Recorder, 2026

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