The embrace of Nessus
THEY all look the same and for good reason. Every budget over the past 10 years (and more) is pretty much the same with minor differences usually in the gimmickry being advanced in the name of a ‘revenue plan’. And it will be no different this time round when the budget for FY27 is announced.
There is a simple reason for this. A little more than a decade and a half ago Pakistan finally abandoned its last attempt to try and get serious tax reform through. Since then, successive governments have been rolling out various gimmicks, from amnesty schemes to ‘point of sale machines’ to do something that cannot be done with gimmicks. They are trying to document the growing services sector of the economy with these gimmicks, which is like trying to measure the ocean with a teacup.
Consider a little perspective first. Since the 1980s, the single fastest-growing sector of the economy has been services. It was slightly less than half of Pakistan’s GDP back in those days. Today, it is touching 60 per cent while the shares of industry and agriculture have shrunk. But today, services contributes less than 40pc of total revenues while the share of manufacturing can be as high as 55pc.
This is an important crux of the problem. The fastest-growing sector in Pakistan’s economy has made a diminutive contribution to its revenue effort. And there are a number of reasons why. First, successive governments have failed to undertake the kind of tax reforms necessary to keep abreast of the changes sweeping the economy where the services sector is a motor force for growth. For now, the bulk of the revenues contributed by this sector comes from banking and telecom — the low-hanging fruit.
Quite possibly, this is the one budget of the past decade or more which will be defined almost entirely by its revenue effort.
Documenting the transactions taking place in this sector is the first step to reaching them. And for decades there was one big idea on how to do that. It was called ‘value-added tax’, or VAT, and countries around the world implemented it with varying measures of success to help document their economies during periods of change, and help distribute the burden of the tax effort more widely. In some shape or form, the VAT was always on the agenda as a crucial structural reform measure of every IMF programme that Pakistan signed between 1988 and 2008, and there were many. The tax itself was passed into law in 1992, updated in 1996, but never really applied in value-added mode across the board. In 2008, it was supposed to be updated and modernised but the government of the time failed to ensure passage of the legislation so spectacularly that the IMF simply dropped it from all future reform agendas. Since then, it has been abandoned.
In abandoning it, however, a new question arose. If you are not going to use the VAT to document your economy, how exactly are you going to do it? The question was an important one because Pakistan’s economy was growing in directions that its tax machinery struggled to capture. And successive governments gave their own answers to this question.
This was the decade of gimmicks. We had amnesty schemes, proliferating withholding taxes, new taxes on banking transactions of non-filers, attempts to document the economy by triangulating multiple databases, reliance on data from point of sale machines and even one brief and doomed attempt to manually document the retail sector by serving tens of thousands of notices to them.
Of course, all of these failed because, as already stated, they amounted to attempts to measure the amount of water in the ocean using a teacup. Pakistan’s tax-to-GDP ratio stagnated in the single digits and intensified political struggles around the shrinking resource envelope of the state. We saw more gimmicks on the revenue side, like deemed incomes. We saw a ‘hard state’ approach to withdraw all exemptions or rebates offered to schoolteachers and university professors. They leaned harder on fuel taxes than any government in any period in the past. And they printed more money than any other government in any comparable decade in the past. All to help make ends meet at the centre.
Taken together, all these gimmicks made for an unseemly display of desperation. The growing resort to gimmickry was the state thrashing around within the shrinking confines of its resource envelope when it could not generate resources in quantities sufficient to keep pace with its expenditure growth. And they squeezed out a decade for themselves like this.
This was the overriding context within which all budgets in these years were made. And now the context is wrapping itself around them like the cloak of Nessus that once worn began to tighten around the wearer until its grip became inescapable and fatal.
This is what sets the stage for the forthcoming budget. Watch what rabbit they’ll pull out of their hat this time round to call a ‘revenue plan’ for the next fiscal year. They have to give relief to salaried people, and industry is near breaking point. They can’t lean more heavily on fuel or electricity taxes or deem more taxes into being out of foreign assets of the rich.
Keep an eye on the revenue plan they announce as well as the target for incremental revenues they have to pursue. They are chasing incremental revenues of up to 0.6pc of GDP, half of which will come from the federal government through slashing exemptions and their FBR transformation plan, including production monitoring and audits. This was their Achilles heel this year. Now their constraints are tighter still for next year, and options even more limited. Quite possibly, this is the one budget of the past decade or more which will be defined almost entirely by its revenue effort. If there is no attempt to break out of the constraints, then we’ll know we are all headed for the embrace of Nessus.
The writer is a business and economy journalist.
Published in Dawn, June 4th, 2026
