Beyond Public Finance: Towards Constitutional Poli…
The preceding parts of this series began with a simple question: why do technically sound economic and tax reforms repeatedly fail in Pakistan? The answer cannot be found in tax rates, revenue targets or administrative capacity alone. Pakistan’s fiscal failures arise from the constitutional and political order within which taxation, expenditure, borrowing and distribution take place.
The country does not merely have an inefficient tax system. It has a fiscal state whose incentives favour immediate extraction, selective enforcement, negotiated privilege and recurring external dependence.
The previous part IX applied this framework to contemporary proposals for closing Pakistan’s tax gap. Empirical estimates of untaxed capacity, sectoral inequality and revenue potential are valuable.
Data tell us where disparities exist and what additional resources might theoretically be mobilised. However, data do not explain why those disparities have survived repeated reform efforts, nor why the same burdens continue to fall upon documented businesses, salaried persons and ordinary consumers. That explanation lies beyond public finance.
Constitutional Political Economy (CPE) begins from the recognition that the state is not an abstract guardian automatically pursuing collective welfare. It consists of institutions and individuals responding to incentives, protecting authority, bargaining over resources and operating within formal and informal rules.
Fiscal outcomes reflect the distribution of political power as much as principles of efficiency or equity. Pakistan’s tax crisis is the fiscal expression of that political order.
Revenue without a fiscal compact
A sustainable tax system rests upon a fiscal compact between citizen and state. Citizens contribute according to lawful and reasonably distributed burdens. The state, in return, provides security, justice, education, healthcare, infrastructure, economic opportunity and protection against vulnerability.
Pakistan has progressively weakened both sides of that compact. The state demands more from those already visible while tolerating privileges for those capable of political resistance.
Citizens encounter taxes in electricity bills, fuel prices, banking transactions, telecommunications, imports, contracts and ordinary consumption. Much of this extraction occurs without determining their actual income or ability to pay.
Public services remain inadequate and uneven. Taxpayers are then told that services cannot improve because revenue is insufficient. The state responds to the resulting mistrust with more withholding, surveillance and coercion.
This creates a destructive cycle: weak services reduce consent; declining consent increases reliance on coercive collection; coercion deepens mistrust; mistrust encourages informality; and informality becomes the justification for still more transaction-based taxation. A fiscal compact cannot be created through fear.
Restoring income taxation
The first requirement is to restore the meaning of income tax. Income taxation should ordinarily measure net income after legitimate costs and losses and impose liability according to capacity to pay. Pakistan has instead constructed a vast structure of advance, minimum, final, presumptive and withholding taxes imposed upon transactions, turnover and gross receipts.
This structure is administratively convenient. It allows the state to collect through banks, employers, utilities, import authorities and private businesses without developing the institutional capacity to determine real income. Its convenience is precisely the problem.
Withholding should remain where deduction at source is logically connected with the recipient’s income and operates as an adjustable advance—principally salaries, dividends and profit on debt. It should not function as a substitute for return-based taxation, proper assessment and intelligent audit.
Turnover cannot permanently replace income. A business earning a narrow margin cannot justly be taxed in the same manner as one earning extraordinary profits merely because both record similar receipts. Minimum and presumptive regimes penalise investment, distort business structures and convert losses into taxable events.
The objective should not be abolition of withholding overnight. It should be a legislated transition towards a system in which withholding becomes limited, adjustable and subordinate to final determination of income.
A genuine value added tax
The second requirement is restoration of sales tax as a genuine value added tax. Pakistan has retained the vocabulary of VAT while repeatedly breaking its chain through exemptions, special schedules, blocked credits, fixed regimes, multiple rates and arbitrary restrictions. The result is cascading, litigation, refund accumulation and a bias against documented production.
A genuine VAT should apply through a broad and coherent base, a substantially lower standard rate and unrestricted adjustment of legitimate input tax.
Exemptions should be confined to carefully identified necessities and public-interest activities. Refunds should be treated as taxpayers’ money, not as an unofficial source of financing for the state.
The constitutional division between sales tax on goods and services need not condemn businesses to fragmented administration. Harmonised definitions, a common return, integrated registration, shared information and an agreed clearing mechanism can preserve provincial taxing authority while reducing compliance costs.
Coordination is essential. Re-centralisation is not. Pakistan’s federation was not designed solely for administrative convenience. Article 160 of the Constitution protects the distribution of specified revenues between the Federation and provinces, while Article 140A requires devolution of political, administrative and financial responsibility to elected local governments.
Fiscal reform must strengthen all three levels of constitutional government rather than treating provinces and local bodies as spending agencies dependent upon federal discretion.
Ending taxation through labels
A constitutional fiscal order must also respect the actual nature of each levy. Parliament cannot convert a provincial tax into a federal tax merely by attaching a different label. Nor can the executive create a new taxable event through rules, notifications or administrative directions where the legislature has not imposed one.
Article 77 requires federal taxation to rest upon parliamentary authority. Articles 4, 24 and 25 bring legality, protection against arbitrary deprivation and equality into the same constitutional inquiry. Legislative enactment is indispensable, but enactment alone does not validate a levy that exceeds legislative competence, discriminates irrationally or denies due process.
The annual Finance Act should not be used as a container for major structural changes receiving limited parliamentary examination. Essential elements of a tax—the subject, person liable, measure, rate and taxable event—must be stated clearly in primary legislation.
Delegated legislation may implement the law. It cannot become an alternative legislature.
Expenditure is the other side of taxation
The debate over Pakistan’s tax-to-GDP ratio often proceeds as though every additional rupee collected automatically advances public welfare. It does not.
Taxation and expenditure form a single constitutional relationship. Additional revenue may finance education and healthcare. It may also be absorbed by debt servicing, administrative expansion, losses of state-owned enterprises, poorly targeted subsidies, opaque procurement and privileges protected from scrutiny.
Pakistan’s official tax-expenditure reporting itself demonstrates that concessions operate like spending conducted through the tax system. The Tax Expenditure Report 2026 estimated tax concessions for fiscal year 2024–25 at approximately Rs. 2.353 trillion. These concessions embody distributive choices as real as appropriations appearing in the budget.
Every exemption should have a stated objective, estimated cost, defined duration and measurable outcome. Concessions that cannot demonstrate public benefit should lapse automatically.
The same discipline must apply to direct expenditure. Parliamentary scrutiny should extend beyond total allocations to outcomes, beneficiaries and opportunity costs. Public accounts must reveal who ultimately receives subsidies, guarantees, concessional financing and protection from market competition.
Citizens cannot be expected to finance indefinitely a state whose expenditure priorities remain insulated from them.
Independent administration and adjudication
Tax reform cannot succeed while policy, administration, investigation, recovery and adjudication remain entangled.
Tax policy should be developed transparently through a professional body answerable to Parliament and required to publish the expected incidence, revenue effect and constitutional basis of proposed measures. Administration should focus on facilitation, risk-based enforcement and accurate determination of liability rather than annual collection pressure.
Disputes require independent and specialised adjudication. A taxpayer challenging the revenue authority should not remain trapped within institutions structurally dependent upon the same executive machinery.
Delayed justice is itself a fiscal burden. Money remains blocked, business decisions are postponed, contingent liabilities accumulate and confidence in lawful administration declines.
Effective remedies are not concessions to taxpayers. They are part of the constitutional infrastructure of revenue mobilisation.
Digitalisation under law
Pakistan does not lack data. Identity records, financial transactions, property ownership, travel, utility consumption, vehicle registration and corporate information already create an extensive digital footprint.
The decisive issue is how public power uses that information.
Digitalisation can reduce compliance costs, identify inconsistencies and support risk-based audits. It can also facilitate indiscriminate notices, automated demands, surveillance and selective enforcement.
Technology must operate under law. Taxpayers should know what information is held, how it is used and how an incorrect inference may be challenged.
Algorithms should assist lawful decision-making, not replace reasoned orders or reverse the burden of proof.
A defective fiscal state does not become just by becoming digital. It may merely become more efficient at reproducing its defects.
Moving beyond external compulsion
Pakistan’s present economic programme continues to emphasise broadening the tax base, improving administration, strengthening spending efficiency, reforming state-owned enterprises and enhancing public financial management.
These objectives are necessary and appear repeatedly in the country’s engagements with the International Monetary Fund (IMF).
External programmes can enforce immediate discipline. They cannot create lasting constitutional ownership.
A reform adopted to secure the next review may produce compliance with a benchmark. A reform developed through informed parliamentary consent, federal agreement and public accountability is more likely to survive political change.
Pakistan must move from reforms designed for external certification to reforms grounded in domestic legitimacy.
The central question should not be whether the IMF approves a tax measure. It should be whether the measure advances a coherent constitutional fiscal compact that Pakistan would choose even in the absence of external pressure.
From rent distribution to productive citizenship
The deeper transformation concerns incentives. A rent-based political economy rewards access to authority. A productive political economy rewards innovation, labour, investment, competition and creation of value. Tax policy should reinforce the latter.
This requires withdrawal of arbitrary exemptions, protection from monopolies and cartels, predictable energy and tariff policies, neutral investment allowances, effective loss relief and stable rules. It also requires accessible education, justice, infrastructure and finance so that citizenship, rather than inherited privilege or political connection, determines economic opportunity.
The purpose is not a weak state. Pakistan needs a capable state strong enough to enforce general rules, protect competition, collect lawful revenue and provide public goods.
The required state must also be constitutionally restrained: strong against evasion and corruption, but equally strong against privilege, arbitrariness and abuse by its own institutions.
The constitutional fiscal compact
The series has moved from public finance to Constitutional Political Economy; from tax neutrality to political choice; from technical reform to institutional incentives; from strategic rents to the buffer-state thesis; from Western public-choice theory to Abu Yusuf and Ibn Khaldun; and from revenue arithmetic to constitutional legitimacy. A coherent conclusion now emerges.
Pakistan requires a fiscal compact founded upon constitutional competence, representative consent, equality, due process, predictable taxation, accountable expenditure, genuine federalism, empowered local governments and effective remedies.
Its success will not be measured by the tax-to-GDP ratio alone. It will be measured by whether taxation encourages production rather than rent-seeking; whether burdens reflect capacity rather than visibility; whether revenue finances human and productive capability; whether institutions themselves obey the law they enforce; and whether citizens can see a fair relationship between what they contribute and what the state provides.
No single Finance Act can produce this transformation. It requires sustained reconstruction of fiscal institutions and the political incentives governing them.
The first step is intellectual honesty. Pakistan’s economic crisis is not merely a shortage of revenue. It is the consequence of a state that has repeatedly sought resources without reconstructing the constitutional relationship upon which legitimate revenue depends.
Taxpayers are not subjects from whom the maximum possible amount must be extracted. They are citizens whose consent, enterprise and trust constitute the real foundations of the state.
The ultimate purpose of taxation is not to enlarge state power over citizens. It is to enable citizens, through a constitutionally restrained and democratically accountable state, to secure justice, dignity and shared prosperity. Only then will taxation cease to be an instrument of extraction and become an expression of constitutional citizenship.
[Concluded]
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.
