It has taken some time to reflect on the latest 2026-27 Federal Budget announcement, as the government's vision and strategy behind this outlay remain unclear. The budget appears to lack clear goals for the upcoming year. If the aim is rationalizing taxation, the steps are insufficient and meaningless without purposeful reforms in the FBR. If adhering to IMF dictates, more demands and discussions are likely to follow. If stopping rapid deindustrialization, this budget may exacerbate it. If discouraging the undocumented sector, the message is reversed. If spurring growth, it fails to identify drivers. If containing inflation, allocations suggest an inflationary budget. If curtailing government footprint, it signals the opposite. If pursuing export-led growth, the steps are inadequate.
Underlying Economic Challenges
Regardless of government statements, Pakistan's underlying economy is deteriorating: debt is rising, growth is stagnant, youth discontent is evident, deindustrialization continues, unemployment is at historic highs, poverty has increased, and the social contract between state and citizens is fragile, reminiscent of East Pakistan in 1971.
Salient Features of the Budget
- Salary Slabs: Reduced for salaried class from Rs2.2 million, with no surcharge on salary income. This primarily benefits the bureaucracy, with no real employment generation plan.
- Super Tax: Applicable on income exceeding Rs500 million at 8%, abolished for lower incomes. A step forward, but super tax should have been abolished entirely given excessive taxation.
- Property Transfer Taxes: Reduced from 2.5% to 1.25% for buyers, and from 5.5% to 2.75% for sellers. A welcome step.
- IT Export Services: Reduced rate of 0.25% remains until June 2031. Welcome.
- Exporter Tax: Reduced from 2% to 1.25% as minimum tax, but makes no significant difference.
- Small Businesses: Turnover up to Rs200 million taxed at 1% with minimum Rs25,000 final tax. Likely counterproductive, encouraging transactions outside documented net.
- Excise Duty: Imposed on motor vehicles over 2000cc and EVs over Rs20 million. Good step.
- Credit Card/Online Payments: Tax reduced from 5% to 0.5%. Capital Value Tax on foreign assets abolished. Excise duty on foreign business class travel abolished. These reliefs seem misplaced.
Lack of Transformative Measures
The budget fails to deliver bold, innovative, or transformative measures to spur industrial growth, enhance exports, revive agriculture, or generate employment. Setting a target for increasing petroleum levy collection by 18% is inflationary, as logistics and production costs adjust anticipatorily. At a time when export-led growth is essential, the budget offers no real incentives to boost exports or improve international competitiveness. It lacks a coherent roadmap for expanding the export base and addressing manufacturing challenges. Marginal tax adjustments are eyewash because the primary issue for exporters is the absence of a final tax regime, which was removed, leading to consistent export decline. A straightforward tax framework minimizing compliance costs and reducing interaction with tax authorities is needed. Reducing withholding tax while keeping exporters in the normal tax regime solves nothing.
GSP+ and International Competitiveness
Some elements of competitiveness and agreements are beyond the private sector and require governmental action. Pakistan's GSP+ status with the EU will be reviewed soon. Pakistan is the world's largest beneficiary, with 86% of exports to the EU using these preferences and a 95% utilization rate. This creates a single-point-of-failure risk; any change would jeopardize significant export volumes, especially with the recent EU-India FTA offering unprecedented market access to Indian businesses. To mitigate this risk, Pakistan must urgently secure GSP+ renewal beyond 2027 by involving private sector technocrats in negotiations. Historically, restoration of the scheme occurred when actual stakeholders, exporters, were included in the negotiating team.
The writer is an entrepreneur and economic analyst. Email: kamal.monnoo@gmail.com
