Centre urges provinces to raise Rs400bn in new taxes for FY27

ISLAMABAD: The federal government has asked the provinces to generate more than Rs400 billion in additional taxes in the next fiscal year, largely from agriculture, services and real estate, as part of commitments made under Pakistan’s programme with the International Monetary Fund (IMF).

According to government officials, Finance Minister Muhammad Aurangzeb held a virtual meeting with provincial governments on Monday and shared fresh net additional revenue targets for fiscal year 2026-27. With the provincial contribution included, the combined extra revenue effort under five separate budgets is projected to exceed Rs1.1 trillion from July.

Of that total, nearly Rs700 billion is expected to come from the federal side through tax measures, enforcement actions and the petroleum levy. The Federal Board of Revenue (FBR) is projected to contribute about Rs430 billion in additional tax effort, while the petroleum levy is expected to bring in another Rs260 billion.

Provincial targets and IMF commitments

The new provincial targets form part of commitments requiring the four provinces to raise extra taxes equal to 0.3% of GDP, or about Rs430 billion. Officials said almost half of the additional target has been assigned to Sindh at around Rs200 billion, followed by about Rs175 billion for Punjab, Rs45 billion for Khyber-Pakhtunkhwa and nearly Rs20 billion for Balochistan.

Sindh’s target is higher than Punjab’s because of revenue collected at seaports. For the current fiscal year, the IMF expects the provinces to generate at least Rs1.2 trillion in revenues. Under the new targets, this amount must rise to at least Rs1.65 trillion, although the IMF’s third staff-level report places next year’s provincial collection at nearly Rs1.95 trillion.

After the meeting, the finance ministry released pictures of Federal Minister for Finance, Senator Muhammad Aurangzeb, holding a virtual meeting with provincial finance ministers to discuss economic and fiscal matters.

Focus on agriculture, services and property-related taxes

The centre urged Sindh to improve collection from the real estate and agriculture sectors. During the first nine months of the current fiscal year, Sindh collected Rs21.4 billion in stamp duties, while Punjab collected Rs38 billion.

Punjab’s low collection from agricultural income tax was also highlighted during the discussions. Punjab informed the meeting that it would expand the general sales tax on services to 40 major cities after collecting Rs244 billion from services sales tax in the first nine months of the current year.

Officials said the FBR has started sharing income tax and sales tax return information with the provinces to support their collection efforts. The data will be extracted from income tax and sales tax returns.

The IMF has said provincial tax revenues have been rising well above nominal GDP growth, mainly because of expansion in the GST on services base and stronger enforcement. However, agricultural income tax receipts remained below expectations due to delays in implementing revised rates and other administrative difficulties.

Revenue measures and fiscal pressures

The IMF is seeking stronger provincial collection from sales tax on services, stamp duties, property tax, agricultural income tax and registration fees. Provinces are expected to mobilise revenue by gradually extending GST on services enforcement across all sectors of the economy.

New agricultural income tax rates will apply to this fiscal year’s agricultural income, with the revenue effect expected to appear in the next fiscal year. The IMF report said agriculture is the single largest undertaxed sector based on analysis using input-output tables. Although agriculture contributes 24.6% of value added, its effective tax rate is only 0.3%.

Agricultural income tax rates were increased significantly in 2025 to align them with other income categories, but revenues remained below expectations because of implementation delays and enforcement issues. It also said that while the effective tax rate on agriculture is 0.3%, the effective tax rate on petroleum products stands at 166%.

For the next fiscal year, the IMF has set a petroleum levy collection target of Rs1.727 trillion, around Rs260 billion higher than this year’s target.

The provinces were also informed that the federal government has agreed with the IMF to post a primary budget surplus of Rs2.8 trillion, or 2% of GDP, in the next fiscal year. This surplus is calculated excluding interest payments, which are estimated at more than Rs7.8 trillion.

The government is facing a revenue shortfall of about Rs1 trillion because of weak FBR performance. It is attempting to bridge the gap through enforcement measures, higher petroleum levy collection and reductions in federal development spending. It is also seeking larger provincial cash surpluses to offset the effect of the FBR shortfall on the primary budget surplus.

The finance minister also asked the provinces to work closely with the IMF in finalising their budgets. Pakistan has assured the lender that all provinces will refrain from introducing any policy or taking any action that could undermine agreed commitments. Aurangzeb further assured that the finance ministry would closely monitor economic developments and performance and would be ready to take additional measures where needed to meet programme objectives.