The outgoing fiscal year remained a period of relative macroeconomic calm, barring fresh inflationary pressure from the Gulf conflict in the final quarter.
The rupee remained broadly stable and IMF engagement brought greater predictability to fiscal management. The documented economy, especially salaried taxpayers and formal businesses, helped sustain this stabilisation through advance deductions, higher effective taxation, and stricter compliance.
For the next fiscal year, the government has offered selective relief to the documented base. Salaried taxpayers get rate relief. Export proceeds face lower tax collection. IT exports retain their concessional regime. Industrial inputs receive tariff relief. Less documented activities, such as those of retail sellers, face new reporting and collection measures. Real estate gets lower transaction taxes and the removal of Section 7E to revive formal transactions and construction activity.
Salaried relief has the strongest equity claim because the deduction is visible and avoidance is limited. Export and IT relief can be linked to foreign exchange earnings, documentation and repatriation. Industrial input relief can support production where firms pass on lower costs. Real-estate relief needs updated valuations, beneficial ownership reporting and stronger provincial property taxation before it can be defended as documentation rather than asset relief.
The immediate question is how the fiscal cushion for these concessions has been created. Federal expenditure leaves little room for manoeuvre. I have often explained this through my Four Ds framework: debt servicing, defence requirements, day-to-day running of civil government and development. The first three are largely non-discretionary, though each requires rationalisation. Development remains the most adjustable head when the other three expand.
The revenue side shows the scale of the effort. FBR has been assigned a Rs15.264 trillion target. Petroleum levy is budgeted at Rs1.676 trillion. Documentation measures have been expanded through the Finance Bill. Federal accounts also include a new Rs1.035 trillion receipt from provinces under Article 164 of the constitution. Article 164 allows the federal government and the provinces to grant each other grants for any purpose, including those outside their normal areas of responsibility.
The finance minister has linked this provincial contribution to defence requirements and to a buffer against the second- and third-round effects of the Gulf conflict. He has also referred to a three-year understanding with provinces. Provinces are not paying a labelled relief bill. They are being asked to carry part of the defence and external shock burden. Once that burden is partly shared, the federal government obtains room to finance concessions elsewhere.
Defence services are budgeted at Rs3 trillion. The Article 164 receipt equals about one-third of that allocation. Defence spending rises by about Rs450 billion compared with last year’s original budget and by about Rs412 billion compared with the revised estimate. Federal accounts also carry Rs430 billion for emergency and other pressures, including natural disasters and exogenous shocks. The grant from provinces can cover the defence increment and a large part of the shock buffer. This helps explain how relief can coexist with debt servicing, higher defence spending and the routine cost of government.
The constitutional route carries institutional consequences. Article 160 governs the NFC and the divisible pool. Article 164 permits grants between governments. The new arrangement leaves the NFC award intact on paper and changes fiscal flows during the year. A three-year understanding would move it beyond an annual adjustment and create a medium-term fiscal practice outside the formal NFC process.
A provincial contribution can be justified when it is tied to national security and external shock management. Defence and Gulf-related risks are national concerns. Provinces also received larger fiscal space after the 7th NFC. Several provincial governments did not pass enough of that space downward. Provincial Finance Commission awards remained delayed, irregular or weak. Districts remained dependent on provincial discretion rather than predictable, formula-based transfers.
It is a valid criticism that the larger provincial share after the 7th NFC did not automatically become local fiscal empowerment. However, it does not prove that federal spending will produce better outcomes unless the Article 164 receipt is linked to transparent use and measurable fiscal commitments.
The government’s effort to balance the Four Ds at the federal level will put pressure on provincial development. The federal PSDP remains unchanged at Rs1 trillion. The national development programme falls because provincial development allocations are compressed.
Here, one needs to keep in mind that the Article 164 grant starts only after FBR collection crosses the protected Rs13.350 trillion threshold; the full Rs1.035 trillion depends on FBR moving close to the Rs15.264 trillion target. Thus, the provincial grant explains one part of the cushion. The rest depends on FBR’s ability to collect more from a wider and better-documented base.
The revenue target requires Rs2.281 trillion more than the revised estimate of the outgoing year. The Finance Bill expands the use of banking data, digital integration, withholding on social media income, higher collections from selected distributors and wholesalers, sales tax compliance and production monitoring. It is good to see that the government is relying on compliance and enforcement reforms. However, one must accept that these reforms may not broaden the tax base or bring new taxpayers into the system.
Data and automation may raise revenue through better matching. However, it may also create distrust if weak systems lead to mismatches, delayed refunds, repeated notices and selective enforcement.
To sustain the relief and strengthen fiscal consolidation, several assumptions must hold during the next fiscal year. FBR collections must exceed the protected threshold for the Article 164 mechanism to deliver the full amount. Petroleum levy collections must remain close to the budget. The Gulf conflict must not raise oil prices beyond the buffer. Provinces must make the transfer, maintain the required surplus and keep development releases alive. A shortfall in one stream can shift pressure toward fuel, indirect taxation, lower development releases, delayed refunds, domestic borrowing, or a later adjustment (mini-budget).
Before the first quarterly review, the Finance Division should publish an Article 164 statement with six entries for each province: protected FBR threshold, actual FBR collection, incremental divisible pool, provincial share generated above the threshold and grant transferred to the federation. The statement should also show how much of that grant was applied to which expense and any unspent balance. Doing so will improve trust between the federation and the federating units. It will also help provinces take due credit for their contributions to the collective national goals.
Most importantly, such discussions should take place through the Council of Common Interest (CCI). The constitution requires the CCI to hold a quarterly meeting and address such issues. Unfortunately, the CCI usually does not meet for years.
The writer heads SDPI, chairs the board of the National Disaster Risk Management Fund, and serves on the ADBI’s Advisory Board. He posts on LinkedIn @Abidsuleri
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