Sales tax masks provincial collection weaknesses

While the general sales tax (GST) on services was the main driver of provincial tax collections in 2025-26, the more significant story is the revenue the provinces failed to mobilise.

A closer examination of provincial tax structures highlights significant differences in tax capacity, economic structure and revenue mobilisation. The figures also reflect that provinces differ not only in the collection of tax, but also in the composition of their revenues, indicating varying success in mobilising taxes outside the GST regime.

Data compiled from provincial tax collections show that GST on services accounted for 69.6 per cent of Punjab’s total provincial tax revenues, followed by 66.7pc in Balochistan, 60.8pc in Khyber Pakhtunkhwa and 56.7pc in Sindh.

At first glance, Punjab appears to be the most dependent on GST, while Sindh seems to have a more diversified revenue structure. However, these percentages require careful interpretation because each province operates under distinct economic conditions and possesses a different mix of taxable activities.

Under the IMF-backed reforms, all provinces have shifted from a positive list to a negative list regime for services, bringing more services into the tax net in FY26. However, more than 70pc GST on services continues to come from the well-documented telecommunication sector. The sectoral composition of collections suggests improvement in enforcement across other taxable services.

Beyond services tax, revenue mobilisation remains weak

Despite its smaller population, Sindh collected the highest provincial tax revenue of Rs608bn in FY26, substantially exceeding Punjab’s Rs519bn. However, its lower GST share does not indicate weaker performance. Rather, it reflects the province’s stronger contribution from other provincial taxes, particularly Infrastructure Development Cess (IDC), which is Rs180bn collected on imports entering through Karachi’s ports.

This is a structural advantage unavailable to inland provinces. As Pakistan’s principal maritime gateway, Sindh benefits from trade-related revenues that naturally diversify its tax base. This advantage, however, also exposes an area where revenue mobilisation has fallen short.

Despite having the country’s largest urban centres and one of the most active real estate markets, Sindh collected Rs1bn from property transfers, another Rs32bn from stamp duties, and Rs25bn from motor vehicles in FY26. These taxes remain modest relative to the province’s economy, suggesting that administrative weaknesses, property undervaluation, and limited enforcement continue to constrain tax collections.

Punjab presents a different fiscal profile. The province relies far more heavily on GST on services, which accounts for nearly 70pc of its total provincial tax revenues. However, the province has managed to offset the absence of port-based revenues by delivering comparatively stronger performance in conventional provincial taxes. Collections from transfer of property tax stood at Rs27bn, stamp duties Rs54bn, motor vehicle taxes Rs43bn, Rs7bn from IDC and other provincial taxes have generally been more robust than in other provinces, reflecting a broader tax effort and relatively stronger administrative capacity.

Khyber Pakhtunkhwa, total collection of Rs79bn, faces a more challenging fiscal environment. The province has traditionally relied on IDC linked to trade with Afghanistan. IDC collection stood at Rs7bn in FY26 due to border closure, with the projection of Rs20bn in FY27, contingent on the reopening of the Pak-Afghan border. The province’s second largest revenue source is electricity duty at Rs14bn, followed by property and wealth taxes at Rs4bn. Given the uncertainty surrounding border trade, the IDC target appears optimistic, while projections for other taxes also hinge on stronger revenue mobilisation.

The province’s fiscal challenge extends beyond weak border related collections to the continued underperformance of property, motor vehicle and other provincial taxes, leaving GST on services as its main source of tax revenue.

With Rs51bn collection in FY26, Balochistan has a similarly narrow revenue base, with GST on services accounting for about two-thirds of provincial tax collection, followed by IDC, which generated Rs10bn in FY26. While the combined collection from property tax, stamp duty and land revenue was only Rs3bn. Excise and taxation contributed another Rs2.7bn. The figures highlight the province’s limited revenue base and the need to strengthen conventional provincial taxes to reduce reliance on GST and IDC.

Despite the higher GST share, provincial GST collections amount to only about 0.5pc of GDP, while all other provincial taxes contribute just 0.3pc. This points to significant untapped revenue potential. However, GST collections have improved; they remain heavily dependent on the telecommunications sector. Property tax collections are negligible in three provinces and remain well below potential even in Punjab. Agriculture Income Tax (AIT) offers another major opportunity. Agricultural income declared nationwide stands at Rs460bn, but the Federal Board of Revenue estimates the actual figure could be around Rs800bn, indicating substantial scope to expand the tax base.

The data suggest that provinces should move beyond GST reforms and harmonise legislation, tax administration and collection mechanisms for other provincial taxes, as they have done for GST on services and AIT. Stronger enforcement and improved compliance across all provincial taxes would broaden the revenue base and reduce dependence on a few sources. The GST has become the cornerstone of provincial taxation, but the next phase of reform must focus on strengthening the provincial tax system as a whole.

Published in Dawn, July 12th, 2026 ...