How Pakistan Raises Its Money: Taxes, Levies and the Indirect Tilt (2026-27)

Where the federal government's Rs 20,600 billion in receipts comes from

By the ISN Media desk • June 2026 • Approx. 8-min read

Before a budget can be divided, it has to be collected. This explainer sets out how the federal government of Pakistan funds its 2026-27 budget: where the money comes from, which taxes carry the weight, and the structural feature that economists most often flag. All figures are Budget Estimates from the Government of Pakistan's budget papers, in billions of rupees. This is a companion to the full breakdown in Pakistan's federal budget 2026-27, where every rupee goes.

How does Pakistan raise its revenue?

Pakistan raises its revenue in two broad ways: taxes, which provide the bulk, and non-tax revenue such as levies, the profits of state institutions, fees and dividends. For 2026-27 gross revenue receipts are projected at about Rs 20,600 billion, of which the Federal Board of Revenue is set to collect about Rs 15,264 billion in taxes, roughly 8 percent more than the previous year. After the constitutional transfer of about Rs 8,848 billion to the provinces, the centre retains about Rs 11,751 billion of its own.

That is the shape of it. The detail follows.

Direct versus indirect taxes

Taxes fall into two families, and the distinction matters for who actually pays.

Direct taxes, chiefly income tax, are paid out of what people and companies earn, so they rise with income. Indirect taxes, such as sales tax, excise duty and customs, are folded into the price of goods, so they are paid by everyone who buys, regardless of income.

Figures in billions of rupees.

Income tax is the single largest line and grows fastest among the major taxes, at about 9.8 percent. But the combined indirect taxes, sales tax, customs and excise, together raise more than income tax does.

The levies: petroleum and a new carbon charge

Two non-tax lines deserve attention. The petroleum levy, a charge on every litre of fuel, is projected to raise about Rs 1,676 billion, which is more than customs duty brings in. Unlike most taxes it is not shared with the provinces, so the centre keeps the whole of it, and it rose about 14 percent this year.

A carbon levy appears for the first time in 2026-27, expected to yield about Rs 50 billion. Against these gains, the profit transferred by the State Bank falls about 40 percent, which is part of the reason the budget leans harder on fuel and excise this year. Federal excise duty itself rose about 21 percent, among the steepest increases on the revenue side.

The indirect tilt

The structural feature most often noted by economists is the budget's reliance on indirect taxes and levies. Because sales tax, excise, customs and the petroleum levy are all paid through the price of goods and fuel, they fall on every consumer regardless of income. A charge on fuel, for example, is paid at the same rate by a daily-wage worker and a wealthy household.

This makes the revenue system less progressive than one weighted toward direct income tax. It is a long-standing feature of how Pakistan raises money, not the choice of a single year, and it is one reason the International Monetary Fund and the World Bank consistently recommend broadening the direct-tax base and bringing untaxed sectors into the net. We report the wider reform debate in Pakistan's federal budget 2026-27, where every rupee goes.

The tax-to-GDP gap

Behind the year's figures sits a longer-running problem that economists return to repeatedly: Pakistan collects a low share of its economy in tax. With a Federal Board of Revenue target of about Rs 15,264 billion against a projected economy of about Rs 143,604 billion, federal tax collection is in the region of 10 to 11 percent of gross domestic product, low by the standards of comparable economies, many of which collect 15 percent or more.

A low tax-to-GDP ratio matters because it limits what the state can fund without borrowing. When revenue is thin relative to the size of the economy, even ordinary spending must be part-financed by debt, which raises the interest bill in future years. This is why the International Monetary Fund and the World Bank treat broadening the tax base, rather than only raising rates on existing taxpayers, as central to Pakistan's fiscal stability. Much of the FBR's growth target each year is met from the same narrow base of documented taxpayers and withholding taxes, rather than from bringing new sectors into the net.

How the burden is shared

A further consequence of the indirect tilt is that the burden of funding the state does not fall evenly. Salaried employees and documented businesses pay direct income tax that is deducted and recorded, while large parts of the economy that operate in cash or are formally exempt contribute far less in direct terms. Because the shortfall is then made up through indirect taxes and levies on goods and fuel, the cost is spread across all consumers, including those on the lowest incomes. The result, economists note, is a system in which the documented and the poor carry a disproportionate share, while undocumented and exempt activity is undertaxed.

Where the receipts go next

Of the roughly Rs 20,600 billion collected, about Rs 8,848 billion passes straight to the four provinces under the National Finance Commission formula, leaving the centre about Rs 11,751 billion. Because the centre plans to spend a great deal more than it retains, the difference is met by borrowing, a gap examined in the 43 percent, how debt interest consumes the budget.

Frequently asked questions

How much revenue will Pakistan collect in 2026-27? Gross revenue receipts are projected at about Rs 20,600 billion, of which the Federal Board of Revenue is targeted to collect about Rs 15,264 billion in taxes, up roughly 8 percent on the year.

What is the difference between direct and indirect taxes? Direct taxes, mainly income tax, are paid out of earnings and rise with income. Indirect taxes, such as sales tax, customs and excise, are included in the price of goods and are paid by everyone who buys, regardless of income.

What is the petroleum levy? A charge on every litre of fuel sold, projected to raise about Rs 1,676 billion in 2026-27. It is not shared with the provinces, so the federal government keeps all of it, and it rose about 14 percent this year.

What is the new carbon levy in Pakistan's budget? A levy introduced for the first time in 2026-27, expected to raise about Rs 50 billion. It joins the petroleum levy on the non-tax side of revenue.

Why do economists say Pakistan's tax system is regressive? Because it leans heavily on indirect taxes and levies that are paid through the price of goods and fuel, falling on all consumers regardless of income. Bodies such as the IMF and World Bank recommend broadening direct taxation to make the system fairer.

What is Pakistan's tax-to-GDP ratio? Federal tax collection is in the region of 10 to 11 percent of gross domestic product, with the FBR target of about Rs 15,264 billion set against a projected economy of about Rs 143,604 billion. This is low compared with many similar economies, which collect 15 percent or more, and it is a central reason the budget relies on borrowing.

Why does a low tax-to-GDP ratio matter? Because thin revenue relative to the size of the economy means even ordinary spending must be part-financed by debt, which raises the interest bill in future years. This is why broadening the tax base, rather than only raising rates, is treated as central to fiscal stability.

How much is transferred to the provinces? About Rs 8,848 billion of the roughly Rs 20,600 billion the federation collects passes to the four provinces under the National Finance Commission formula, leaving the centre about Rs 11,751 billion of its own revenue.

Sources and notes

• Government of Pakistan, Federal Budget 2026-27: Budget in Brief and revenue schedules. All figures are Budget Estimates in billions of rupees, rounded for readability.
• Provincial transfer and net federal revenue: National Finance Commission award framework as applied in the 2026-27 budget.
• Reform recommendations reflect published analysis by the International Monetary Fund and the World Bank.

Related reading

• The pillar: Pakistan's federal budget 2026-27, where every rupee goes
• Siblings: where every hundred rupees goes, the budget by sector, this year against the last
• Related: the 43 percent, how debt interest consumes the budget