Key takeaways
- The federal government raises over 90% of tax revenue while provinces deliver most services.
- Provinces receive 57.5% of the divisible pool as largely unconditional transfers.
- Even Punjab funds only 12–15% of its spending from its own taxes.
- Urban property tax and municipal revenues are the most neglected fiscal link.
- Fiscal autonomy must come before new administrative boundaries.
In this Paradigm Shift column (February 2026), Dr. Ghulam Mohey-ud-din responds to renewed calls for new provinces with a simple point about sequencing: redrawing boundaries cannot fix a fiscal system in which provinces spend money they do not raise.
The argument
Pakistan’s tax collection is highly centralised. The column notes that more than 90 percent of total tax revenue is raised federally, while provinces provide most public services. Under the National Finance Commission Award, provinces receive 57.5 percent of the divisible pool, mostly as unconditional transfers that reward spending rather than revenue effort. Even Punjab, the wealthiest province, finances only around 12 to 15 percent of its spending from provincial taxes.
Provinces behave rationally within these incentives. Taxing powerful constituencies such as agricultural income is politically costly, while lobbying for a larger federal share is cheap. Subdividing provinces would reproduce the same dependency in more places and intensify competition for NFC money, encouraging each new unit to present itself as poor and backward to win a larger allocation.
The author identifies local and city governments as the missing fiscal link. Urban property tax, betterment levies and municipal charges are under-administered and politically avoided, even though cities generate most economic activity.
What needs to change
- Performance-based NFC transfers that reward tax effort and service delivery, not just population.
- Stronger urban local governments, with property tax built on digitised land records and cadastral mapping.
- Wider municipal revenue: betterment levies, developer charges, parking fees, congestion pricing and user charges.
- Provincial taxation of agricultural income and services, with a broad base at moderate rates.
New provinces, the column concludes, should be considered only once provinces can pay their own way.