Pakistan's Tax Exemptions Decline to Rs2.35 Trillion in FY26

On Thursday, the government of Pakistan announced a decrease in tax exemptions for the outgoing fiscal year, FY26. This marks the first such reduction in recent years, as detailed in the Pakistan Economic Survey 2025-26, unveiled by Finance Minister Muhammad Aurangzeb.

The survey noted a 3.37% fall in tax exemptions, bringing the total cost down to Rs2.353 trillion in FY26. This figure is a decrease from the downward-revised Rs2.434 trillion recorded in FY25. Initially, tax exemptions for FY25 were reported at Rs5.84 trillion, indicating a 51% increase from Rs3.879 trillion the previous year, before undergoing a revision.

This decline follows seven consecutive years of increasing tax concessions, despite repeated government commitments to gradually curtail them as part of the International Monetary Fund program. The reduction comes as the Federal Board of Revenue (FBR) grapples with significant revenue shortfalls, having missed collection targets for three consecutive years.

Tax exemptions represent revenue foregone by the state across various categories, benefiting different industries and groups. These typically include exemptions on raw materials, semi-finished products, and concessions for specific sectors aimed at reducing input costs for export-oriented industries. Additionally, certain individuals receive tax exemptions on specific perks and privileges.

Specific changes include a slight increase in income tax exemptions, a decline in customs exemptions, and a modest rise in sales tax concessions. Total sales tax exemptions increased by 2.91% to Rs1.273 trillion in FY26 from Rs1.237 trillion in FY25. Conversely, the cost of zero-rated exemptions under the Fifth Schedule decreased by 89.18% to Rs8.774 billion in FY26 from Rs81.108 billion in FY25, attributed to reduced zero-rated regimes for five export-oriented and other sectors. For local supplies, exemptions under the Sixth Schedule fell by 7.54% to Rs305.628 billion in FY26 from Rs330.545 billion in the prior year, due to significant withdrawals of items from that schedule.

The value of tax exemptions has shown an upward trend over recent years, moving from Rs540.98 billion in FY18 to Rs1.757 trillion in FY22. These concessions were previously extended across all sectors to foster industrialization.

Last year, the FBR had projected a sharp rise in the cost of tax exemptions, largely due to a Rs1.796 trillion waiver on petroleum, oil, and lubricants (POL) products. This figure was omitted from the latest survey. The government has planned to raise over Rs1.4 trillion through the petroleum development levy (PDL), which is fiscal in nature, with provinces receiving no share. The federal government recovers the full proceeds through the PDL, which does not form part of the divisible pool, resulting in minimal actual cost to the federal government, while provinces are excluded from revenue sharing on PDL collections.

(Source: Dawn Pakistan)