Govt grants Rs2.35tr tax relief despite fiscal pressure

ISLAMABAD: Pakistan’s annual tax expenditure declined modestly to Rs2.35 trillion in the current fiscal year, according to the Economic Survey of Pakistan 2026 released by Finance Minister Muhammad Aurangzeb on Thursday, as the government rolled back a number of tax exemptions and concessions.

The survey showed tax losses narrowed from Rs2.43 trillion in the last fiscal year to Rs2.35 trillion this year, a decrease of Rs82 billion, or 3.3%. In dollar terms, the cost was stated at $8.5 billion. These concessions, approved over time and protected under three tax laws, have started to come down after successive rounds of withdrawals. Since last fiscal year the government has excluded the sales tax exemption cost on petroleum products because it now imposes a levy on those products that is higher than the standard 18% sales tax.

Sales tax remains the largest component

Sales tax exemptions continued to account for the biggest share of tax losses. The survey put sales tax losses at Rs1.27 trillion this fiscal year, up from Rs1.24 trillion last year, an increase of Rs37 billion. These losses made up 54% of the total.

Losses linked to products covered under the Fifth Schedule of the Sales Tax Act fell sharply to Rs9 billion from Rs81 billion a year earlier. The survey said the Fifth Schedule relates to the zero-rated tax system. The estimated cost of exemptions under the Sixth Schedule dropped to Rs567 billion from Rs703 billion last year, including Rs306 billion on local supplies and Rs261 billion on imported goods. According to the survey, the government withdrew these exemptions under commitments made in the International Monetary Fund programme. Losses on local supplies declined by Rs25 billion after 18% tax was imposed in the last budget on many products.

At the same time, the cost of reduced sales tax rates rose significantly. The survey said lower-than-standard rates under the Eighth Schedule of the Sales Tax Act cost Rs635 billion in the current fiscal year, up by Rs261 billion, or 70%, from a year earlier. The government plans to remove some of these reduced rates in the next budget, while the IMF has called for most of them to be aligned with the standard rate and for the existing 5% rate to be raised to 10%.

Income tax exemptions edge higher

Income tax exemptions were estimated at Rs580 billion this year, compared with Rs545 billion in the previous fiscal year, showing an increase of Rs35 billion, according to the Federal Board of Revenue estimates cited in the survey.

The survey said more than Rs4 billion in income tax exemptions were granted through various allowances, down from Rs71 billion last year. Tax credits accounted for Rs76 billion, compared with Rs79 billion a year earlier. Exemptions on total income under the Second Schedule of the Income Tax Ordinance stood at Rs438 billion, which was Rs6 billion lower than last year. The survey added that the IMF is now targeting these exemptions. It further showed that about Rs11 billion was lost because of reductions in tax liabilities, Rs10 billion less than the previous year, while another Rs51 billion was lost due to reduced income tax rates for different sectors, Rs3.5 billion higher than last year.

Customs duty losses decline

The cost of customs duty exemptions fell to Rs499 billion from Rs652 billion in the previous year, a reduction of Rs153 billion, or 24%, the survey showed.

However, tax losses linked to concessions for the automobile sector, the oil and gas exploration sector and the China-Pakistan Economic Corridor increased to Rs276 billion. This was Rs143 billion, or 108%, higher than last year. The survey also showed that nearly Rs206 billion in duties were lost under the Fifth Schedule of the Customs Act, which covers goods exempt from customs duties, down from Rs380 billion in the last fiscal year. In addition, the cost of exemptions related to free trade agreements was reduced to zero this fiscal year from Rs61 billion last year.