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Public finance

Pakistan Announces Sweeping Tax Reforms in Federal Budget 2025-26

Strategic Insights

— 2 min read

The Pakistan government has unveiled sweeping tax reforms in the federal budget 2025-26, aiming to balance sectoral relief, expand tax scope, and achieve equitable burden-sharing. The reforms offer tax cuts of up to 80% for low-income salaried individuals while limiting relief for higher earners to just 3%. A new 5% tax has been proposed on high-value pensions exceeding Rs10 million annually. The government expects digital taxation, carbon levies, and tax enforcement on e-commerce and digital transactions to help Pakistan adapt to global financial regulation standards.

Key Takeaways:

  • The tax relief measures total Rs60 billion for salaried individuals, Rs2.4 billion for the corporate sector, and Rs60 billion in exemptions for fertilisers and pesticides.
  • The proposed tax collection target is Rs14.131 trillion, with an autonomous tax growth of Rs1.34 trillion in FY26 based on a GDP growth target of 4.2% and an inflation rate of 7.5%.
  • The income tax and withholding tax exemption for the erstwhile Fata and Pata regions has been proposed to be extended to June 30, 2026.
  • Withholding tax on property purchases has been lowered across brackets, and Federal Excise Duty on commercial property transfers has been abolished.
  • The interest income tax rate will rise from 15% to 20%, although national savings schemes are exempt.
  • Rent from commercial properties must be reported at a minimum of 4% of fair market value unless proven otherwise to the commissioner.
  • A Digital Transactions Proceeds Levy will apply to all payments for goods or services delivered via digital platforms.
  • The tax rate on profit on debt has been increased from 15% to 20%, and the dividend tax rate has been enhanced to 25% and 15% on dividend from mutual funds.
  • Sales tax has been extended to items like pet food, chocolates, and cereal bars in retail packs, and the rate on vermicelli and sheermaal has been increased from 10% to 18%.

Statistics:

  • Proposed tax cuts of up to 80% for low-income salaried individuals.
  • Limited relief for higher earners of just 3%.
  • New 5% tax on high-value pensions exceeding Rs10 million annually.
  • Autonomous tax growth of Rs1.34 trillion in FY26.
  • Proposed tax collection target of Rs14.131 trillion.
  • Revenue collection will reach Rs12.845 trillion in FY26 without any new tax or enforcement measures.
  • Enforcement measures to restrict high-value economic transactions and share tax-related information with scheduled banks.

Sources:

  • Pakistan Government's Federal Budget 2025-26 document.
  • Federal Board of Revenue (FBR) Chairman Rashid Mahmood Langrial's statement.
  • International Monetary Fund (IMF) programme commitments.
  • Pakistan Tax Laws and Regulations.

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