Pakistan Business

Finance bill proposes major tax reforms

Salient features of proposed measures in Customs, Sales Tax and Income Tax

Finance bill proposes major tax reforms
Pakistan likely to reduce Super Tax in budget for FY26
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The Finance Bill has proposed tax reforms, targeting customs duty reductions, expanded e-commerce taxation, and stricter enforcement against evasion.

Key proposals include slashing additional customs duties on thousands of tariff lines, imposing higher withholding taxes on digital transactions, and phasing out exemptions for industries in former tribal regions. The measures aim to boost revenue, close loopholes, and level the playing field for local businesses.

Tax Measures taken FY26 Budget

✓ Introduction of Section 114C: Restriction on economic transactions by certain persons. The govt. has proposed to add 114C section in finance bill which will impose restriction on economic transactions for non tax filers i.e. purchase of securities above a threshold, purchase of autos above 850cc, opening of bank account of IPS account except for Asan account.

✓ Removal of sales tax exemptions on FATA/PATA: Industries (Steel, Ghee etc) operating in FATA/PATA were exempt from taxes, however, government has removed sales tax exemption on industries in FATA/PATA and has imposed GST of 10% and will increase by 200bps each in next 3 fiscal years. This was long standing demand of steel, ghee players as products were dumped from FATA to other cities of Pakistan, especially in Punjab. This will be positive for steel, edible oil cos.

✓ Increase in tax on interest income from 15% to 20%: The government has increase tax on interest income from 15% to 20%. We believe, this will encourage more participation in other asset classes like equities which are taxed at preferred rates, thus positive for market.

✓ Increase in withholding tax on cash withdrawal of over PKR 50,000 from 0.6% to 0.8% for nontax filers.

✓ Imposition of PDL on Furance Oil: In line with commitment to IMF, the Govt. has imposed PDL on furnace oil, however rate is not disclosed yet.

✓ Imposition of Carbon Tax: The government has imposed carbon tax of PKR2.5/liter on petrol, diesel and furnace oil for FY26.

✓ Increase in local ecommerce sales tax from 1% to 2% for non active tax payers.

✓ Imposition of pension tax at 5% on above PKR 10 million for people below 70 year age

✓ Increase in GST on autos below 850cc: The reduced rate of 12.5% on autos below 850cc is removed. Normal tax of 18% will be applied in our view. This will be negative for small car manufacturers i.e. Pak Suzuki.

✓ Tax on import of Solar Panels: Earlier solar panel imports were exempt from sales tax. The budget propose to levy sales tax of 18% in FY26 budget.

✓ Withholding tax rate increase for specified services from 4% to 6% with the exception of IT and IT enabled Services has been proposed. For other non specified services, a flat 15% will be imposed and from 10% to 15% on Sportsperson.

✓ Dividend income from mutual funds: The dividend tax rate has been enhanced to 25% & 15% on dividend from mutual funds.

✓ Imposition of off grid levy (captive levy), government has estimated Rs105bn under this head for FY26.

✓ Carry forward of minimum tax losses is reduced from 3 years to 2 years.

Relief measures unveiled in Budget FY26

✓ Salaries of the Government employees is proposed to increase by 10%, while pension income is proposed to be increased by 7%, as per news.

✓ Reduction in tax rate on 3 salaried class slabs: The Govt has proposed to bring down existing 5% slab to applicable on income between PKR 60k-120k per month to 1%. While in subsequent 2 slabs rates (ppts) have reduced from 15% to 11%, and from 25% to 23%. While the surcharge is reduced from 10% to 9%.

✓ Income tax exemption for FATA/PATA to continue for one more year: Income tax along with withholding tax exemption for erstwhile FATA/PATA areas propose for extension for one year i.e. upto FY26.

✓ Tax rebate on teachers: 25% rebate against tax payable by full time teachers and researchers will be restored retrospectively i.e. from FY23 to FY25.

✓ Restoration of tax credit on mortgage facility for houses upto 10 marla and flats up to 2000 Sqf

✓ Decrease in advanced tax/FED on immovable properties: The Government has removed FED of 7% and reduced Advance Tax by 150bps on immovable property. This is positive for construction sector and will thus help in lifting sentiments for construction and allied sectors/stocks.

✓ Reduction in super tax by 0.5%: Super tax rates under section 4C proposed to be reduced by half a percentage point for income slabs between PKR 200 million to PKR 500 million against each slab respectively. we believe this will positive for market.

✓ Grant of exemption on local sales of Bun and Rusk: Currently these products were charged at 10% GST, now this GST is removed.

✓ Government has allocated housing subsidy of PKR 5 billion for FY26 and mark up subsidy of additional PKR 5 billion for FY26.

✓ Government has allocated payments to IPPs to the extent of PKR 95 billion in FY26.

Other taxes which remained unchanged

✓ No change in capital gain or dividend tax on stocks: Unlike widespread expectations, the government has not increased tax on dividend and capital gain for stocks.

✓ Bonus: There is no change in bonus tax.

✓ Minimum Turnover Tax: Minimum turnover tax has remained unchanged in line with market expectations.

✓ Taxation on Reserves/Retained Earnings: There is no news/measures with respect to tax on reserves.

✓ No change in FED on Fertilizer and Pesticide: Despite committing to IMF last year, the government has managed to keep the FED rate on fertilizer and pesticides unchanged for FY26.

Major highlights

  • A cargo tracking system has been introduced to prevent smuggling.
  • Import duty on raw materials for LED bulbs has been reduced to zero.
  • Import duty on raw materials for steel has been reduced from 15% to 10%.
  • Import duty on raw materials for textiles has been removed entirely.
  • Import duty on industrial sewing machines has been eliminated.
  • Import duty on local vehicle engines has been reduced by 5%.
  • Import duty on raw materials and CKD (completely knocked down) kits for local vehicles has been reduced from 20% to 15%.
  • Import duty on radio broadcast transmitters has been reduced from 20% to 15%.
  • Import duty on TV broadcast transmitters has been lowered from 20% to 15%.
  • Import duty on wireless microphones has been reduced from 20% to 15%.
  • Import duty on energy-saving bulbs has been decreased from 10% to 5%.
  • Import duty on pharmaceutical raw materials and related taxes have been reduced by 5%.
  • Import duty on diagnostic kits has been lowered from 10% to 5%.
  • Import duty on machinery and plants used by oil and gas exploration companies has been reduced.
  • Taxes on machinery, plants, and special vehicles used by petroleum companies have been lowered from 15% to 10%.
  • Import duty on 381 types of pharmaceutical raw materials has been eliminated.
  • Import duty on raw materials used for industrial packaging has been reduced from 10% to 5%.

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