Pakistan passes revised budget with tax relief, climate levy, and digital economy reforms

Pakistan’s lower house of parliament on Thursday passed the federal budget for fiscal year 2025-26, including key amendments to tax laws and climate financing, despite protests from the opposition.

The clause-by-clause approval of the Finance Bill 2025 was held in a session chaired by National Assembly Speaker Ayaz Sadiq. Finance Minister Muhammad Aurangzeb moved the motions, which were passed over opposition resistance.

One of the most significant changes was a reduction in income tax for salaried workers earning between 600,000 and 1.2 million Pakistani rupees (about $2,150-$4,300) per year. Their tax rate was lowered from 2.5% to 1%.

The bill also rebrands the previously proposed “Carbon Levy” as the “Climate Support Levy.” Officials say the change reflects a broader focus on climate-related spending rather than emissions alone. All references to the old term were replaced in Clause 3 of the amended bill.

Several tax incentives were approved to promote renewable energy and aviation infrastructure. Customs duties were removed on imports of key solar components like control panels and Stirling Engine Generators.

Aircraft maintenance firms authorized by the Defense Division and Pakistan Airports Authority will also be allowed to import equipment duty-free, subject to regulatory clearance. Officials say the move will support both clean energy adoption and aviation upgrades.

Support was also extended to local manufacturers of artificial leather. Inputs such as PVC emulsion and release paper will now qualify for duty exemptions or reductions, based on quotas and lab testing verified by the Input Output Coefficient Organization (IOCO).

To tighten tax oversight of the digital economy, the government imposed a 2% tax on goods sold through digital platforms. This includes online marketplaces, websites, mobile apps, and services handled by payment or delivery companies.

The Finance Bill also introduces the concept of “Significant Digital Presence,” allowing Pakistan to tax foreign vendors that earn more than PKR 1 million ($3,600) in revenue from local consumers. Foreign businesses will be taxed if they meet any of several criteria, such as billing in Pakistan, storing customer data, providing aftersales service, or engaging in targeted local marketing.

Other amendments target tax fraud and property market non-compliance. New sections (14AC–14AE) empower tax authorities to block property transfers by unregistered or non-compliant individuals. Offenders will have 15 days to regularize their status.

Section 37A was revised to protect against arbitrary arrests in tax cases. An inquiry must now be completed before any arrest, and prosecution must focus on serious fraud.

The bill also introduces new tax exemptions. Pakistani athletes who win Olympic medals will not be taxed on awards granted by government bodies or public officials.

Educational and welfare institutions, including Beaconhouse National University, Federal Ziauddin University, and the Punjab Police Welfare Organization, were granted tax-exempt status.

The National Logistics Corporation (NLC) was granted a preferential 3% tax rate on toll collections and contractual payments. This will serve as a minimum tax; if the standard liability is higher, the higher amount will apply.

The Federal Board of Revenue (FBR) was granted expanded authority to issue notifications for tax exemptions and define a “Negative List” of tax-free services. Officials say this flexibility is intended to allow faster responses to economic changes.

In a controversial move, the government also imposed a 10% sales tax on the import of solar panels and parts. Critics say the tax could slow progress on clean energy.

Pakistan’s economy is under pressure to boost revenue, attract investment, and meet IMF conditions as it navigates high inflation and sluggish growth.