Annual tax losses restricted to Rs2.35tr

Customs duty exemptions drop 24% to Rs499b; FTA-related cost zero

ISLAMABAD:

The cost of tax concessions has for the first time in many years marginally reduced by 3% to Rs2.35 trillion in this fiscal year, driven by the withdrawal of sales tax exemptions and nil cost of exemptions under bilateral free trade agreements.

Although the cost has started reducing, it was still $8.5 billion in dollar terms – almost equal to the money Pakistan borrowed from Saudi Arabia to build foreign exchange reserves.

The Economic Survey of Pakistan 2026, released by Finance Minister Muhammad Aurangzeb on Thursday, showed that after successive rounds of withdrawal of tax concessions and exemptions, the amount has started coming down. The tax exemptions have been approved over the years and are protected under three tax laws.

The survey showed that compared with Rs2.43 trillion in tax expenditures last fiscal year, the figure shrank to Rs2.35 trillion this year – a reduction of Rs82 billion or 3.3% in these losses.

Since last fiscal year, the government has started excluding the cost of sales tax exemption on petroleum products, as it now charges a hefty levy on these products that is even higher than the standard 18%

sales tax.

Sales tax

Compared with Rs1.24 trillion in sales tax exemptions given last fiscal year, the survey showed the country sustained Rs1.27 trillion in losses this fiscal year again – a Rs37 billion increase. The share of sales tax losses in total tax losses was 54%.

An amount of Rs9 billion was lost on account of exemptions on products protected under the Fifth Schedule of the Sales Tax Act, a phenomenal reduction from last year's cost of Rs81 billion. The Fifth Schedule relates to the zero-rated tax system.

The cost of tax losses due to sales tax exemptions under the Sixth Schedule is estimated at Rs567 billion this year, compared with Rs703 billion last year. These include Rs306 billion in exemptions on local supplies and another Rs261 billion on imported goods. The government has withdrawn these exemptions as part of the International Monetary Fund (IMF) programme commitments.

The cost of losses on local supplies reduced by Rs25 billion after the government imposed 18% tax in the last budget on many products.

The government charges reduced sales tax on various goods, which cost Rs635 billion in the current fiscal year, up by Rs261 billion or 70% within a year. These exemptions are given under the Eighth Schedule of the Sales Tax Act, which allows lower-than-standard 18% sales tax.

In the next budget, the government plans to withdraw some of these reduced rates. The IMF has asked for most of these reduced rates to be brought to par with standard rates and for the rate to be doubled to 10% where the current rate is 5%.

Income tax

As against Rs545 billion in income tax exemptions given last fiscal year, the Federal Board of Revenue (FBR) has estimated the cost of exemptions at Rs580 billion this year, according to the survey. There was a Rs35 billion increase in the income tax losses.

Over Rs4 billion in income tax exemptions were given on account of various allowances, far lower than Rs71 billion last year. The government also gave exemptions of Rs76 billion in tax credits, compared with Rs79 billion last year.

Similarly, Rs438 billion in exemptions were given on total income under the Second Schedule of the Income Tax Ordinance – down by Rs6 billion. The IMF is now targeting these exemptions.

About Rs11 billion was lost due to the reduction in tax liabilities, also Rs10 billion less than the previous fiscal year. Another Rs51 billion was lost on account of reduced income tax rates for various sectors, which was Rs3.5 billion higher than last year.

Customs duty

The cost of customs duty exemption decreased to Rs499 billion from Rs652 billion the previous year. There was a reduction of Rs153 billion or 24%, over the previous year, according to the survey.

The government sustained Rs276 billion in tax losses due to concessions given to the automobile sector, oil and gas exploration sector and the China-Pakistan Economic Corridor. This was Rs143 billion or 108% higher than last year.

Nearly Rs206 billion in duties were lost under the Fifth Schedule of the Customs Act, which deals with goods exempted from customs duties. This cost of exemption was Rs380 billion last fiscal year, and has come down by Rs175 billion.

The cost of exemptions related to free trade agreements was brought to zero this fiscal year, compared with Rs61 billion last year, according to the survey.