Rs18.8tr expansionary budget sails through NA

House passes Finance Bill 2026 with last-minute tax tweaks

ISLAMABAD:

The National Assembly on Tuesday passed the Rs18.8 trillion expansionary federal budget by a majority vote, with its successful implementation - including achieving a Rs15.3 trillion tax target - seen as critical for funding defence spending and fast-tracking the construction of major dams.

The lower house also approved the Finance Bill 2026 with several amendments, authorising the government to implement over Rs1 trillion in policy and enforcement measures in an effort to meet the ambitious Rs15.264 trillion revenue target.

The budget will take effect from July 1. It is the third budget of Prime Minister Shehbaz Sharif's current term and his fifth consecutive budget since the ouster of former prime minister Imran Khan in 2022.

The National Assembly also approved last-minute changes in tax laws, including a reduction in the tax burden on imported mobile phones of up to Rs55,600 or $200 value only. The combined tax on account of mobile levy and income tax has been reduced by Rs1,230 or 86%. The revised levy rates are now Rs300 per handset.

The prices of some packaged products are expected to increase after the government decided to charge sales tax on their printed values. This would generate additional Rs91 billion revenues. The Rs20 billion additional taxes have also been imposed on high-end vehicles.

The Rs18.8 trillion expansionary budget is 20% or Rs3.1 trillion higher than the outgoing fiscal year's revised outlay. The defence budget has been approved at Rs3 trillion, including at least Rs335 billion provincial contribution. Over Rs8 trillion have been approved for interest payments, as the Finance Ministry's debt management strategy also comes under scrutiny due to couple of domestic and foreign debt transactions.

The National Assembly also approved Rs252 billion budget subsidy to contain the circular debt, which reflects poorly on the performance of the Power Division that has not been able to bring the flow of the debt to nil.

The house also approved Rs8 billion subsidy for incentivising use of electric vehicles whereas the government has targeted to collect Rs70 billion through climate support levy and levy on internal combustion engines to promote cleaner fuel vehicles.

The National Assembly authorised the changes in Pakistan's four tax laws, which would result into imposing little over Rs1 trillion in additional measures and to provide Rs360 billion in relief.

The property sector has been given a Rs115 billion relief out of its little over Rs200 billion tax contribution. Compared to this, the salaried class is extended Rs52 billion relief out of the Rs630 billion annual contribution in the last fiscal year.

The Rs18.8 trillion will be funded by taking Rs7 trillion in new loans. This is in addition to Rs1.035 trillion provincial cash grants to finance the defence and mega dams, mainly Diamer Basha, Mohmand and Dasu hydropower project. But the provincial grants are subject to the Federal Board of Revenue's (FBR) ability to collect Rs15.264 trillion target. In case of any slippage, the grant amount would automatically reduce.

Finance Minister Muhammad Aurangzeb said early this month that the provincial shares would be determined based on Rs13.35 trillion taxes and the additional amount of Rs1.9 trillion would go to the federal government, including Rs1.035 trillion provincial share.

For the last two fiscal years, the FBR missed its tax targets by wide margins of Rs2.3 trillion. But this time if the FBR misses the targets, Pakistan will also have to seek a waiver from the IMF and its plans to expedite construction of mega dams will also be affected.

The federal budget deficit target is set at 4.9% of the GDP or Rs7 trillion, which is significantly higher than this fiscal year. The federal deficit is Rs1.9 trillion or 36%higher than the outgoing fiscal year, which shows that the government is not adopting the fiscal consolidation path anymore. The petroleum and carbon levy targets have been set at Rs1.748 trillion for the next fiscal year on the back of Rs80 per litre levy.

The National Assembly has approved to give income tax exemptions to nine more entities, including the Quaid-e-Azam Mazar income. It has approved adding Make-a-Wish Foundation, provincial employees' social security institutions and Workers Welfare Fund organisations to the list of exempted entities.

The house approved to allow traders to leave the newly-announced fixed income tax regime from tax year 2027. The government has given an optional scheme for traders offering them the option to pay only 1% of sales in income tax and a minimum Rs25,000 per annum in return for exemption from audit and becoming part of the digital economy.

The National Assembly approved to reduce the maximum import taxes on cars from 156% to 74% for vehicles of up to 2,000cc, making these cars cheaper. The proposal is in line with the National Tariff Policy.

The assembly also endorsed changes in the import tariffs, facilitating the trade liberalisation during the second year by reducing the simple average import tariffs from 16.56% to 13.8% during the new fiscal year.

The maximum tariff on vehicles above1,800cc has been reduced from the existing 156% to 74%. On imported cars, SUVs and other vehicles with engine capacity of 2,000cc and above, 86% federal excise duty has been imposed. Likewise, on vehicles with engine capacity exceeding 3,000cc, a tax rate of 92% has been imposed.

For vehicles in the 1,500cc to 1,800cc category, the combined tariff has been lowered from 91% to 57%. The import duties applicable on 1,000cc to 1,500cc vehicles have been decreased from 76% to 52%.

For 850cc to 1,000cc vehicles, the maximum tariff has been set at 47% from 71%, and the maximum tariff on vehicles up to 850cc, bikes and vehicle bodies has been cut from 66% to 42%. For the auto-parts sector, the maximum tariff has been reduced from 61% to 45%, including 25% customs duty.

The finance minister proposed four more amendments to the tax laws, which the National Assembly also approved. The house reduced the income tax rate on up to $200 value handset from Rs930 to Rs100.

It also approved to reduce the handset levy from Rs600 to Rs200 for the $200 value handset. The National Assembly also allowed the people to pay hefty taxes on mobile phones in tranches, but the government did not reduce taxes on handsets of over $200 value.

The National Assembly approved to lower the income tax at the import stage on glycerol, crude; glycerol waters and glycerol from 5.5% to 2%. It also allowed exemption of 20% federal excise duty on mineral waters, aerated waters, hydration drinks or electrolyte beverages specifically formulated to support hydration electrolytes replenishment containing artificial sweetener or sugar or both not exceeding 5g/100 ml.

Headed by Syed Naveed Qamar, the National Assembly Standing Committee on Finance had also recommended numerous changes in tax laws, which the lower house approved.