Pakistan Economic Survey 2025-26: Tax Exemptions Decline for First Time in Seven Years

Tax exemptions in Pakistan fell by 3.37% to Rs2.353 trillion in the 2025-26 fiscal year, according to the Pakistan Economic Survey 2025-26. Finance Minister Muhammad Aurangzeb unveiled the data, marking the first reduction in such concessions in seven years.

The cost of exemptions in the previous fiscal year (FY25) was recorded at a downward-revised Rs2.434 trillion. The government initially reported FY25 exemptions at Rs5.84 trillion, which would have been a 51% increase from the prior year, but later cited “errata” for the revision.

This decline follows seven years of steady increases in tax concessions. The government had previously stated these concessions would be curtailed under the International Monetary Fund programme.

Did You Know? The cost of zero-rated exemptions under the Fifth Schedule plummeted 89.18%, dropping to Rs8.774 billion in FY26 from Rs81.108 billion in FY25.

Why did tax exemptions decrease after seven years?

The reduction stems from a massive withdrawal of exemptions on items under the Sixth Schedule for local supplies, which fell 7.54% to Rs305.628 billion. The government also reduced zero-rated regimes for five export-oriented sectors and other groups.

Historical data shows a long-term upward trend before this shift. Exemptions rose from Rs540.98 billion in FY18 to Rs972.4 billion in FY19, Rs1.49 trillion in FY20, and Rs1.757 trillion by FY22 to promote industrialization.

While customs exemptions declined, the Pakistan Economic Survey 2025-26 noted a slight increase in income tax exemptions and a 2.91% rise in total sales tax exemptions, which reached Rs1.273 trillion.

How does the petroleum development levy affect revenue?

The federal government used the petroleum development levy (PDL) to recover proceeds that do not form part of the divisible pool. This means the federal government bears minimal actual cost, but provinces receive no share of this revenue.

🔴LIVE: FM Muhammad Aurangzeb Presents Pakistan Economic Survey 2025-26 | Geo News

The Federal Board of Revenue (FBR) had previously projected a sharp rise in exemption costs due to a Rs1.796 trillion waiver on petroleum, oil, and lubricants (POL) products. However, the government omitted this figure in the latest survey while planning to raise over Rs1.4 trillion through the PDL.

Expert Insight: Samantha Carter notes that the shift from broad industrial concessions to targeted revenue recovery suggests a tightening fiscal environment. The reliance on the PDL allows the federal government to maintain liquidity without sharing gains with provinces, potentially creating friction in revenue distribution.

What happens next for FBR collection targets?

The FBR is currently struggling with significant revenue shortfalls, marking three consecutive years of missed collection targets. The reduction in tax exemptions may be a step toward closing this gap.

Future fiscal adjustments could lead to further withdrawals of concessions for specific industries. The government may continue to prioritize the removal of “zero-rated” regimes to increase the tax base, though this could impact input costs for export-oriented industries.

Frequently Asked Questions

What was the total cost of tax exemptions in FY26?
The cost was Rs2.353 trillion, according to the Pakistan Economic Survey 2025-26.

Why did the cost of zero-rated exemptions under the Fifth Schedule drop?
The decline was due to the government reducing zero-rated regimes for five export-oriented and other sectors.

What is the reason for the revision of FY25 exemption figures?
The government revised the figure from Rs5.84 trillion down to Rs2.434 trillion, citing “errata” without further explanation.

Do you believe reducing industrial tax exemptions is the most effective way to meet national revenue targets?