Govt plans to end sales tax exemption for former tribal areas in FY2025-26 budget

The government is considering withdrawing the long-standing sales tax exemption on goods manufactured in the former tribal areas, aiming to generate more than Rs45 billion in revenue during the next fiscal year, The News reported. 

The proposed 18% sales tax, expected to be included in the 2025-26 federal budget, will also apply to electricity supplied to the ex-FATA and PATA regions, ending years of tax relief granted after the merger of these areas into Khyber Pakhtunkhwa.

In addition, the Federal Board of Revenue (FBR) is evaluating a proposal to impose withholding tax on imports into the region, signaling a significant shift from the post-merger fiscal leniency. Officials suggest that revenue could increase further if income tax concessions are also revoked. The FBR is in the process of finalising legal amendments to comply with court rulings and existing tax laws.

Last year’s Finance Act extended exemptions on the import and supply of goods and electricity in the former tribal areas until June 30, 2025. However, recent changes require importers to submit a pay order instead of a post-dated cheque to qualify for exemptions, which are only granted after producing verified consumption or installation certificates from the relevant commissioner within six months.

The government’s decision reflects mounting fiscal pressures and a push to broaden the tax base amid commitments to international lenders, particularly the IMF. 

However, the move is expected to face criticism from stakeholders in the tribal belt, where economic development remains limited and recovery fragile.