Pakistan’s tax concessions fall 3.3% to Rs2.35 trillion, first decline in years

Pakistan’s tax expenditures declined by Rs82 billion, or 3.3%, to Rs2.35 trillion in the current fiscal year, marking the first reduction in many years, according to the Economic Survey of Pakistan 2026 released by Finance Minister Muhammad Aurangzeb on Thursday.

Despite the decline, the cost of tax concessions remained significant at around $8.5 billion.

The reduction was mainly driven by lower customs duty exemptions and the elimination of costs associated with exemptions under bilateral free trade agreements.

According to the International Centre for Tax and Development, tax expenditures are revenue losses resulting from special tax provisions—such as deductions, exemptions, exclusions, credits, or deferrals—that allow certain individuals or businesses to pay lower taxes.

During the FY2025-26, Sales tax-related concessions remained the largest component of tax expenditures. The survey estimated sales tax losses at Rs1.27 trillion, up from Rs1.24 trillion a year earlier, accounting for 54% of total tax expenditures.

Losses under the Sixth Schedule of the Sales Tax Act declined to Rs567 billion from Rs703 billion after the government withdrew a number of exemptions under commitments made to the International Monetary Fund (IMF). The cost of exemptions on local supplies stood at Rs306 billion, while imported goods accounted for Rs261 billion.

However, revenue losses from reduced sales tax rates under the Eighth Schedule increased sharply to Rs635 billion, up 70% from Rs374 billion last year. The government is expected to withdraw some of these reduced rates in the upcoming budget.

Income tax expenditures rose to Rs580 billion from Rs545 billion last year, an increase of Rs35 billion. Exemptions on total income under the Second Schedule of the Income Tax Ordinance amounted to Rs438 billion, while tax credits cost the exchequer Rs76 billion.

The survey also showed that losses from reduced income tax rates reached Rs51 billion, while exemptions related to various allowances dropped significantly to just over Rs4 billion from Rs71 billion a year earlier.

Customs duty exemptions recorded the largest decline, falling 24% to Rs499 billion from Rs652 billion last year.

Revenue losses under the Fifth Schedule of the Customs Act, which covers goods exempt from customs duties, declined to nearly Rs206 billion from Rs380 billion. The cost of exemptions under free trade agreements was reduced to zero this year, compared with Rs61 billion in the previous fiscal year.

At the same time, concessions provided to the automobile sector, oil and gas exploration companies, and projects under the China-Pakistan Economic Corridor increased to Rs276 billion, more than double the previous year's level.

The survey noted that the government has gradually reduced tax exemptions through amendments to tax laws and IMF-backed reforms aimed at broadening the tax base and increasing revenue collection.