Islamabad: Pakistan’s annual tax expenditure declined for the first time in several years, falling to Rs2.35 trillion during the current fiscal year as the government continued efforts to reduce tax exemptions and broaden the revenue base.
The reduction, highlighted in the Economic Survey of Pakistan 2026, reflects ongoing fiscal reforms and commitments aimed at improving tax collection and reducing revenue losses. Despite the decline, the overall cost of tax concessions remains substantial, representing a significant challenge for public finances.
According to the survey presented by Finance Minister Muhammad Aurangzeb, tax expenditures decreased by Rs82 billion, or 3.3%, compared to the previous fiscal year.
Tax Expenditure Drops for the First Time in Years
Tax expenditure refers to revenue the government forgoes through exemptions, reduced tax rates, credits, deductions, and special concessions provided under various tax laws.
The Economic Survey showed:
- Tax expenditure in FY2025-26: Rs2.35 trillion
- Tax expenditure in FY2024-25: Rs2.43 trillion
- Reduction: Rs82 billion
- Percentage decline: 3.3%
In dollar terms, the cost of these concessions remains significant, estimated at approximately $8.5 billion.
According to the survey, the decline resulted primarily from the withdrawal of certain sales tax exemptions and the elimination of costs associated with some free trade agreement-related concessions.
Sales Tax Exemptions Remain Largest Source of Revenue Loss
Despite reform measures, sales tax exemptions continue to account for the largest share of tax expenditure.
The survey estimates sales tax-related revenue losses at Rs1.27 trillion during the current fiscal year, slightly higher than the Rs1.24 trillion recorded last year.
This category represents approximately 54% of total tax expenditures.
Reduction in Zero-Rated Exemptions
Revenue losses associated with products covered under the Fifth Schedule of the Sales Tax Act fell sharply.
The cost declined from Rs81 billion last year to just Rs9 billion in the current fiscal year.
The Fifth Schedule governs the zero-rated tax regime applied to selected goods and sectors.
Sixth Schedule Exemptions Continue to Decline
The government also reduced losses linked to exemptions provided under the Sixth Schedule of the Sales Tax Act.
These exemptions fell from Rs703 billion last year to Rs567 billion this year.
The breakdown includes:
- Rs306 billion in exemptions on local supplies
- Rs261 billion in exemptions on imported goods
The reduction follows the government’s commitment to gradually withdraw tax exemptions under economic reform programs.
Reduced Sales Tax Rates Still Cost Billions
While several exemptions have been withdrawn, reduced sales tax rates continue to generate significant revenue losses.
According to the survey, the government incurred Rs635 billion in losses through reduced tax rates under the Eighth Schedule of the Sales Tax Act.
This figure represents a sharp increase of Rs261 billion, or nearly 70%, compared to the previous fiscal year.
The Eighth Schedule allows lower-than-standard sales tax rates on selected goods and sectors.
Officials have indicated that further adjustments may be introduced to align reduced rates more closely with the standard tax rate.
Income Tax Exemptions Increase Slightly
Unlike sales tax expenditures, income tax-related concessions rose during the fiscal year.
The survey estimates income tax revenue losses at Rs580 billion, compared with Rs545 billion last year.
This marks an increase of Rs35 billion.
Major Components of Income Tax Expenditure
Key areas contributing to income tax losses include:
- Rs438 billion in exemptions on total income
- Rs76 billion through tax credits
- Rs51 billion due to reduced tax rates for specific sectors
- Rs11 billion from reductions in tax liabilities
At the same time, losses linked to various allowances declined significantly, dropping from Rs71 billion to around Rs4 billion.
According to the survey, exemptions under the Second Schedule of the Income Tax Ordinance continue to represent the largest component of income tax expenditure.
Customs Duty Exemptions See Significant Reduction
The most notable decline occurred in customs duty-related concessions.
Revenue losses from customs duty exemptions fell from Rs652 billion last year to Rs499 billion during the current fiscal year.
The reduction amounts to:
- Rs153 billion
- 24% year-on-year decline
This improvement contributed substantially to the overall reduction in tax expenditure.
Fifth Schedule Customs Exemptions Reduced
Losses associated with customs duty exemptions under the Fifth Schedule of the Customs Act declined significantly.
The cost dropped from Rs380 billion last year to Rs206 billion in the current fiscal year.
The Fifth Schedule covers goods that receive customs duty exemptions under specific policy provisions.
Free Trade Agreement Concessions Drop to Zero
One of the most striking findings in the survey is the elimination of revenue losses linked to certain free trade agreement (FTA) concessions.
The reported cost of FTA-related exemptions fell from Rs61 billion last year to zero in the current fiscal year.
This contributed significantly to the overall reduction in customs duty expenditure.
According to the survey, the change reflects revisions in how trade-related concessions are applied and reported.
Concessions for Strategic Sectors Continue
Despite broader efforts to reduce exemptions, several strategic sectors continue to benefit from customs duty concessions.
The survey notes that:
- Automobile sector incentives
- Oil and gas exploration concessions
- China-Pakistan Economic Corridor (CPEC)-related exemptions
collectively accounted for Rs276 billion in revenue losses.
This represents an increase of Rs143 billion compared with the previous fiscal year.
Supporters argue these incentives encourage investment and economic development, while critics question their fiscal impact.
Fiscal Reform and Revenue Mobilization
The reduction in tax expenditure comes as Pakistan continues efforts to strengthen public finances and improve revenue collection.
Economists often view excessive tax exemptions as a major constraint on revenue generation because they narrow the tax base and create distortions within the economy.
The government has increasingly focused on reviewing exemptions and reducing preferential treatment for selected sectors.
According to fiscal experts, expanding the tax base while simplifying the tax system remains critical for achieving sustainable revenue growth and reducing reliance on borrowing.
Conclusion
Pakistan’s tax expenditure declined to Rs2.35 trillion in FY2025-26, marking the first meaningful reduction in several years. The decrease was driven largely by lower customs duty exemptions, reduced sales tax concessions, and the elimination of certain free trade agreement-related costs.
However, tax expenditures remain substantial, particularly in the areas of sales tax and income tax exemptions. As the government pursues broader fiscal reforms, further efforts to rationalize concessions and improve tax collection are expected to remain a key policy priority.
FAQs
What is tax expenditure?
Tax expenditure refers to government revenue lost through tax exemptions, deductions, credits, reduced rates, and other special concessions.
How much did Pakistan’s tax expenditure amount to this year?
The Economic Survey of Pakistan 2026 estimates total tax expenditure at Rs2.35 trillion.
Why did tax expenditure decline?
The reduction resulted from the withdrawal of certain sales tax exemptions, lower customs duty concessions, and the elimination of some FTA-related exemption costs.
Which category accounts for the largest revenue loss?
Sales tax exemptions remain the largest component, costing approximately Rs1.27 trillion.
Did customs duty exemptions decrease?
Yes. Customs duty-related tax expenditure fell by 24%, declining from Rs652 billion to Rs499 billion.
SEO Hashtags
#PakistanEconomy #TaxExpenditure #EconomicSurvey2026 #PakistanBudget #FBR #TaxReforms #SalesTax #CustomsDuty #IncomeTax #FiscalPolicy #PakistanFinance #EconomicNews
