Fiscal Leakage: Tax Exemptions to Elite Still Cost Economy PKR 2.35 Trillion, Backed by Economic Survey.
Pakistan Economic Survey 2025-26 tax exemptions elite cost
ISLAMABAD: Pakistan’s tax expenditure bill remained elevated at Rs2.35 trillion in FY2026, reflecting only a modest 3% decline despite continued withdrawal of exemptions under IMF-driven fiscal reforms, the Economic Survey 2026 revealed.
The reduction of Rs82 billion compared to last year was largely attributed to withdrawal of sales tax exemptions and the elimination of costs under free trade agreements. Yet, the overall burden continues to represent a significant drag on revenue mobilisation efforts.
Sales Tax Structure Under Pressure as Reduced Rates Surge:
Sales tax exemptions continued to dominate fiscal losses, rising to Rs1.27 trillion, with reduced-rate taxation emerging as the fastest-growing category.
Exemptions under the Sixth Schedule dropped sharply to Rs567 billion as the government eliminated zero-rating benefits on several goods. However, the Eighth Schedule—covering concessional rates—jumped to Rs635 billion, highlighting a shift from outright exemptions toward indirect revenue leakage.
The IMF is reportedly pressing Pakistan to unify these slabs under the standard 18% rate, while also phasing out preferential categories that distort consumption taxation.
Customs Reliefs Decline, Income Tax Exemptions Rise Slightly:
Customs duty exemptions recorded a sharp decline of 24% to Rs499 billion, driven by reduced concessions in automobiles, energy exploration, and CPEC-related imports. Free trade agreement-linked exemptions were completely eliminated, compared to Rs61 billion last year.
Income tax exemptions, however, edged up to Rs580 billion, reflecting higher sectoral reliefs and continued use of reduced tax rates under the Second Schedule of the Income Tax Ordinance.
Allowances-based exemptions fell significantly, but broader structural exemptions and credits continue to keep the income tax base narrow.
Despite ongoing reforms, analysts suggest Pakistan’s tax system remains heavily reliant on exemptions that dilute the effectiveness of revenue collection and complicate fiscal consolidation targets.
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