Tax revenue target raised to Rp15.26 trillion, tax measures of Rp306 billion proposed, tax relief of Rp360 billion announced, provinces
Finance Minister Muhammad Aurangzeb presents the 2026-27 budget in the National Assembly on Friday. — NATIONAL ASSEMBLY
ISLAMABAD:
Backed by the first provincial grants of more than Rp 1 trillion, Finance Minister Muhammad Aurangzeb on Friday unveiled a Rp 18.8 trillion federal budget, proposing to significantly roll back punitive taxes imposed on the salaried class and the real estate sector, while deepening economic liberalization.
The expansionary budget of Rs 18.8 trillion was 20% or Rs 3.1 trillion higher than the revised outlay of the outgoing fiscal year, signaling the government’s intentions to shift gears from consolidation to spending.
Despite significant contributions from four provinces, the federal government has announced a deficit of Rs 7 trillion, larger than this fiscal year and to be covered by more borrowing. The government also plans to raise foreign loans of $23.4 billion, including $2 billion through euro and panda bonds.
Prime Minister Shehbaz Sharif’s government also reintroduced the ban on major purchases of more than Rs 100 crore if these assets are not backed by declared white money. But it also tried to encourage capital formation by abolishing the super tax on annual incomes of up to Rs 500 million and reducing it to 8% for those above this threshold. However, the super tax rate will remain at 10% for banks and companies in the oil and fertilizer sector.
It was the fifth budget that Prime Minister Shehbaz Sharif has overseen since 2022 and the third of his current five-year constitutional terms.
Both the government-allied Pakistan People’s Party and the opposition party, the Pakistan Tehreek-e-Insaf, organized protests, but for different reasons.
The Finance Minister’s speech was inaudible due to the noise created by the PTI demanding the release of its leader Imran Khan. The PPP protested against high taxes on mobile phones and water shortages in Sindh.
Opposition leader Mehmood Khan Achakzai approached Prime Minister Shehbaz Sharif’s seat and shook his hand. There was also a fight between a couple of assembly members from the PTI and the PML-N.
The proposed budget seems like a step towards growth, but a deeper look suggests that the increased spending is mainly for defense purposes and construction of water sector projects to fight Indian aggression on water.
The Finance Bill 2026-27 aimed to strike a balance between reversing the injustice being inflicted on the salaried class, helping the real estate sector get the business going and reducing the tax burden on the corporate sector. Social media income was once again subject to a 5% income tax.
The government has proposed a total of more than 306 billion rupees in fiscal measures in the budget, but has also given relief worth 360 billion rupees. Additionally, the government has proposed compliance measures worth Rs 354 billion. But the FBR’s tax-to-GDP ratio would remain around 10.5% in the next fiscal year.
Oil and carbon tax targets have been set at Rs 1,748 trillion for the next fiscal year, thanks to the Rs 80 per liter tax. The minister also announced a 7% increase in salaries and pensions, which left public sector employees unhappy.
The salaried class got a tax relief of Rs 52 billion, while the real estate sector received a tax relief of Rs 115 billion. The government imposed a federal excise duty of 30% on electric vehicles valued up to Rs 30 million and 40% on electric vehicles costing more than Rs 30 million.
Sources said talks with the IMF on reducing taxes on the real estate sector were still ongoing as the IMF was not in favor of halving withholding rates.
It also imposed a 5% income tax on income from social media platforms and reintroduced a ban on purchasing major assets if declared income does not support the purchase. 18% sales tax has been imposed on hybrid vehicles.
The government imposed Rs 306 billion in additional taxes and took coercive measures worth Rs 354 billion to achieve the new fiscal target of Rs 15,264 trillion set by the Federal Board of Revenue. The target of the oil tax is set at Rp1.68 trillion, the climate support tax at Rp50 billion and the electric vehicle adoption tax at Rp22.8 billion.
Some of the measures are expected to boost the economy, including the decision to abolish or reduce regulatory duties on 1,914 tariff lines. The government has also proposed to reduce customs duties on 3,125 tariff lines, including the abolition of the 5% customs duty.
For the first time, three provinces except Balochistan have provided Rs 1.035 trillion in grants to the FBR based on a target of Rs 15.264 trillion. In case of any deviation, the subsidy amount would be reduced automatically. The finance minister said provincial shares would be determined based on Rp13.35 trillion in taxes and the additional amount of Rp1.9 trillion would go to the federal government, including the provincial share of Rp1.035 trillion.
For the next fiscal year, four provinces would get a combined total of Rp8.85 trillion, but of that total, Rp1.035 trillion would return to the federal fund in the form of a grant. Punjab would receive Rs 4.4 trillion but would donate a significant amount to the Centre. Sindh would receive Rs 2.2 trillion. Khyber-Pakhtunkhwa would receive Rs 1.44 trillion gross, including grants.
Muzzammil Aslam, financial advisor to the KP chief minister, reiterated on Friday that his province would donate money only after arranging a meeting with the party’s founding president Imran Khan. Khan is serving a prison sentence and is not allowed to meet visitors.
For the first time, the government has sought to ease fiscal constraints by proposing a higher spending package. The total size of the budget is Rp18.8 trillion, Rp3.1 trillion more than this year’s revised budget.
The proposed federal budget deficit is 4.9% of GDP or Rs 7 trillion, significantly higher than this fiscal year. The federal deficit is Rs 1.9 trillion or 36% higher than the outgoing fiscal year, showing that the government is no longer adopting the path of fiscal consolidation.
The defense budget has been proposed at Rs 3 trillion, up 16% or Rs 413 billion from this fiscal year due to hostilities with India and Afghanistan. Of the provincial grant of Rs 1 trillion, Rs 335 billion has been allocated to the declared defense budget.
Furthermore, the cost of military pensions is Rs 822 billion and Rs 319 billion has been allocated for the development program of the armed forces.
The government projects gross federal revenue of a record 20.6 trillion rupees for the next fiscal year, an increase of 1.3 trillion rupees or 7%. The gross revenue is based on the FBR’s fiscal target of Rs 15.264 trillion and Rs 5.3 trillion in non-tax revenue.
The non-tax revenue will mainly come from the Petroleum Tax, where the government wants to collect almost Rs 1.7 trillion and profits of Rs 1.435 trillion from the State Bank of Pakistan. The Rs 1 trillion reduction in central bank profits due to lower interest rates is offset by provincial subsidies shown as non-tax revenue in the budget.
The Minister of Finance stated that the provinces would provide subsidies for three consecutive years.
Of the Rs 15.264 trillion collected by the FBR, the provinces will get Rs 8.8 trillion as share of federal taxes under the allocation of the National Finance Commission.
This leaves the federal government with net revenue of Rp11.8 trillion for the next fiscal year, which will not be enough to cover interest payments and include all defense spending. The government will borrow 7 trillion rupees in the next fiscal year to finance the total federal budget of 18.8 trillion rupees.
More than 8 trillion rupees or 43% of the total budget goes towards interest payments. Pensions would consume Rs 1.17 trillion, subsidies Rs 1.1 trillion, functioning of civil government Rs 1.07 trillion and only Rs 1 trillion is allocated for development.
Under the IMF programme, the four provinces must also save Rs 1.8 trillion of their revenue as cash surpluses to reduce the national budget deficit to Rs 5.2 trillion or 3.6% of GDP. He
The Finance Minister announced a Rs 838 billion BISP program aimed at widening the net to over 12 million beneficiaries and adding more children to conditional cash transfer programmes.
The government also hopes to earn Rs 160 billion from the privatization of power distribution companies during this fiscal year.
The government has estimated it will receive $23.4 billion in foreign loans in the next fiscal year, including refinancing $12 billion of debt from China and Saudi Arabia.
