ISLAMABAD: Pakistan’s cost of tax concessions and exemptions declined marginally by 3.3% to Rs2.35 trillion in the current fiscal year, mainly due to withdrawal of several sales tax exemptions and zero cost impact from bilateral free trade agreements, according to the Economic Survey 2026.
The total tax expenditure stood at Rs2.43 trillion in the previous fiscal year, showing a net reduction of Rs82 billion. In dollar terms, however, the burden still equals around $8.5 billion, nearly matching the foreign inflows Pakistan received in recent bilateral support arrangements.
Sales Tax Exemptions Remain Dominant Pressure Point
Sales tax exemptions remained the single largest contributor to revenue losses, rising slightly to Rs1.27 trillion from Rs1.24 trillion last year. This category alone accounts for 54% of total tax expenditures, highlighting structural weaknesses in the indirect tax system.
Within this segment, exemptions under the Sixth Schedule fell to Rs567 billion from Rs703 billion, reflecting IMF-linked withdrawal of zero-rating and exemptions on both local and imported goods. However, reduced tax rates under the Eighth Schedule surged sharply to Rs635 billion, up 70% year-on-year.
The government is expected to further rationalise these reduced rates in the upcoming budget, with the IMF pushing for alignment toward the standard 18% sales tax regime and a possible increase of concessional slabs from 5% to 10%.
Income Tax Reliefs Edge Higher, Customs Duties Fall Sharply
Income tax exemptions rose to Rs580 billion from Rs545 billion, driven mainly by higher sectoral concessions and reduced tax rates, even as exemptions on allowances and credits showed mixed declines.
Customs duty exemptions, however, fell significantly by 24% to Rs499 billion, reflecting withdrawal of concessions across key sectors including automobiles, oil and gas exploration, and CPEC-linked imports.
Notably, free trade agreement-related exemptions dropped to zero from Rs61 billion, marking a structural shift in tariff policy under ongoing fiscal consolidation efforts.
Despite the reduction, large exemptions under the Customs Act’s Fifth Schedule and sector-specific concessions continued to weigh heavily on revenue mobilisation.