ISLAMABAD: Key tax proposals for the upcoming fiscal year 2025-26 budget are emerging, indicating a strategic focus on enhancing corporate profitability, bolstering revenue collection, and implementing targeted reforms across various economic sectors. The proposed measures aim to address existing fiscal challenges while fostering economic growth and stability.
General tax reforms & relief measures
Among the general proposals, a phased elimination of the super tax is being considered, with a 3% reduction in FY26, followed by further reductions in subsequent years. This move is expected to significantly enhance corporate profitability and boost investor confidence. For the salaried class, there’s a proposal to increase the income tax exemption threshold from PKR 600,000 to PKR 800,000, aiming to increase disposable income and stimulate consumer spending.
Stock market & financial sector adjustments
In the stock market, proposals include an increase in Capital Gains Tax (CGT) by 2.5% to 17.5% for filers and by 5.0% to 35.0% for non-filers. Dividend tax is also set for a potential increase of 2.5% to 5.0%. Conversely, there’s a measure to withdraw the 10% tax on bonus share issues to encourage companies to issue bonus shares and enhance market liquidity. The restoration of exemption on inter-corporate dividends is also on the table to prevent double taxation and boost corporate cash flows.
For the banking sector, rationalizing the effective tax rate (currently at 54% including corporate and super tax) is proposed to reduce the tax burden and improve profitability.
Industry-specific tax proposals
Several sectors face specific tax considerations:
Fertilizer: A 5% increase in Federal Excise Duty (FED) on fertilizers is proposed, which is expected to raise urea and DAP prices.
Exploration and Production (E&P): Revival of a 0% tax credit for plant, machinery, and BMR investments is suggested to enhance growth and productivity.
Cement: Measures include developing 200,000 low-cost housing units and allocating PKR 1.1 trillion to the Public Sector Development Program (PSDP) to drive cement demand.
Steel: A proposal to remove GST exemption for FATA/PATA steel is under consideration, which may increase steel prices.
Oil Marketing Companies (OMCs): Potential measures include imposing a 3-5% sales tax on petroleum products and a PKR 2.5-5.0/liter carbon levy, aiming to encourage cleaner energy use.
Power: Proposals address circular debt resolution, including a measure to resolve PKR 2.4 trillion circular debt by May 2025. A measure to reduce IPP (Independent Power Producer) dividends from 15% to 7.5% is also discussed, though its passage is deemed unlikely.
Automotive & export sector reforms
For the auto sector, proposals include setting a 40% tariff premium on used vehicle imports, which would reduce by 10% annually until 2030, and increasing the age limit for imported vehicles to 5 years. These measures could impact local demand and competition.
The textile sector might see the restoration of a 1% final tax regime for exporters, replacing the 29% normal tax, aiming to boost profitability. The technology sector also seeks an extension of its final tax regime for another 10 years (2025-2035).
Healthcare & consumption-based taxes
In the pharmaceutical sector, restoring a zero-rated regime for DRAP-registered pharmaceuticals is proposed to enable input tax credit and boost cost efficiency.
Consumption-based taxes may see increases, with a proposal to raise FED on sugary drinks from 20% to 40% (targeting 50% long-term), which may lead to higher prices and a decline in sales volumes. For tobacco, an increase in FED to 75% of the retail price and stricter penalties on illicit trade are proposed.
Real estate sector incentives
The real estate sector is considering a reduction in advance tax to 2% for sales and 1% for purchases, aiming to lower transaction costs and increase compliance.
These proposals highlight the government’s multi-faceted approach to budget planning for FY26, aiming to balance revenue generation with economic stimulus and sector-specific development.
