Cash-starved govt doles out Rs2.35tr in tax exemptions

ISLAMABAD: The government on Thursday announced a decline in tax exemptions in the outgoing fiscal year — the first such reduction in recent years — according to the Pakistan Economic Survey 2025-26 unveiled by Finance Minister Muhammad Aurangzeb.

The survey noted an unprecedented 3.37pc fall in tax exemptions, bringing the cost down to Rs2.353 trillion in FY26 from the downward-revised Rs2.434tr recorded in FY25.

In FY25, the government had initially reported exemptions at Rs5.84tr, a sharp 51pc rise from Rs3.879tr a year earlier. However, the figure was later revised to Rs2.434tr, with the survey offering no explanation beyond a reference to “errata”.

The decline in the cost of tax exemptions comes after seven consecutive years of increases, despite repeated government assurances that such concessions would be gradually curtailed under the International Monetary Fund programme.

Economic Survey reports a rare decline in concessions after seven years’ increases

Last year, the FBR had projected a sharp rise in the cost of tax exemptions, largely due to a Rs1.796tr waiver on domestically supplied and imported petroleum, oil and lubricants (POL) products.

In the latest survey, however, the government omitted this figure. However, the government had already planned to raise more than Rs1.4tr through the petroleum development levy (PDL).

The exemption is essentially fiscal in nature — provinces receive no share from this amount, while the federal government recovers the full proceeds through the PDL, which does not form part of the divisible pool.

As a result, the federal government bears minimal actual cost, but provinces are excluded from revenue sharing on PDL collections.

The value of tax exemptions has increased over the years. In FY18, it was Rs540.98 billion, rising to Rs972.4bn in FY19, Rs1.49tr in FY20 and then easing slightly to Rs1.314tr in FY21, before surging to Rs1.757tr in FY22. These tax concessions were extended to all sectors to promote industrialisation.

The Economic Survey 2025-26 showed a slight increase in income tax exemptions, a decline in customs exemptions, and a modest rise in sales tax concessions.

The fall in overall tax concessions comes at a time when the FBR is struggling with sizeable revenue shortfalls, marking the third consecutive year of missed collection targets.

Tax exemptions refer to revenue foregone by the state across various categories for different industries and other groups. This is mainly due to exemptions on raw materials and semi-finished products, as well as concessions for specific sectors aimed at reducing input costs for export-oriented industries.

Additionally, specific individuals are eligible for tax exemptions on certain perks and privileges.

The total sales tax exemptions increased by 2.91pc to Rs1.273tr from Rs1.237tr in FY25.

The cost of zero-rated exemptions under the Fifth Schedule fell to Rs8.774bn in FY26 from Rs81.108bn in FY25, a decline of 89.18pc. This is because the government reduced the zero-rated regimes for five export-oriented and some other sectors.

For local supplies, the cost of exemptions under the Sixth Schedule decreased to Rs305.628bn in FY26 from Rs330.545bn in the previous year, a decline of 7.54pc. This is due to a massive withdrawal of exemptions on items under that schedule.

Published in Dawn, June 12th, 2026