• Up to 80pc tax relief for salaried individuals earning Rs600,000-1.2m annually
• Minimal relief for top salary brackets earning above Rs4.1m
• 1pc surcharge reduction for income above Rs10m to curb brain drain
• Super tax cut by 0.5pc for companies earning Rs200m-500m
• Pensions above Rs10m to be taxed at 5pc
• Cash withdrawal tax for non-filers increased to 1pc from 0.6pc
ISLAMABAD: The government has announced sweeping tax reforms in the federal budget 2025-26, offering tax cuts of up to 80 per cent for low-income salaried individuals while limiting relief for higher earners to just 3pc. A new 5 per cent tax has also been proposed on high-value pensions exceeding Rs10 million annually.
The focus of the budget seems to balance sectoral relief, expand tax scope, achieve equitable burden-sharing, and introducing strong enforcement measures. The government expects the digital taxation framework, carbon levies and tax enforcement on e-commerce and digital transactions to help Pakistan adapt to global financial regulation standards.
Federal Board of Revenue (FBR) Chairman Rashid Mahmood Langrial said tax relief measures total Rs60 billion for salaried individuals, Rs2.4bn for the corporate sector, and Rs60bn in exemptions for fertilisers and pesticides.
To achieve the proposed tax collection target of Rs14.131 trillion, the autonomous tax growth is projected at Rs1.34tr in FY26 based on the GDP growth target of 4.2pc and inflation rate of 7.5pc.
With the current year’s revenue collection of Rs11.5tr and autonomous growth of Rs1.345tr, revenue collection will reach Rs12.845tr in FY26 without any new tax or enforcement measures.
Tied to its commitments under the International Monetary Fund (IMF) programme, the government introduces additional revenue measures of Rs1.05tr, including new tax measures of Rs655bn and another Rs400bn through enforcement.
Enforcement measures
The Finance Bill also proposes Section 114C, which introduces a framework to restrict high-value economic transactions — such as purchase of vehicles, immovable property and securities — for individuals and entities, who have not filed income tax returns or cannot justify their financial capacity through formally declared resources.
By mandating that, only “eligible persons” with sufficient declared assets can engage in such transactions.
A new Section 175AA is proposed to be inserted into the Income Tax Ordinance 2001, empowering the FBR to share tax-related information of high-risk persons with scheduled banks.
This includes details such as turnover, income (including taxable income) for one or more tax years, identification data (including bank account numbers) declared in income tax returns, wealth statements, financial statements, or any other document submitted to the FBR, along with data-based algorithms as may be prescribed.
Salaried class
The salary exemption limit has remained unchanged at Rs50,000 per month. However, the government has now proposed a reduction in tax rates for annual income up to Rs3,200,000 to provide relief to people in lower- and middle-income brackets. Similarly, the surcharge rate has been proposed to be reduced to 9pc from 10pc for salaried individuals only.
Taxpayers earning between Rs600,000 to Rs1.2m annually will now face a 1pc tax rate, down from 5pc, offering up to 80pc tax reduction.
For annual incomes between Rs1.2m and Rs2.2m, the rate will drop to 11pc from 15pc (on the amount exceeding Rs1.2m), and the fixed sum reduced to Rs6,000 from Rs30,000. For a salary of Rs150,000 per month, this translates to a 48pc reduction in tax liability.
For annual salaries between Rs2.2m and Rs3.2m, the rate drops from 25pc to 23pc (on the income exceeding Rs2.2m) and the fixed sum to Rs116,000 from Rs180,000.
No percentage change was made for the remaining two slabs except reductions in the fixed sums.
Those earning between Rs3.2m and Rs4.1m per year will see their fixed tax reduced to Rs346,000 from Rs430,000, though the income exceeding Rs3.2m will still be taxed at 30pc.
For people earning more than Rs4.1m annually, the fixed sum has been reduced to Rs616,000 from Rs700,000, but the tax rate on income exceeding Rs4.1m will remain 35pc.
A 1pc surcharge reduction is proposed for individuals earning above Rs10m to discourage skilled professionals from emigrating. Meanwhile, pensioners drawing over Rs10m annually will now be taxed at 5pc.
Other key measures
The income tax and withholding tax exemption for the erstwhile Fata and Pata regions has been proposed to be extended to June 30, 2026.
Withholding tax on property purchases has been lowered across brackets — from 4pc to 2.5pc, 3.5pc to 2.5pc, and 3pc to 1.5pc — and Federal Excise Duty on commercial property transfers has been abolished (previously up to 7pc).
The interest income tax rate will rise from 15pc to 20pc, though national savings schemes are exempt.
Rent from commercial properties must be reported at a minimum of 4pc of fair market value unless proven otherwise to the commissioner.
Digital economy
A Digital Transactions Proceeds Levy will apply to all payments for goods or services delivered via digital platforms. Banks and courier services will act as withholding agents to capture the payment chain.
Withholding tax on cash withdrawals by non-filers rises from 0.6pc to 1pc. For specified services, withholding tax increases from 4pc to 6pc, excluding IT and IT-enabled services.
For non-specified services, a flat 15pc applies; for sportspersons, the rate increases from 10pc to 15pc. The tax rate on profit on debt has been increased from 15pc to 20pc. The dividend tax rate has been enhanced to 25pc and 15pc on dividend from mutual funds.
The government also proposes removing the Rs5m cap on profit from debt under the final tax regime for individuals and associations of persons though companies will retain the adjustable tax.
Sales tax measures
The government also proposes an 18pc sales tax on the sales of imported solar panels.
Hybrid cars will also be subject to an 18pc sales tax, aligning them with petrol and diesel vehicles. A 10pc sales tax on goods will now be gradually imposed over the next five years in the sales tax-exempt provinces, i.e. ex-Fata region and Balochistan.
Under the proposed regime, payment intermediaries (banks, financial institutions, exchange companies, and payment gateways) will collect sales tax on digital payments, while couriers will handle tax collection for cash on delivery transactions. Additionally, the withholding tax rate is set to increase from 1pc to 2pc.
Sales tax has been extended to items like pet food, chocolates and cereal bars in retail packs. Rate on vermicelli and sheermaal has been increased from 10pc to 18pc. The 10pc tax on bun and rusk supply has been withdrawn.
The government has imposed 18pc sales tax on supplies, imports and import of plant and machinery by the industrial units located in the erstwhile Fata and Pata.
Published in Dawn, June 11th, 2025
