ISLAMABAD: Pakistan is preparing for a major overhaul of tax exemptions in Budget 2026-27 after the International Monetary Fund (IMF) called for a further reduction in tax reliefs during budget negotiations, sources said.
According to sources, the IMF has demanded that Pakistan shrink tax exemptions as part of broader fiscal reforms, with the government expecting around Rs 40 billion in additional revenue from curtailing various tax concessions.
Sources said the federal government has decided not to extend tax exemptions beyond 30 June 2026, and is planning to gradually phase out multiple relief measures to increase revenue collection in the upcoming fiscal year.
IMF-backed fiscal tightening and revenue targets
A key change under consideration is the removal of income tax exemptions for the former FATA and PATA regions, which is expected to take effect from 30 June 2026. From 1 July 2026, residents and businesses in these areas are likely to come under the standard national tax regime, sources added.
Sources further said that sales tax in the former tribal regions may also be increased in phases, with industrial units in FATA and PATA potentially facing a rise from 10% to 12%. Import-based industrial raw materials in these regions are also expected to be subject to a 12% sales tax.
The withholding tax exemption for FATA and PATA is also likely to end from 1 July 2026, sources said, marking a significant shift in the taxation framework for the former tribal areas.
In addition, several sector-specific tax incentives are expected to expire. Sources said sales tax exemptions on Completely Knocked Down (CKD) kits for electric vehicles are likely to end from 1 July 2026, while the reduced 1% sales tax regime on locally manufactured or assembled electric vehicles will remain in place until 30 June 2026.
The concessional sales tax regime on hybrid electric vehicles is also expected to end on 30 June 2026, with no extension expected, sources added. However, sales tax exemptions on electricity supply in tribal areas are likely to remain in place until 30 June 2026.
Sources further said that tax relief on locally manufactured silos will also expire on 30 June 2026.
In a separate move, the government is planning to double the Climate Support Levy on petroleum products from Rs 2.5 per litre to Rs 5 per litre starting 1 July 2026.
The revised levy is expected to generate over Rs 90 billion in revenue in the next fiscal year, sources added, as part of broader efforts under Budget 2026-27 to reduce exemptions and strengthen public finances.
