Pakistan grants PKR 2.53 trillion in tax exemptions despite fiscal tightening

The Federal Board of Revenue (FBR) granted PKR 2.53 trillion in tax exemptions and concessions during fiscal year 2024–25 (FY2025), according to the Pakistan Economic Survey 2025–26, even as the overall cost of state-backed tax incentives showed a slight decline.

The survey reported that total tax exemptions and concessions stood at PKR 2.53 trillion in FY2025, compared with PKR 2.43 trillion in the previous fiscal year. However, the report highlighted that relief in key domestic tax categories continued to rise.

“The fiscal cost of tax exemptions and concessions remains significant, with divergent trends across tax heads,” the Economic Survey 2025–26 said, pointing to rising domestic tax exemptions alongside a sharp fall in import-related concessions.

Income tax exemptions rise 6.42%

According to the survey, income tax exemptions increased 6.42% to PKR 580 billion in FY2025 from PKR 545 billion a year earlier.

The increase reflects continued revenue foregone through targeted and broad-based tax relief measures.

Sales tax remains the largest component

Sales tax exemptions accounted for the largest share of the total cost, rising to PKR 1.274 trillion in FY2025 from PKR 1.237 trillion in the previous year, an increase of 2.99%.

The increase underscores continued pressure on indirect tax collection.

Customs duty concessions fall sharply

In contrast, customs duty exemptions fell 23.67% to PKR 499 billion from PKR 652 billion a year earlier.

The decline reflects tighter controls on import-stage incentives and improved enforcement at customs.

Breakdown of tax exemptions

Analysis

Economic analysts say the decline in customs-related concessions signals progress toward fiscal tightening and improved import-side discipline. However, the continued rise in income and sales tax exemptions highlights persistent structural challenges in broadening the domestic tax base.

The Economic Survey 2025–26 noted that Pakistan’s tax system continues to rely heavily on indirect taxation, although a gradual shift toward direct taxes is underway. The share of direct taxes in FBR collections rose to 49.3% in FY2025 from 48.7% in FY2024, while the share of indirect taxes declined correspondingly.

Despite the gradual improvement in tax composition and tax administration, analysts caution that the growing volume of exemptions underscores the need for deeper reforms to reduce revenue leakage and improve long-term fiscal sustainability.