Karachi, November 15, 2025 — The Federal Board of Revenue (FBR) has provided detailed guidance on the methodology for accounting for sales tax exemptions in its tax expenditure reports.
The clarification aims to help businesses, policymakers, and taxpayers better understand how exemptions are treated under the Sales Tax Act (STA) 1990.
According to the FBR, sales tax exemptions are outlined in Section 13 and the Sixth Schedule of the STA 1990. These exemptions can apply to both locally supplied goods and imported items. Similar to zero-rated supplies, exemptions are granted by the federal government under specific circumstances, such as national security, natural disasters, emergency food supply programs, or the implementation of bilateral and multilateral agreements, typically notified through the official Gazette.
The FBR highlighted a key distinction between exempt and zero-rated items. While sellers of zero-rated goods can adjust input tax against output tax, the input tax paid on exempt items cannot be offset, meaning the government foregoes only the net output tax on these goods.
To calculate tax expenditure on exempt items, the FBR uses a notional adjustment method based on the tax calculated on the final sale price. For local supplies of exempt items, the adjustment is generally made at a 30% rate, reflecting historical practices. For imports of exempt items, since no input tax is involved, the calculation is simpler: the sales tax expenditure is directly based on the import value of the goods.
The FBR emphasized that this methodology ensures accurate reporting of tax expenditure, promotes transparency, and supports better fiscal planning. The clarification is part of the government’s ongoing effort to improve compliance, streamline tax administration, and provide clarity to stakeholders on exemptions and tax liabilities.