Tax Expenditure Report 2026 says conservative benchmark avoids overstating the fiscal cost of corporate tax concessions.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained why it applies a 24.5 per cent benchmark tax rate for non-banking companies when estimating corporate tax expenditures, despite data showing that companies paid a considerably higher effective tax rate during the latest tax year.
The explanation, contained in the Tax Expenditure Report 2026, outlines the methodology used by the FBR to calculate the fiscal cost of tax exemptions, concessions and incentives granted under Pakistan’s tax laws.
Benchmark Rates Based on Tax Law
According to the report, benchmark income tax rates are derived from the statutory provisions of the Income Tax Ordinance, 2001.
Individual taxpayers are assessed using the applicable income tax slabs, while taxpayers reporting losses are assigned the 1.25 per cent minimum tax under Section 113 of the ordinance. Export income is benchmarked at 1 per cent for the purpose of estimating tax expenditures.
For banking companies, the FBR applies a 39 per cent benchmark rate, reflecting both the corporate income tax and the super tax imposed under Section 4C of the Income Tax Ordinance.
Why Non-Banking Companies Are Benchmarked at 24.5%
The methodology differs for non-banking companies.
The FBR uses an average benchmark tax rate of 24.5 per cent, explaining that companies outside the banking sector are subject to different statutory tax rates depending on their industry, business size and applicable tax provisions.
According to the report, the lower benchmark has been adopted as a conservative measure to avoid overstating the fiscal cost of corporate tax incentives and concessions.
Corporate Tax Data Shows Higher Effective Rate
The report also reveals that an analysis of corporate income tax returns for Tax Year 2025 produced a substantially higher effective tax burden than the benchmark used for tax expenditure calculations.
According to the FBR, non-banking companies reported taxable income of approximately Rs3.57 trillion and net tax chargeable of nearly Rs1.68 trillion, resulting in a raw effective tax rate of 46.94 per cent.
However, the tax authority said this figure is significantly influenced by the minimum tax regime under Section 113, which requires companies to pay 1.25 per cent of turnover even when they do not earn taxable profits.
Based on aggregate corporate turnover of around Rs52.29 trillion, the FBR estimated that minimum tax contributed approximately Rs653.6 billion to total corporate tax collections.
After excluding the minimum tax component, the effective corporate income tax rate falls to approximately 28.6 per cent, which the FBR said broadly corresponds with the statutory corporate tax rate of 29 per cent.
Conservative Approach to Tax Expenditure Estimates
Despite the higher effective corporate tax rate, the FBR has retained the 24.5 per cent benchmark for estimating tax expenditures.
The report states that the lower benchmark provides a conservative basis for calculating the fiscal cost of tax concessions and reduces the risk of overstating the value of exemptions and incentives available to companies.
The methodology forms part of the FBR’s broader effort to align Pakistan’s tax expenditure reporting with international practices while providing policymakers with a more transparent assessment of the revenue forgone through targeted tax relief measures.
The disclosure comes at a time when Pakistan is pursuing fiscal reforms aimed at broadening the tax base, rationalising tax exemptions and strengthening domestic revenue mobilisation, making accurate measurement of tax expenditures increasingly important for tax policy and budget planning.