Overall income tax concessions rise to Rs580 billion despite decline in exemptions from total income
ISLAMABAD: The Federal Board of Revenue (FBR) granted Rs438 billion in exemptions from total income during the tax year covered by the Tax Expenditure Report 2026, according to the report released alongside the federal budget documents.
The latest figure represents a slight decline from Rs443.45 billion reported under the same category in the Tax Expenditure Report 2025, indicating a modest reduction in revenue forgone through income tax exemptions.
According to the FBR, a person’s total income for a tax year comprises two principal components: income earned under all heads of income during the year and income exempt from tax under the provisions of the Income Tax Ordinance, 2001.
The tax authority explained that exemptions from total income are governed by Part I of the Second Schedule to the Income Tax Ordinance, 2001, which specifies categories of income that are excluded from taxation.
Overall income tax concessions increase
Despite the marginal decline in exemptions from total income, the report showed that overall income tax exemptions and concessions increased to Rs580 billion in 2026, compared with Rs545.23 billion recorded in the previous year’s report.
The increase reflects changes across various categories of tax expenditures.
According to the report, deductible allowances surged to Rs4.01 billion in 2026 from only Rs71 million a year earlier.
Meanwhile, tax credits declined slightly to Rs76 billion, compared with Rs78.61 billion reported in the previous year.
A significant increase was recorded under reduction in tax rates, where revenue forgone rose sharply to Rs50.71 billion, compared with just Rs3.46 billion in the Tax Expenditure Report 2025.
In contrast, reduction in tax liability fell substantially to Rs11 billion from Rs19.64 billion a year earlier.
Purpose of the report
The Tax Expenditure Report provides an estimate of government revenue forgone through exemptions, concessions, reduced tax rates, credits and other preferential tax treatments. It is intended to improve transparency in fiscal policy by highlighting the cost of tax incentives provided under Pakistan’s tax laws.
Tax experts note that while many exemptions are designed to support investment, promote specific sectors and provide social relief, they also reduce the government’s revenue base. They argue that regular evaluation of tax expenditures is essential to ensure that such concessions achieve their intended economic objectives while maintaining fiscal sustainability.
