Tax Expenditure Report 2026 categorises major income tax relief measures to improve transparency and assess their fiscal impact.
ISLAMABAD: The Federal Board of Revenue (FBR) has classified seven major categories of income tax expenditures under the Income Tax Ordinance, 2001, providing a detailed framework to explain how tax exemptions and concessions support economic and social objectives while reducing government revenue.
The classification, published in the Tax Expenditure Report 2026, is intended to enhance transparency by identifying the various forms of tax relief available to taxpayers and assessing their impact on the national exchequer.
Exemption from income tax
The FBR said certain individuals, organisations and entities are completely exempt from income tax despite otherwise falling within the scope of the Income Tax Ordinance.
As an example, non-profit organisations and welfare institutions approved under Section 100C are exempt from income tax on earnings generated through voluntary contributions and qualifying activities under Clause 66 of Part I of the Second Schedule.
Exemption from specific heads of income
The report explained that certain categories of income are excluded from taxation even though they would normally form part of the tax base.
For instance, profits earned from qualifying electric power generation projects established after 1 July 1988 under the government’s approved energy policy enjoy tax exemption for a specified period under Clause 132 of Part I of the Second Schedule.
Deductible allowances
According to the FBR, deductible allowances enable taxpayers to reduce their taxable income by claiming specified expenses or contributions that would not ordinarily qualify as business deductions.
The report cited contributions to approved pension funds under Section 63 of the Income Tax Ordinance as an example, allowing individuals to reduce their taxable salary income.
Tax credits
Unlike deductions, tax credits directly reduce the amount of tax payable after the taxpayer’s liability has been calculated.
The FBR noted that Section 65F provides a tax credit for qualifying investments in technology and information technology-related enterprises, encouraging investment in Pakistan’s digital economy.
Reduced tax rates
The report also highlighted concessions where specific income streams or taxpayers are taxed at rates lower than the standard benchmark.
As an example, the withholding tax on profit paid to non-residents without a permanent establishment in Pakistan has been reduced to 10 per cent under Clause 5A of Part II of the Second Schedule, compared with the benchmark rate of 15 per cent.
Reduced tax liability
Some tax relief measures lower the amount of tax payable by granting a fixed reduction to eligible taxpayers.
The report pointed to full-time teachers and researchers employed by recognised non-profit educational institutions, who receive a 25 per cent reduction in income tax on their salary under Clause 1(2) of Part III of the Second Schedule.
Tax deferral
The FBR explained that tax deferral allows taxpayers to postpone the payment of tax until a future date, effectively providing an interest-free financial benefit.
One example is contributions made to Registered Pension Plans and Voluntary Pension System funds, where both contributions and investment income remain tax-deferred until the funds are withdrawn.
Strengthening transparency
The tax authority said categorising income tax expenditures into clearly defined classes would improve public understanding of the fiscal cost of tax concessions and assist policymakers in evaluating whether existing relief measures continue to achieve their intended economic and social objectives.
The classification forms part of the Tax Expenditure Report 2026, which aims to provide a comprehensive assessment of the revenue forgone through Pakistan’s tax exemptions, incentives and other preferential tax treatments.