Islamabad, September 21, 2025 – The Federal Board of Revenue (FBR) has formally introduced benchmarks for determining income tax exemptions and concessions, aiming to enhance clarity and consistency in the taxation system.
The new framework highlights how tax reliefs are to be assessed against standard and special benchmark rates, ensuring that deviations are transparent and measurable.
According to the FBR, the Income Tax Ordinance (ITO) 2001 considers the “person” as the unit of taxation. Under this definition, a person can include individuals, companies, associations of persons (AOPs), or other legal entities. Each category is assessed on the basis of its taxable income, which may include salaries, rental income, business profits, capital gains, and other sources.
A resident person, defined as an individual or entity spending at least 183 days in Pakistan within a tax year, is taxed on worldwide income, whereas non-residents are taxed only on income generated from within Pakistan. To avoid double taxation, a foreign tax credit is permitted, meaning taxes paid abroad can be adjusted against liability in Pakistan.
Benchmarking of Rates
For calculating tax expenditures, Schedule-1 of the ITO provides the standard benchmark. Corporate entities, for instance, are assessed at 39% for banking companies, while other companies, including SMEs, face an average benchmark of 24.5%. Where losses are declared, a minimum tax of 1.25% applies. Income from exports is benchmarked at 1%. Any tax relief below these levels is treated as a concession or exemption.
Procedural Clauses and Deferred Taxation
Certain clauses in the ITO grant relief from immediate withholding requirements. These provisions, often viewed as procedural, are not always considered true tax expenditures, since liability is eventually collected when returns are filed. An example is the waiver of withholding tax on Behbood Savings Certificates for old-age citizens. While these are technically exemptions, they are more accurately deferred obligations rather than outright revenue loss.
Data Limitations and Transparency
The FBR acknowledges limitations in collecting comprehensive data. In some cases, it is difficult to confirm whether deferred taxes were eventually recovered. Where verification is not possible, the amounts are included in the overall tax expenditure estimates. The report also identifies structural exclusions, such as agricultural income, inter-corporate dividends, and tax reliefs tied to Free Trade Agreements (FTAs). These exclusions are not categorized as concessions since they are part of the constitutional or international framework.
Role of Subordinate Legislation
Tax reliefs are frequently implemented through Statutory Regulatory Orders (SROs). These delegated instruments empower the government to grant targeted benefits to specific sectors. All such SRO-related concessions and exemptions have been incorporated into the latest estimates to provide a complete picture of revenue foregone.
By issuing these benchmarks, the FBR seeks to provide policymakers, businesses, and taxpayers with greater clarity on the cost of tax incentives. The move is expected to strengthen fiscal discipline while ensuring that tax exemptions serve genuine economic and social purposes.