Revised methodology excludes exports, diplomatic exemptions and other structural tax provisions to align reporting with international best practices.
ISLAMABAD: The Federal Board of Revenue (FBR) has introduced a revised framework for measuring sales tax expenditures, redefining the benchmark tax base by excluding several categories of exemptions and non-taxable transactions that it considers structural features of Pakistan’s tax system rather than preferential tax incentives.
The changes, outlined in the Tax Expenditure Report 2026 (TER-2026), are part of the FBR’s broader effort to align Pakistan’s tax expenditure reporting with internationally accepted standards by ensuring that only policy-driven tax concessions are included in future estimates.
According to the report, Pakistan’s benchmark sales tax system is based on the destination principle, under which sales tax applies only to goods and services consumed within the country, while exports and supplies consumed outside Pakistan fall outside the tax base.
The FBR explained that because exports are not intended for domestic consumption, their zero-rating or exemption does not represent a tax expenditure.
Federal sales tax limited to goods and ICT services
The report noted that the 18th Constitutional Amendment transferred the authority to levy sales tax on services to the provinces.
As a result, provincial governments administer sales tax on services within their respective jurisdictions, while the federal government retains responsibility only for services supplied in the Islamabad Capital Territory (ICT).
Accordingly, the benchmark sales tax base adopted in the report comprises:
• Sales tax on goods consumed throughout Pakistan.
• Sales tax on services supplied within the Islamabad Capital Territory.
However, the FBR clarified that tax expenditure relating to ICT services has not been included because the Islamabad Capital Territory (Tax on Services) Ordinance, 2001 does not provide exemptions, tax credits or concessional tax rates. Instead, it mainly prescribes minimum thresholds while applying uniform tax rates.
Structural exclusions from tax expenditure
The revised methodology excludes several categories from sales tax expenditure estimates, treating them as structural elements of the tax system.
These include exports and international supplies, including exports covered under Section 4 of the Sales Tax Act, 1990, and stores and provisions supplied to international aircraft and vessels under Section 4B. Since these supplies are consumed outside Pakistan, they are not regarded as tax expenditures.
The FBR has also excluded financial instruments such as currency notes, banknotes, shares, stocks, bonds and monetary gold. According to the report, these items are financial assets or legal tender rather than goods or services consumed by end users, making their exclusion a structural feature of the tax system.
In addition, transitional non-taxation applicable to territories integrated into the Sales Tax Act following the Twenty-fifth Constitutional Amendment, 2018, has been excluded because it stems from constitutional requirements rather than discretionary tax policy.
The report also excludes exemptions granted to diplomatic missions, United Nations agencies and other organisations enjoying tax privileges under international agreements signed by Pakistan, noting that these arise from treaty obligations rather than domestic tax incentives.
Standard rate remains unchanged
Despite the revised methodology, the FBR confirmed that the benchmark sales tax rate remains the standard 18 per cent prescribed under the Sales Tax Act, 1990.
The tax authority said the updated benchmark framework is intended to improve the accuracy, transparency and international comparability of Pakistan’s tax expenditure reporting by ensuring that only preferential tax measures and policy-driven concessions are reflected in future estimates.