Tax authority adopts international reporting standards, narrowing the scope of tax expenditures by excluding structural tax provisions and treaty-based exemptions.
ISLAMABAD: The Federal Board of Revenue (FBR) has overhauled the methodology used to calculate Pakistan’s tax expenditures, excluding several major categories of tax exemptions and concessions from its estimates in a move that has significantly reduced the reported value of revenue forgone by the government.
The revised approach, detailed in the Tax Expenditure Report 2026 (TER-2026), aligns Pakistan’s reporting framework with international best practices by distinguishing policy-driven tax incentives from provisions that are considered integral to the country’s tax system or mandated under constitutional and international obligations.
According to the FBR, only tax provisions that depart from the benchmark tax system and provide preferential treatment to specific sectors, industries, taxpayers or economic activities will now qualify as tax expenditures.
Major tax relief measures excluded
Under the revised methodology, several categories of tax relief are no longer included in tax expenditure estimates. These include:
• The minimum taxable income threshold below which individuals are exempt from income tax.
• Exemptions on inter-corporate dividends aimed at preventing double taxation within corporate groups.
• Agricultural income, which falls outside the federal income tax regime under the Constitution.
• Tax concessions granted to diplomats and foreign diplomatic missions.
• Tax exemptions available to United Nations agencies and other international organisations.
• Revenue implications arising from Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs), and other bilateral or multilateral treaties entered into by Pakistan.
The FBR explained that these provisions either form part of the fundamental structure of the tax system or arise from legal and international commitments. As such, they do not constitute discretionary tax incentives and should not be classified as tax expenditures.
Reported tax expenditure declines
The revised accounting framework has substantially reduced the reported value of tax expenditures by narrowing the range of exemptions and concessions included in the calculations.
The tax authority stressed that the lower figures do not necessarily indicate a reduction in tax incentives but instead reflect a more refined methodology designed to produce a more accurate estimate of revenue forgone through targeted tax preferences.
According to the report, a comprehensive list of statutory provisions, clauses and legal sections excluded from the tax expenditure calculations has been included in Appendix C of the Tax Expenditure Report 2026.
Alignment with global standards
The FBR said the revised methodology is intended to improve the transparency, consistency and credibility of Pakistan’s tax expenditure reporting by bringing it in line with internationally accepted practices.
By focusing exclusively on preferential tax treatments that deviate from the benchmark tax system, the authority believes the revised framework will provide policymakers, researchers and fiscal analysts with a more accurate picture of the actual fiscal cost of targeted tax incentives while avoiding the overstatement of tax expenditures.