Arif Habib Limited has released its detailed preview of Pakistan’s Federal Budget for FY2025-26, indicating a mix of strict tax measures alongside carefully targeted relief.
The budget, expected to be announced on June 10, 2025, will aim to strike a balance between fiscal consolidation and economic support, with a strong focus on structural reforms.
The FY26 budget is projected to feature a series of aggressive revenue mobilization measures. These include the likely imposition of a 3% General Sales Tax (GST) on petroleum products, an increased petroleum levy, expanded income tax coverage for retailers and wholesalers, and the withdrawal of certain tax exemptions. According to analysts, these measures could generate an estimated Rs869 billion in additional revenue. Key tax collection areas include Rs429 billion from taxing wholesalers and retailers, Rs147 billion from GST on petroleum, and Rs99 billion from a 25% increase in Federal Excise Duty (FED) on tobacco products.
Additional tax measures may include a 2% FED on ultra-processed foods (Rs70 billion), removal of exemptions in FATA/PATA (Rs35 billion), and a 5% increase in FED on fertilizers (Rs33 billion). The government is also considering raising the Capital Gains Tax (CGT) rate by 2.5% for filers and 5% for non-filers, and hiking dividend withholding taxes by up to 5%.
Despite the expected harsh tax measures, the budget does propose some relief measures. These include possible income tax cuts for salaried individuals, the proposed increase in the income tax exemption threshold from PKR 600,000 to PKR 800,000, and the gradual phasing out of the super tax by FY28 — starting with a 3% reduction in FY26. Measures such as relaxed vehicle import rules and renewed support for housing finance may also provide targeted relief to middle- and lower-income groups.
Additionally, restoring the inter-corporate dividend exemption and withdrawing the 10% tax on bonus shares are being considered to promote investment and reduce double taxation. The banking sector, which currently faces an effective tax rate of 54%, is expected to see tax rationalization.
Economically, the FY26 budget is expected to be neutral to positive for the stock market and broader economy. GDP growth is forecasted at 3.6%, up from 2.68%, while inflation is expected to rise to 6.29%. The current account deficit is projected at USD 1.5 billion, reversing from a surplus of USD 1.6 billion in FY25.
Aligned with IMF guidelines, the budget avoids tax amnesty schemes and focuses on long-term fiscal sustainability. Key structural reform measures include resolving the energy sector’s circular debt and finalizing a National Fiscal Pact to shift greater fiscal responsibility to provinces.
In summary, the FY26 budget will combine tough tax measures with carefully considered relief and reform-focused initiatives aimed at enhancing Pakistan’s fiscal health and economic stability.