Tax Expenditure Report 2026 identifies social security, pensions and the financial sector as the largest beneficiaries of income tax concessions
KARACHI: Pakistan’s social security sector emerged as the largest beneficiary of income tax exemptions during fiscal year 2024-25, receiving Rs197.29 billion in tax relief, according to the Tax Expenditure Report (TER) 2026 released by the Federal Board of Revenue (FBR).
The report estimates total Income Tax Expenditure at Rs579.70 billion, accounting for 24.6 percent of total federal tax expenditure and 0.51 percent of Pakistan’s Gross Domestic Product (GDP).
According to the FBR, the estimate includes genuine tax expenditures arising from exemptions, tax credits, reduced tax rates and deductible allowances that deviate from the benchmark income tax system.
However, the report excludes income relating to government entities under Section 49 of the Income Tax Ordinance, 2001, provincial government statutory funds, constitutional transitional arrangements and certain procedural withholding provisions, which have been reclassified as structural components of the benchmark tax system under the revised methodology.
The social security sector accounted for the largest share of income tax expenditure at Rs197.29 billion. The FBR noted that provincial Social Security Institutions (SSIs) and the Employees’ Old-Age Benefits Institution (EOBI) have been incorporated into the revised benchmark methodology adopted in the latest report.
The pension sector ranked as the second-largest recipient of tax relief, benefiting from Rs147.88 billion in income tax expenditure.
The financial sector received tax concessions amounting to Rs63.51 billion, while the energy and mining sector benefited from Rs42.92 billion following the reclassification of exemptions relating to the Dams Fund and certain withholding tax provisions.
According to the report, the health and pharmaceutical sector received Rs29.24 billion in income tax relief, while the education sector benefited from tax expenditure estimated at Rs25.09 billion.
Tax concessions relating to donations and charitable organisations amounted to Rs15.86 billion, whereas miscellaneous sectors accounted for Rs23.26 billion in income tax expenditure.
The FBR reported that tax expenditure relating to the state apparatus and the tribal sector was recorded at zero following methodological revisions. Income covered under Section 49 has been classified as part of the benchmark tax system, while exemptions for tribal areas have been treated as constitutional arrangements rather than preferential tax treatment.
Overall, Income Tax Expenditure increased by Rs34.47 billion, or 6.3 percent, compared with Rs545.23 billion reported in the previous edition of the Tax Expenditure Report.
The report further revealed that exemptions from total income remained the largest component of income tax expenditure, amounting to Rs437.99 billion and accounting for more than three-quarters of the total.
Meanwhile, tax credits totalled Rs75.94 billion, reduced tax rates accounted for Rs50.71 billion, deductible allowances stood at Rs4.01 billion, and reductions in tax liability amounted to Rs10.91 billion.
The FBR stated that the revised methodology adopted in the Tax Expenditure Report 2026 aligns Pakistan’s tax expenditure reporting with international best practices recommended by global institutions, providing policymakers with a more accurate assessment of the fiscal cost of preferential tax treatments and improving transparency in the country’s tax system.