Tax Expenditure Report 2026 adopts IMF- and OECD-aligned methodology to provide a more accurate estimate of revenue foregone
The Federal Board of Revenue (FBR) has estimated that tax exemptions, concessions and preferential tax treatments cost Pakistan’s national exchequer Rs2.35 trillion, equivalent to 2.07 percent of Gross Domestic Product (GDP), according to the Tax Expenditure Report (TER) 2026.
The report provides a comprehensive assessment of federal revenue forgone during fiscal year 2024-25 under the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, and the Customs Act, 1969.
According to the FBR, total federal tax expenditure for FY2024-25 amounted to Rs2,352.81 billion, compared with Rs2,434.73 billion reported previously. The tax authority clarified that the apparent decline does not necessarily indicate fewer tax incentives but reflects the adoption of a more refined and internationally recognised methodology for measuring tax expenditures.
New methodology aligned with global standards
The Tax Expenditure Report 2026 marks a significant shift in Pakistan’s tax expenditure reporting framework after six consecutive annual publications.
The FBR said the latest report adopts a benchmark tax system consistent with international best practices recommended by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD).
Under the revised framework, a tax expenditure is defined as a deviation from the benchmark tax system that grants targeted tax relief to specific taxpayers, industries or transactions.
However, the report excludes provisions regarded as part of the normal tax system, including constitutional requirements, obligations arising from international treaties, measures preventing the government from taxing its own income, and structural provisions necessary for the operation of the tax system.
According to the FBR, including such provisions as tax expenditures would overstate the actual fiscal cost of tax incentives and distort policy analysis.
More accurate estimate of revenue forgone
The tax authority stated that the revised methodology provides a more accurate estimate of revenue genuinely forgone through preferential tax treatment.
It emphasised that the lower tax expenditure figure reflects improved analytical accuracy rather than the withdrawal of tax concessions.
The methodology was developed following an extensive internal review that examined tax expenditure reporting practices in comparable jurisdictions, evaluated estimation assumptions across different supply chains, and ensured consistency in the classification of income tax, sales tax and customs duty concessions.
The FBR added that the principles underpinning the revised methodology have been documented in Appendix E of the report to improve understanding among researchers, economists, fiscal experts and policymakers.
FBR highlights transparency efforts
Describing the publication as the most comprehensive public assessment of the fiscal cost of preferential tax treatments in Pakistan’s federal tax system, the FBR said the report is intended to strengthen transparency, accountability and evidence-based policymaking.
The authority also reaffirmed its commitment to continuously improving the report by refining its methodology in line with evolving international standards and the availability of higher-quality data. It invited feedback from researchers, tax professionals and other stakeholders to further enhance future editions.
In-house analytical capacity strengthened
The FBR acknowledged the contributions of the Directorate General of Revenue Analysis, the Strategic Transformation Wing, the Customs Policy Wing, and other technical teams involved in preparing the report.
According to the tax authority, the analytical improvements incorporated into TER-2026 demonstrate its growing in-house capacity to produce internationally comparable fiscal analysis while supporting greater transparency and informed tax policy formulation in Pakistan.