Pakistan’s 2025-26 budget circular introduces green revenue classification

ISLAMABAD: The Finance Division has released the budget circular for the fiscal year 2025-26, which introduces a new framework to identify and categorize green or climate-related elements within revenues. Under this framework, revenues are classified into four primary categories, which encompass both tax and non-tax revenues, reported the Business Recorder.

According to the circular, the estimated development expenditures for 2025-26 should not include any schemes that have not received prior approval. Additionally, no new positions can be created within divisions, departments, subordinate offices, organizations, or entities without the consent of the Finance Division.

The circular categorises the federal government’s revenue sources into two main types: tax revenue, managed by the Federal Board of Revenue (FBR), and non-tax revenue, overseen by the Finance Division.

The connection between non-tax revenue and environmental impact can be assessed by evaluating the activities upon which these levies are imposed. If an activity is known to have detrimental effects on the environment and climate, the corresponding taxes are positively associated with climate initiatives.

For instance, levies on fossil fuel usage are considered environmentally relevant due to their impact on climate change. Similarly, fines or fees related to plastic usage or hazardous waste can be classified in this context.

To accurately determine whether taxes or non-taxes are climate-friendly, the tax base must be identified, leading to the establishment of four fundamental categories for revenue classification. This classification aligns with global standards and, although some categories may not currently exist in Pakistan, they may be implemented in the near or distant future as part of ongoing climate reform efforts.

Furthermore, the circular also highlighted the need to distinctly show the foreign exchange components in the development expenditure estimates, along with the sources of funding (whether from domestic or foreign resources).

 It stipulates that provisions made for foreign exchange expenditures cannot be allocated to local currency expenditures and vice versa; no re-allocation is permitted between these two categories.

Whenever necessary, foreign exchange details should be provided separately for both foreign and domestic resources. Some foreign-aid agreements stipulate that the Government of Pakistan must initially cover expenses in local currency before being reimbursed by donor agencies for equivalent amounts. Therefore, for projects funded by foreign aid, the local currency expenditure linked to the reimbursement should be clearly indicated.