Budget 2026-27: IMF pushes for further reduction in tax exemptions

ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to further reduce tax exemptions in the upcoming fiscal year 2026-27 budget, with the government considering the withdrawal of several tax concessions as part of broader revenue-enhancement measures, sources said.

According to sources, tax exemptions currently available to the former Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) are likely to expire on June 30, 2026, with no extension expected beyond that date.

The move is reportedly being considered in line with IMF recommendations aimed at broadening Pakistan’s tax base and increasing revenue collection. Officials estimate that ending the exemptions could generate an additional Rs40 billion in tax revenues.

FATA, PATA tax exemptions may end

Sources said the income tax exemption available to businesses and individuals in FATA and PATA could lapse at the end of the current fiscal year. From July 1, 2026, standard tax laws are expected to be implemented in these regions.

The government is also considering withdrawing withholding tax exemptions currently available in the tribal areas.

In addition, a proposal is under consideration to impose a 12 per cent sales tax on imported industrial raw materials used in FATA and PATA.

Changes proposed for electric and hybrid vehicles

Sources said the government is also reviewing tax concessions granted to the automobile sector.

A proposal has been put forward to withdraw the sales tax exemption on completely knocked down (CKD) kits used in the assembly of electric vehicles. However, the existing one per cent sales tax on locally manufactured electric vehicles is expected to remain in place until June 30, 2026.

Meanwhile, the concessional sales tax regime for hybrid vehicles is also expected to expire at the end of the current fiscal year.

Revenue measures under discussion

The sales tax exemption on electricity supply in tribal areas will remain in effect until June 30, 2026, according to sources.

Officials said discussions between the government and the IMF on the upcoming budget have resulted in broad agreement on tax reforms and revenue measures. As part of these efforts, authorities are reviewing the continuation of various tax incentives across multiple sectors of the economy.

Sources indicated that the FY2026-27 budget is expected to include significant measures aimed at expanding the tax net and boosting government revenues, with several difficult fiscal decisions likely to be announced.