KP’s merged districts, Malakand Division lose decades-old tax-exempt status

PESHAWAR: The federal government on Wednesday officially ended a decades-old tax holiday for merged tribal districts of Khyber Pakhtunkhwa and the Malakand Division, bringing the erstwhile autonomous regions into the formal tax net for the first time since the country’s independence.

Under the federal budget for the fiscal year 2026-27, which took effect on July 1, industrial units operating in these northwestern territories will now be subject to a 12 per cent sales tax on industrial production and a 7 per cent income tax.

Earlier on Sunday, the Khyber Pakhtunkhwa Assembly unanimously passed a resolution to demand the federal government to immediately withdraw its decision about imposition of taxes in Malakand Division, known as Provincially Administered Tribal Areas (PATA), and erstwhile Federally Administered Tribal Areas (FATA).

Historically, FATA and the PATA enjoyed constitutional exemptions from federal taxes to compensate for severe economic backwardness, poverty, and infrastructural deficits.

When the FATA was constitutionally merged into the Khyber Pakhtunkhwa province in 2018, the government extended a temporary tax waiver to shield local businesses.

The expiry of this waiver has triggered anxiety among local industrial sectors, who said the move could permanently cripple an industrial base already reeling from deteriorating security conditions and logistics hurdles.

“The merged districts are still plagued by terrorism, underdevelopment, and unemployment,” Al-Haj Muhammad Shafique Afridi, a prominent steel mill owner and former provincial lawmaker from Jamrud, told Geo News.

“The government has a right to collect taxes only after it provides infrastructure on par with other industrial hubs.”

Afridi noted that broken roads, power outages, a lack of skilled labor, inadequate banking support, and high freight costs from the Karachi seaport already inflate production costs, making it impossible to compete with industrial units in Punjab and Sindh.

He urged the government to defer the taxation for at least another two years.

According to provincial department of industry records, the merged districts and Malakand Division house hundreds of manufacturing units across the ghee, steel, and textile sectors, employing tens of thousands of local workers.

Business leaders also cited broken state assurances and promises.

Pakistan Borders’ Trade Council Chairman Syed Jawad Hussain Kazmi said that at the time of the 2018 merger, Islamabad had verbally committed to a 10-year tax-free transition period.

“Due to the resurgence of militancy and the suspension of Pak-Afghan bilateral trade over the past eight months, more than 50 per cent of the industrial units in these areas have already shut down,” Kazmi said.

“Imposing these taxes now will destroy the remaining industries, trigger mass layoffs, and worsen the law and order situation.”

Kazmi said that business delegations have taken up the grievance with Federal Commerce Minister Jan Jamali and other top officials indicated that the federal cabinet might still consider an alternative relief package or a short-term extension to prevent immediate industrial closure.