KARACHI: The federal budget for FY26 has been broadly welcomed by capital markets. Through a combination of stable taxation on equities, targeted disincentives for debt investments, and alignment with IMF fiscal benchmarks, the proposals are expected to provide a stable and growth-oriented backdrop for investors in the coming year, said brokers and analysts.
The federal government has unveiled its second budget, projecting revenues of Rs19.3 trillion and expenditures of Rs25.8 trillion for the fiscal year 2025-26. This results in a federal fiscal deficit of Rs6.5 trillion, or 5.0 per cent of GDP. The overall country deficit is estimated at Rs5 trillion (3.9 per cent of GDP), implying that provincial governments will be required to generate a surplus of Rs1.5 trillion, up from the Rs1 trillion surplus anticipated in FY25.
Market stakeholders have generally welcomed the budget proposals, particularly those that affect the capital markets. The Pakistan Stock Brokers Association described the fiscal plan as a positive development for the stock market.
Bilal Farooq Zardi, CEO of the Pakistan Stock Brokers Association, noted that while the proposed restrictions on certain economic activities, especially for non-tax filers, could impact transactions in securities,
the government should work in close consultation with brokers and other stakeholders. “We urge the FBR to define clear limits and coordinate with the Association so that the implementation is effective without causing major disruption,” he said.
Zardi added that the unchanged capital gains tax (CGT) on equities at 15 per cent makes equities an attractive option, especially in contrast to the increased tax on interest income. “There is no change in tax on equities, and that kind of consistency is a positive signal for investors,” he said. “The increase in mutual fund tax from 15 per cent to 25 per cent on fixed-income funds, while keeping equity-based investments at 15 per cent, further encourages flow of investment into the stock market”.
He said the budget was positive for the market and aligned with the PSBA’s proposal for maintaining consistent taxation in the capital market.
Muhammad Awais Ashraf, director research at AKD Securities, echoed these views. “The budget is favourable for the stock market,” he said. “The higher tax on income from debt instruments, raised from 15 per cent to 20 per cent, and a lower tax rate on equity mutual fund dividends at 15 per cent will likely shift investor interest toward equities”.
Ashraf also noted that the government’s revenue targets appear realistic and are underpinned by tax reforms and rationalisation of sales tax exemptions. “Although the reduction in salary tax and super tax is modest, it signals the beginning of fiscal easing”, he added, pointing to the significant relief from reduced interest expenses as a contributing factor.
Furthermore, he said, the disbursement of funds to address circular debt is a positive development for the entire energy chain, particularly for PSO, SNGP and E&P companies. “The availability of these funds will not only enable these companies to boost capital expenditures but also improve the prospects for dividend payouts”, he said.
Topline Securities also rated the budget as positive for the stock market. “Contrary to some expectations, the government has maintained the tax rates on capital gains and dividends, which we believe is favourable for investor sentiment,” the brokerage said in a note. “Furthermore, targeting a primary surplus of 2.4 per cent of GDP aligns with IMF benchmarks, which is another encouraging sign.”
The brokerage highlighted several other budgetary measures that are likely to support market performance: Section 114C introduction: The new section in the Finance Bill proposes restrictions on non-filers, such as limitations on purchasing securities above a set threshold or registering high-capacity vehicles. This move is expected to encourage tax compliance and increase formalisation of the economy.
Fata/Pata tax exemptions removed: Sales tax exemptions for industries in the Fata and Pata regions have been revoked. A 10 per cent GST has been imposed, with annual increases of 200 basis points planned for the next three years. The change has been welcomed by businesses in other regions who faced competition from untaxed products, particularly in the steel and edible oil sectors.
Construction sector incentives: The removal of the 7.0 per cent FED and a 150 basis point cut in advance tax on immovable property is expected to benefit the construction sector and associated industries.
Reduction in super tax: Super tax for income brackets between Rs200 million and Rs500 million has been reduced by 0.5 per cent, which analysts believe will improve corporate profitability and support stock valuations.
Importantly, the budget makes no changes to capital gains tax or dividend tax on stocks. Similarly, there is no new tax on bonus shares, turnover tax remains unchanged, and there are no measures targeting retained earnings. These factors are being viewed as either neutral or slightly positive for the market.
Topline Securities added that the proposed budget, if passed as is, could help re-rate the market’s price-to-earnings (PE) multiple from the current 5.2x to 7x. “Subject to successful passage and continued IMF engagement, we maintain our base-case index target of 127,000 for December 2025. With higher liquidity and stability, the KSE-100 index could even surpass 150,000”, the note stated.