Additional Rs670bn tax measures unveiled: Govt boosts defence budget amid security challenges, offers modest relief

ISLAMABAD: The federal government has introduced stringent taxation and enforcement measures in the Budget 2025-26, aiming to generate an additional Rs670 billion in revenue. While Rs58 billion in relief has been granted — primarily to the salaried class — the net revenue increase will stand at Rs623 billion.

The Federal Board of Revenue (FBR) has implemented several major changes. These include higher withholding taxes on services, e-commerce and digital platforms, including online shopping. A 10 percent GST has been imposed on erstwhile Fata/ Pata, while an 18 percent GST now applies to solar panel imports. Tax rates on interest income, cash withdrawals, and 850cc vehicle purchases have also been increased. Additionally, new taxes target high-income pensioners, with restrictions on property and vehicle purchases for ineligible persons.

The government has reduced property purchase tax by 1.5 percent while increasing seller tax rates and abolishing the Federal Excise Duty (FED) on property transactions.

The budget outlines Rs281 billion additional revenue from taxation measures and Rs389 billion from enforcement efforts, totaling Rs670 billion in additional revenue. After accounting for the Rs58 billion relief package, the net increase stands at Rs623 billion.

For the upcoming fiscal year, the FBR has set an ambitious Rs14.131 trillion tax collection target, a significant jump from the revised Rs11.9 trillion estimate for the current fiscal year. Initially, the government had agreed with the IMF on a Rs12.97 trillion target, later adjusted to Rs12.33 trillion, before settling at the current Rs11.9 trillion projection for June 30, 2025.

In a departure from tradition, the government did not hold a pre-budget technical briefing for journalists, despite presenting one of the longest Finance Bills in the past three decades. During the cabinet meeting chaired by Prime Minister Shehbaz Sharif, heated discussions erupted over proposed salary and pension increases. The Finance Division had initially recommended a 6-7 percent hike in line with IMF conditions, but the cabinet revised this to 10 percent. The cabinet brought changes in the structure of income of first salary slabs from Rs0.6 million to Rs1.2 million whereby the FBR proposed reduction in the tax rate from 5 to 1 percent. However, the federal cabinet approved of 2.5 percent tax rate on this slab to generate an additional Rs9 billion in revenue. The 10 percent surcharge on incomes exceeding Rs10 million was also reduced to 9 percent.

The Finance Bill 2025-26 proposed increasing tax rates on all services and jacked up Withholding Tax rate from 11 to 15 percent. The services tax on companies increased from four to eight percent especially on architects. This measure will fetch an additional Rs70 billion to the national kitty.

The FBR has imposed an 18 percent GST on digital ecommerce platforms like Temu to protect local retailers. Delivery agents will now collect withholding tax on online purchases.

The FBR has proposed withdrawal of GST exemptions and slapped 10 percent tax to fetch an additional Rs35 billion. The tax on interest income has increased from 15 percent to 20 percent, projected to bring in Rs50 billion. Dividend taxes have also been raised to 25 percent, with mutual funds taxed at 15 percent.

Pension income exceeding Rs10 million will now be taxed at 5 percent, while amounts below this threshold remain exempt. Meanwhile, the cash withdrawal tax for non-filers has risen from 0.6 percent to 0.8 percent.

On Customs side, the FBR brought down tariff on imports by reducing additional Customs duty and regulatory duty, causing an estimated loss in revenues of Rs200 billion. When contacted, FBR Chairman Rashid Mehmood Langrial said that different models were applied and results varied in the range of Rs49 billion plus to minus Rs150-200 billion losses owing to tariff rationalisation on imports.

The government has introduced new tariff slabs of 5 percent, 10 percent, and 15 percent, while abolishing the existing slabs of 3 percent, 11 percent, and 16 percent. The zero tariff slab, previously applicable to 2,201 tariff lines, has been extended to an additional 916 PCT codes, and Customs duties have been reduced on goods falling under 2,624 PCT codes.

On Income Tax side, ‘Digital Transactions Proceeds Levy’ has been introduced along with necessary changes in Income Tax Ordinance 2001 to cover domestic vendors supplying digitally ordered goods and digitally delivered services. Banks and courier services designated as withholding agents to capture entire payment chain. Withholding tax rate proposed to be increased for specified services from four percent to six percent with the exception of IT and IT-enabled services. For other non-specified services, a flat 15 percent will be imposed and from 10 percent to 15 percent on sportspersons. Provisions regarding assessment of banking companies has been made more disclosure oriented to determine true and fair income of the banking companies and tax payable.

Tax rate on profit on debt has been proposed to be increased from 15 percent to 20 percent. The dividend tax rate has been enhanced to 25 percent & 15 percent from mutual funds. Pension income received by an individual below the age of 70 years and over and above of Rs10,000,000 has been charged to tax at five percent. There will be zero tax rate on pension income not exceeding Rs10,000,000.

Adjustable withholding tax rate on cash withdrawal on non-filers proposed to be increased from 0.6 percent to 0.8 percent. Custodian of debt securities other than Sukuk bonds has been proposed to act as withholding agent to prevent tax evasion due to coupon washing scheme. Upper cap on profit on debt upto Rs5,000,000 under final tax regime proposed to be removed for individuals and association of persons (AoP). The tax withheld on profit on debt for company will continue to be adjustable.

The proposed changes include a reduction in super tax rates under section 4C by half a percentage point for income slabs between Rs200 million to Rs500 million for each respective slab. To provide relief to lower and middle-income brackets, tax rates for salaried individuals with income up to Rs3,200,000 have been reduced. Additionally, the surcharge rate for salaried individuals is proposed to decrease from 10 percent to 9 percent. Income tax and withholding tax exemptions for erstwhile Fata/Pata areas are proposed to be extended for one year, until tax year 2026. The 25 percent rebate on tax payable by full-time teachers and researchers will be restored retrospectively, applicable from tax year 2023 to tax year 2025. A proportionate tax credit will also be introduced on profit from debt obtained for the construction or acquisition of a house up to 250 square yards or a flat of 2,000 square feet or less.

To better integrate digitally ordered taxable goods into the e-commerce sales tax framework, the definition of ‘e-commerce’ has been introduced, and ‘online marketplace’ has been redefined to encompass all taxable activities. Currently, online marketplaces withhold one percent sales tax on local supplies by non-active taxpayer vendors, but this does not fully cover the expanding e-commerce sector, particularly businesses using websites and apps for online sales. To address this, the withholding tax scope has been expanded to include transactions settled via online payment or cash on delivery (CoD). Under the proposed regime, which replaces S No 8 of the Eleventh Schedule, payment intermediaries such as banks, financial institutions, exchange companies and payment gateways will collect sales tax on digital payments, while couriers will handle tax collection for CoD transactions. Furthermore, the withholding tax rate will increase from one percent to two percent.

Importers and manufacturers are required to collect sales tax on items listed in the Third Schedule of the Sales Tax Act, 1990, based on the retail price at applicable rates, as embossed on product packaging. The inclusion in the Third Schedule aims to capture downstream value addition in the supply chain beyond manufacturing. The following items are proposed for inclusion in the Third Schedule for this purpose: imported pet food, including dog and cat food in retail packing, imported coffee in retail packing, imported chocolates in retail packing, and imported cereal bars in retail packing.

Currently, a reduced sales tax rate of 10 percent applies to the local supply of vermicelli and Sheermall. As part of GST reforms, existing concessionary rates are being reviewed and withdrawn where possible. Therefore, the reduced 10 percent rate is proposed to be withdrawn. Buns and rusks are currently subject to a reduced 10 percent sales tax. Since they are staple foods for lower-income groups, it is proposed that their local sale be exempted from sales tax.

At present, the supply of electricity to residential, commercial and industrial units in erstwhile Fata/ Pata areas is exempt until June 30, 2025. To provide continued relief to electricity consumers in these regions, the exemption is proposed to be extended until June 30, 2026.