Finance Minister Muhammad Aurangzeb on Tuesday presented the proposed federal budget for FY2025-26 in the National Assembly, increasing tax on interest income in a bid to discourage savings.
With a total outlay of Rs. 17.57 trillion, nearly 7% less than the previous year’s budget, the proposed budget sets a GDP growth target of 4.2%. It has projected a deficit of 3.9% of GDP and inflation of 7.5%. The budget also proposes various tax measures, targeting customs duty reductions, expanded e-commerce taxation, and stricter enforcement against evasion.
Contrary to the government’s past practice of pushing people to boost savings—through a record-high policy rate of 22% that has declined to 11% over the past year—the new budget proposes to increase tax on interest income from 15% to 20%. A discouraging move for those on fixed incomes, the move has been welcomed by investors, who believe it would encourage participation in other asset classes like equities, which are taxed at less oppressive rates.
Presenting the budget, Aurangzeb claimed it came at a “pivotal” time for the country’s future. “Pakistan has now achieved economic stability and is moving towards a Pakistan that is prosperous,” he claimed.
The budget estimates tax collection of the upcoming fiscal year at Rs. 14,131 billion, an 18.7% increase compared to the previous fiscal year, including Rs. 8,206 billion from provinces. The non-revenue tax target has been set at Rs. 5,147 billion, with Rs. 11,072 billion net income of the federal government against total current expenses of Rs. 16,286 billion. The government has allocated Rs. 8,207 billion for mark-up payments on loans.
The government has allocated Rs. 1,000 billion for public sector development; Rs. 2,550 billion for defense; Rs. 971 billion for expenditures of civil administration; Rs. 1,055 billion for pensions; Rs. 1,186 billion for subsidies on electricity and other sectors; Rs. 1,928 billion for grants to the Benazir Income Support Program (BISP), Azad Jammu and Kashmir, Gilgit-Baltistan, and the erstwhile tribal areas.
Additionally, the budget targets increasing the coverage of BISP initiatives and expanding educational scholarship programs. Overall, Rs. 716 billion has been proposed for BISP in the new fiscal year, a 21% increase compared to the previous year.
Taxation measures
The government is once again attempting to encourage tax filing by imposing restrictions on economic transactions of non-filers. In this regard, they face higher tax rates on purchase of securities above a threshold, purchase of autos above 850cc, and opening of bank accounts except for Asan account. Non-filers seeking to withdraw cash from banks will face withholding tax of 0.8% against the earlier 0.6%.
Sales tax exemptions are also being removed for FATA and PATA. The merged districts will now have a GST of 10%–still lower than the 18% charged in the rest of the country—with an aim to increase it by 200bps every year for the next three years. Analysts say this would benefit the steel and edible oil sectors.
The government has proposed imposing PDL on furnace oil, though its rate remains unclear. The PDL on petroleum products for consumers is currently around Rs. 80/liter. The finance minister announced the imposition of a carbon levy on petrol, diesel and furnace oil of Rs. 2.5/liter in a bid to discourage fossil fuels—despite the country currently lacking the infrastructure or resources to switch to e-vehicles.
Additionally, the budget proposes increasing local e-commerce sales tax from 1% to 2% for non-active taxpayers and imposing pension tax at 5% on values over Rs. 10 million for people below 70 years old.
For the automobile sector, the budget proposes increasing GST on vehicles below 850cc to 18% from the current 12.5%. Similarly, the tax on import of solar panels has been raised from nil to 18%. The budget also proposes increasing the withholding tax rate for services from 4% to 6%, with the exception of I.T. and I.T.-enabled services. For other non-specified services, the tax rate will be 15%.
The dividend income from mutual funds faces a tax rate of 25% from the existing 15%.
The government has also proposed increasing taxes on various commodities, including pet food.
Relief measures
While offering a negligible “relief” for salaried individuals, the government has continued its largesse for government employees, raising their salaries by 10% and pensions by 7%. For private salaried individuals, those earning income from Rs. 60,000 to Rs. 120,000/month will face taxes of 1%, down from the existing 5%. The subsequent two slabs have similarly seen their tax rates decrease from 15% to 11% and 25% to 23%.
While tax exemptions for erstwhile tribal areas are being removed, their income tax exemptions will continue for at least one more year.
The proposed budget restores 25% rebate against tax payable by full-time teachers and researchers, with retrospective effect from FY23. It also restores tax credit on mortgage facility for houses up to 10 marla and flats up to 2,000 sq. feet.
In a bid to revive the real estate sector—long derided as “unproductive”—the government has decreased advance tax/FED on immovable properties. It has proposed removing FED of 7% and reduced advance tax by 150 basis points.
The government has also proposed reducing “super tax” by 0.5% for income slabs between Rs. 200 million and Rs. 500 million. Further, it has allocated a housing subsidy of Rs. 5 billion for FY26 and a mark-up subsidy of Rs. 5 billion.
The proposed federal budget for the upcoming fiscal year also grants GST exemption on local sales of bun and rusk and has allocated payments to IPPs of Rs. 95 billion.