*PAKISTAN BUDGET FY26 – Initial Impression* (10th Jun’25) *BUDGET SNAPSHOT* • The Federal Government earlier today announced the Budget for the next fiscal year FY26, with a total budgeted outlay of PKR 17.6trn (up 2% YoY compared to the budgeted outlay of FY25). • *Revenue:* The gross revenue receipts are projected at PKR 19.3trn for FY26b, marking a 14.7% YoY increase from the FY25r estimates. This growth is primarily driven by a sharp 18.7% YoY rise in FBR tax collection, which is budgeted at PKR 14.1 trn. Meanwhile, non-tax revenue is expected to reach PKR 5.2trn, reflecting a moderate 5.0% YoY increase from FY25r estimates. • *Expenditure:* The government has set total expenditure at PKR 17.6trn for the upcoming fiscal year. Of this, current expenditure amounts to PKR 16.3trn, slightly up from the FY25 revised estimates of PKR 16.2trn, despite an 8% decline in markup payments due to lower interest rates easing the debt servicing burden. The Defence Budget is targeted at PKR 2.5trn, reflecting a 17% YoY increase over FY25r. Subsidies to various sectors are budgeted at PKR 1.2trn, 14% lower YoY compared to the revised estimate of PKR 1.4trn in FY25. Meanwhile, the target for Federal PSDP is set at PKR 1trn. • *Fiscal Deficit:* The fiscal deficit for FY26 is budgeted at PKR 5.0trn, equivalent to 3.9% of GDP, down from the revised estimate of PKR 6.4trn (5.6% of GDP) in FY25, marking a 21.7% YoY reduction. The government aims to finance the budget majorly through domestic financing of PKR 6.3trn (-19% lower than FY25’s budgeted number) while net external loans are budgeted to be PKR 0.1trn (-84% lower than FY25’s budgeted number). The bulk of the domestic financing is expected from Bank financing which is budgeted at PKR 6.1trn (-21% lower YoY from FY25’s budgeted PKR 7.7trn). Mark-up payments are budgeted to be 9.0% lower next year, on domestic loans while external loan mark-up payments are expected 3.0% lower YoY. • *Social Relief:* Government has announced relief measures for the lower-income segment, including an increase in BISP allocation to PKR 716bn and a PKR 15bn subsidy for Utility Stores. However, the Ramazan relief package has been withdrawn entirely, down from PKR 18bn last year • *GDP:* The government has set a GDP growth target of 4.2% for FY26 as compared to 2.7% in FY25r. • *Inflation:* Government is expecting inflation for FY25b to be around 7.5%. *SUPPORT MEASURES* • Pension increased by 10% • Government employees salaries increased by 10% • A 0.5% reduction in Super Tax for income exceeding PKR 200mn but below PKR 500mn • The govt proposes slashing the 5% slab to 1% (PKR 60k –120k/month), cutting higher slabs to 11% and 23%, and reducing the surcharge to 9%. • Housing subsidy of PKR 5bn has been proposed. • Abolition of 10% surcharge on income above PKR 10mn for salaried individuals *REVENUE MEASURES* • Introduction of Digital Transaction Proceeds • WHT to be increased from 4% to 6% for specified services (excluding IT/IT-enabled services). • Tax on interest income increased from 15% to 20%. • Dividend tax rate increased from 15% to 25% on dividend from debt mutual funds. • PKR 2.5/liter carbon levy will be imposed on HSD, MS, and FO in FY26, rising to PKR 5/liter in FY27. • Non-Filers Cash Withdrawal Tax Rate increased from 0.6% to 0.8% • Withdrawal of reduced GST of 12.5% GST on cars up to 850cc. • Sales tax on FATA/PATA has been increased to 10% (from 0%), will rise by 2% yearly, reaching 16% by FY29 • The hybrid vehicles will be subject to the standard GST rate of 18%, aligning them with other vehicles. • 10% cap of DSS levy removed and to be used for interest and debt principal repayment. • Commercial property rental income taxed at 4% of fair market value • 18% tax proposed on imported solar panels to ensure fair competition with local manufacturers. • 18% sales tax collection mandated for digital platforms & logistics providers. • Banks to deduct 5% tax on digital payments to foreign suppliers for goods/services consumed in Pakistan. • Govt has imposed Petroleum Levy on FO. • Pension tax has been imposed on PKR 10mn above for people above 70 years age at 5%. • Minimum carry forward losses to be reduced from 3 years and 2 years *OVERALL TAKE – Positive* • *PSX (Positive):* Capital gain and dividend tax rates remain unchanged. However, tax on income from debt mutual funds has been increased from 15% to 25%, while equity mutual funds retain the 15% rate. This shift is market-positive, as it encourages investment in equities. • *Commercial Banks (Neutral):* The withholding tax on cash withdrawals exceeding PKR 50,000 from banks may be increased from 0.6% to 1.2%. Tax rate on profit from debt has been increased to 20%, up from 15% (excluding small investors). • Banks and financial institutions to deduct 5% tax on digital payments to foreign suppliers for goods/services consumed in Pakistan • *Oil Marketing Companies (Neutral):* The government has imposed a PKR 2.5/liter carbon levy on POL products, generating an estimated PKR 48bn for the national exchequer. • *Cement (Positive):* The government has proposed a PKR 5bn mark-up subsidy for low-cost housing, which is expected to boost cement demand • *Real Estate (Neutral to Positive):* FED on the allotment or transfer of commercial and residential plots is proposed to be abolished (previously 3%-7%). Commercial property rental income taxed at 4% of fair market value • *Autos (Negative):* The hybrid vehicles will be subject to the standard GST rate of 18%, aligning them with other vehicles. Furthermore, Reduced GST of 12.5% GST on cars up to 850cc will also be withdrawn. A carbon tax is proposed to be introduced on fossil fuel–based vehicles, aimed at supporting environmental sustainability goals. • *Technology (Neutral):* Exemption for SEZ and STZ entities and developers has been capped till Tax Year 2035 or 10 years from exemption commencement, whichever comes first. • *Power (Neutral):* Removing the 10% ceiling on the DSS levy has been suggested, with the revenue to be used for covering interest costs and debt principal • *Steel (Positive):* The government has announced a phased withdrawal of sales tax exemptions for industrial units in FATA and PATA. The exemption will be partially removed in stages: 10% in FY26, 12% in FY27, 14% in FY28, and 16% in FY29. This gradual approach aims to integrate these regions into the national tax system.