The federal government has officially terminated a longstanding tax exemption for the merged tribal districts of Khyber Pakhtunkhwa (KP) and the Malakand Division, integrating these formerly autonomous regions into the national tax system for the first time since Pakistan’s independence.
Effective from July 1, under the federal budget for the fiscal year 2026-27, industrial enterprises operating in these northwestern areas will now be liable to pay a 12 percent sales tax on industrial output alongside a 7 percent income tax.
In a significant development earlier this week, the Khyber Pakhtunkhwa Assembly unanimously passed a resolution urging the federal government to revoke the tax imposition on the Malakand Division, which includes the Provincially Administered Tribal Areas (PATA) and the former Federally Administered Tribal Areas (FATA).
Historically, FATA and PATA were constitutionally exempt from federal taxation to offset their severe economic underdevelopment, poverty, and lack of infrastructure. Following the constitutional merger of FATA into KP in 2018, the government had extended a temporary tax exemption to protect local businesses during the transition.
The expiration of this waiver has raised concerns among local industrialists, who warn that the new tax burden could devastate an already fragile industrial sector struggling with security challenges and logistical difficulties.
Al-Haj Muhammad Shafique Afridi, a prominent steel mill owner and former provincial legislator from Jamrud, highlighted ongoing issues such as terrorism, underdevelopment, and unemployment that continue to afflict the merged districts. He stressed that taxation should only be implemented once adequate infrastructure is provided to match other industrial regions.
Afridi pointed out that damaged roads, frequent power outages, a shortage of skilled labor, limited banking facilities, and high transportation costs from Karachi’s seaport significantly increase production expenses, making local industries uncompetitive compared to those in Punjab and Sindh. He called for a postponement of the tax imposition for at least two more years.
Provincial industry department data shows that the merged districts and Malakand Division host hundreds of manufacturing units across sectors such as ghee, steel, and textiles, employing tens of thousands of workers.
Business leaders also recalled assurances made at the time of the 2018 merger. Syed Jawad Hussain Kazmi, Chairman of the Pakistan Borders’ Trade Council, stated that Islamabad had verbally promised a 10-year tax-free transition period.
Kazmi further noted that due to a recent resurgence in militancy and the suspension of Pak-Afghan bilateral trade over the past eight months, more than half of the industrial units in these regions have already ceased operations. He warned that enforcing taxes now could lead to the collapse of remaining industries, widespread layoffs, and further deterioration of law and order.
Business delegations have raised these concerns with Federal Commerce Minister Jan Jamali and other senior officials. There are indications that the federal cabinet may consider alternative relief measures or a short-term extension to prevent immediate industrial shutdowns.
