The International Monetary Fund (IMF) has urged Pakistan to further curtail tax exemptions in the forthcoming fiscal year 2026-27 budget. The government is contemplating withdrawing several tax concessions as part of a broader strategy to enhance revenue collection.
Notably, tax exemptions currently granted to the former Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA) are expected to expire on June 30, 2026, with no plans for extension. This move aligns with IMF recommendations aimed at broadening the country’s tax base and increasing fiscal income. Officials estimate that ending these exemptions could generate an additional Rs40 billion in tax revenue.
Specifically, the income tax exemptions for businesses and individuals in FATA and PATA are set to lapse at the close of the current fiscal year. From July 1, 2026, these regions will likely be subject to standard tax regulations. The government is also considering removing withholding tax exemptions currently available in these tribal areas.
In addition, a proposal is under review to impose a 12 percent sales tax on imported industrial raw materials used within FATA and PATA, further expanding the tax net in these regions.
Meanwhile, the government is reassessing tax concessions in the automobile sector. One proposal suggests withdrawing the sales tax exemption on completely knocked down (CKD) kits used for assembling electric vehicles. Despite this, the existing one percent sales tax on locally manufactured electric vehicles is expected to remain until June 30, 2026. Furthermore, the concessional sales tax regime for hybrid vehicles is anticipated to expire at the end of the current fiscal year.
Regarding electricity, the sales tax exemption on supply in tribal areas will continue until June 30, 2026. Officials have indicated that discussions between the government and the IMF on the upcoming budget have reached broad consensus on tax reforms and revenue measures.
As part of these fiscal reforms, authorities are reviewing the continuation of various tax incentives across multiple economic sectors. The FY2026-27 budget is expected to introduce significant measures to expand the tax base and increase government revenues, which will likely include some challenging fiscal decisions.
