The federal budget for 2025–26, presented in the National Assembly on 10 June 2025 by Finance Minister Muhammad Aurangzeb, delineates an assertive fiscal framework against the backdrop of continued macroeconomic stress. The government has forecast consolidated revenues at PKR 19.27 trillion and set an elevated Federal Board of Revenue (FBR) collection target of PKR 14.13 trillion, representing a nearly 18.7% increase over the prior year’s revised figure of PKR 11.9 trillion. The revenue blueprint continues to rely heavily on indirect taxation instruments—sales tax, customs duties, and federal excise duties—highlighting a structural bias which disproportionately burdens consumption rather than income. The persistence of such regressive measures amid prolonged inflationary pressures and declining real wages risks amplifying socio-economic disparities while constraining domestic demand.
Federal expenditure has been projected at PKR 17.57 trillion, with current expenditure alone budgeted at PKR 16.28 trillion, driven predominantly by debt servicing—which has now surged beyond PKR 8.2 trillion. The development allocation, set at PKR 1 trillion under the Public Sector Development Programme, appears insufficient to catalyse meaningful infrastructure or human capital gains—particularly when adjusted for inflation and rupee depreciation. The disparity between current and development expenditure deepens structural stagnation and limits fiscal space for transformative investments.
“This budget is more a consolidation mechanism than a transformative roadmap.”
The fiscal deficit, projected at PKR 6.5 trillion (3.9% of GDP), will be financed through a combination of external receipts—including multilateral loans and commercial borrowing—and significant domestic financing, particularly from bank and non-bank sources. The growing domestic borrowing requirement, coupled with the maturity concentration in short-term instruments such as T-bills and Sukuk, exacerbates rollover and refinancing risks while crowding out private sector credit.
The salient features of the Finance Bill include a series of tax measures aimed at widening the base and enhancing enforcement. The introduction of a tax of up to 2% on digital transaction proceeds from e-commerce and digitally-delivered services represents an attempt to formalise the digital economy. The levy will be collected by banks, payment gateways, and courier services—an approach which expands third-party compliance responsibility, but may strain the operational capacities of intermediaries and deter digitisation within the informal sector. The sales tax framework has also been significantly restructured through the withdrawal of exemptions on items such as cereals, pet food, chocolates, and solar panels; measures which, while revenue-positive, are inflationary and contradictory to wider environmental objectives.
“Regressive measures amid prolonged inflation and declining real wages risk amplifying socio-economic disparities.”
The income tax regime has been recalibrated through revisions in withholding tax rates. For non-specified services, the rate is proposed to rise to 15%, while for specified services it moves to 6%. Dividend and profit on debt income will be subject to withholding tax at a rate of up to 20%. Pension income exceeding PKR 10 million will be taxed at 5%. Simultaneously, the adjustable withholding tax on cash withdrawals by non-filers is increased from 0.6% to 0.8%. These measures are expected to generate additional revenue, but the inclusion of pension and passive income streams suggests a shift towards taxing non-productive wealth categories.
The customs regime has undergone a rationalisation of tariff slabs, with the 3%, 11%, and 16% slabs abolished and replaced by 5%, 10%, and 15% categories. The 0% tariff now applies to an expanded 3,117 PCT codes, and customs duty has been reduced on 2,624 tariff lines. Furthermore, additional customs duty has been either eliminated or reduced across 7,535 tariff lines. Regulatory duty has been removed from 554 items and reduced for 595 others, with the maximum rate now capped at 50%—a move expected to lower input costs and improve trade competitiveness, particularly in intermediate and capital goods.
The government’s enforcement paradigm has been elevated through legal amendments authorising the establishment of Centralised Assessment Units (CAUs), Digital Enforcement Units (DEUs), and cargo tracking systems. The penal framework under the Sales Tax Act has been expanded to include the seizure of bank accounts, sealing of business premises, and property confiscation for non-registrants—indicating an intensified compliance strategy that could have chilling effects on small enterprises. Additionally, the term “abettor” has been formally introduced into tax law, making third-party involvement in tax fraud a punishable offence.
“The macro-fiscal framework prioritises stabilisation over structural transformation.”
The education and health sectors received disappointing allocations, with education allocated PKR 112.6 billion and health only PKR 31.9 billion. Defence expenditure has increased to PKR 2.55 trillion—a 16% rise over last year—which, given the elevated situation with India, appears justified. The social protection outlay has been raised to PKR 734 billion; however, the absence of transparent targeting and disbursement mechanisms limits its likely efficacy.
Non-tax revenue projections are exceptionally optimistic, pegged at PKR 5.14 trillion, including PKR 1.47 trillion from the petroleum levy and significant amounts from SBP profits and dividends. The realisation of these targets depends heavily on global oil prices, exchange rate stability, and continued support from the IMF. Reliance on such volatile sources not only complicates budget predictability but also signals a lack of political will to reform structurally exempted sectors such as agriculture, real estate, and retail trade.
“The development allocation appears insufficient to catalyse meaningful infrastructure or human capital gains.”
The budget’s treatment of former FATA/PATA reflects a mix of transitional relief and integration. Sales tax exemptions for plants and machinery in these areas are set to be phased out gradually, starting with a 10% tax in FY26. Electricity supply to these regions remains exempt from GST until June 2026. While these measures may indicate efforts toward fiscal uniformity, they also risk economic disruption in areas with weak commercial infrastructure.
Privatisation receipts, expected at PKR 86 billion, and provincial surpluses of PKR 1.46 trillion, are essential to the fiscal balance presented. However, both assumptions are fraught with uncertainty—privatisation targets remain elusive amid weak investor appetite, and provincial fiscal discipline is not assured in the absence of deeper National Finance Commission reforms.
“Tax policy remains enforcement-heavy and equity-light.”
The 2025–26 federal budget, while notable for its aggressive revenue ambitions, fails to articulate a cohesive development vision. The macro-fiscal framework continues to prioritise stabilisation over structural transformation. Tax policy remains enforcement-heavy and equity-light, while public expenditure priorities reflect an outdated bias towards rigid recurrent obligations at the expense of social investment and climate resilience.
The budget ultimately resembles a consolidation mechanism rather than a transformative roadmap. The need for a comprehensive fiscal recalibration, grounded in progressive taxation, targeted social investment, and institutional modernisation, remains urgent to shift Pakistan towards equitable and sustainable economic growth.
