ISLAMABAD – June 2025: Pakistan’s Finance Minister Muhammad Aurangzeb presented the federal budget for fiscal year 2025–26 (FY2026) in a highly charged session of the National Assembly, outlining a roadmap to spur economic growth, reform the tax system, and control expenditures. The budget, with a total outlay of Rs17.573 trillion, aims to achieve a 4.2% GDP growth while maintaining fiscal discipline and reducing dependence on debt.
Despite opposition uproar during the session chaired by NA Speaker Sardar Ayaz Sadiq, the finance minister delivered a confident speech, calling the budget a “historic moment” for national unity, drawing parallels between financial and territorial sovereignty.
Budget Highlights and Expenditure Breakdown
The FY26 budget has been reduced by 6.9% compared to last year. Key figures include:
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Total Outlay: Rs17.573 trillion
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Current Expenditure: Rs16.286 trillion (5.33% decrease)
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Interest Payments: Rs8.207 trillion (16% reduction, but still nearly 50% of budget)
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Defence Allocation: Rs2.55 trillion (20.2% increase; 1.97% of GDP)
Aurangzeb announced a special relief allowance for military personnel, acknowledging the armed forces’ contribution to national security.
Tax Reforms and Revenue Targets
The government has set an ambitious Federal Board of Revenue (FBR) tax collection target of Rs14.131 trillion — an 8.95% increase. The focus is on modernizing the FBR with:
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B2B e-invoicing
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AI-based audit selection
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Centralized data collection
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Faceless audits
Aurangzeb revealed that 390,000 high-value non-filers were identified, and Rs300 million recovered. Tax filers doubled, generating Rs105 billion in revenue. The tax-to-GDP ratio is projected to rise from 10.3% in FY25 to 10.4% by June’s end, with a long-term goal of 14%.
Key Taxation Measures
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New income tax slabs:
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Rs0.6m–1.2m: 2.5%
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Rs1.2m–2.5m: 11%
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Rs2.5m–3.2m: 23%
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Super tax on corporations (Rs200m–500m): Reduced to 5%
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Imported solar panels: 18% tax
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Hybrid/petrol/diesel vehicles: Now taxed at 18%
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Foreign vendors (non-tax treaty countries): 5% tax proposed
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Online/digital businesses brought under tax net
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Withholding tax on property reduced across all brackets
Aurangzeb emphasized strict penalties for sales tax evasion and announced the end of special treatment for certain regions, including Balochistan and merged KP districts, which will now pay 10% sales tax over five years.
Macroeconomic Targets
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GDP Growth Target: 4.2%
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Fiscal Deficit Target: 3.9% of GDP (Rs5.037 trillion)
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Primary Surplus Target: 2.4% of GDP
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Inflation Target: 7.5%
Total revenue is projected at Rs19.278 trillion, with Rs8.206 trillion transferred to provinces, leaving net federal revenue at Rs11.702 trillion — a 6.7% increase.
Tariff and Debt Management Reforms
The government will gradually eliminate regulatory and additional customs duties over 4–5 years. Maximum customs duty will be capped at 15%, with reforms targeting pharma, IT, telecom, and textile sectors. Pakistan’s debt-to-GDP ratio, which stood at 74% two years ago, has fallen below 70% and will be lowered further through Sukuk bonds and diversified debt products.
Public Sector Development and Social Spending
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Total PSDP (Federal + Provincial): Rs4.223 trillion (11.4% increase)
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Federal PSDP: Rs1.354 trillion (20% decrease)
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Provincial PSDP: Rs2.869 trillion (36.9% increase)
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Flood-affected school reconstruction (Sindh): Rs3 billion
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PM Youth Skill Development Program: Rs4.3 billion
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Health sector (21 projects): Rs14.3 billion
Support for Employees and Pensioners
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Federal Employee Pay (Grades 1–20): 10% raise
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Pensioners: 7% hike
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Disabled Employees: Rs6,000 monthly allowance
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Tax on Pensions (below 70, earning over Rs100 million): 5%
Digital Economy and SME Growth
IT exports grew to $3.1 billion (21.2% increase) in 10 months. The government aims to raise exports to $25 billion over five years. Rs4.8 billion has been allocated to the Uraan Pakistan IT project.
95,000 SMEs received Rs300 billion in funding under the SME Risk Coverage Scheme, and a three-year SME development plan has been launched.
Conclusion
The FY26 budget reflects the government’s attempt to strike a balance between fiscal responsibility and economic revitalization. With bold reforms in tax collection, debt control, and digital economy support, the government hopes to foster sustainable growth while meeting international financial commitments. However, the sharp rise in defence spending and new taxes on energy and imports may draw scrutiny from opposition leaders and economic analysts in the coming months.
