Budget 2025-26: Pakistan's tough balancing act between reforms and revenue

The federal budget for the fiscal year 2025–26 is shaping up to be a reform-heavy, IMF-guided document aimed at stabilising the economy while striking a delicate balance between fiscal consolidation and targeted relief.

The budget will be presented by Finance Minister Muhammad Aurangzeb in the National Assembly on June 10, if there are no further delays. It was previously scheduled for June 2, but the date was pushed ahead after talks with the IMF on tax relief hit snags.

Ahead of the budget, analysts at Topline Securities and Arif Habib Limited (AHL) forecast the government will maintain its track record of primary balance improvements, aiming for a 1.6% share of GDP this year.

Federal Board of Revenue’s (FBR) collection is projected at Rs13.9-14.3 trillion, implying a growth of 16–18% year-on-year, the slowest rate in six years. This growth is expected to come partly from an inflation rate of 7.7% and a Gross Domestic Product (GDP) expansion of around 3.6–4.0% with the rest driven by Rs500–600 billion in new tax measures.

Fiscal discipline will be reinforced through controversial measures such as a potential pension tax, General Sales Tax (GST) on petroleum products, and the removal of longstanding exemptions. Simultaneously, relief for the salaried class, housing finance, and select industry sectors is expected.

The IMF’s stamp is clear: no amnesties, a crackdown on non-filers, and an expansion of the tax base across sectors. The budget, while neutral in the short term for equities, is expected to boost market confidence in the medium term.

Key budget expectations for FY26

Macroeconomic targets

• GDP Growth: 3.6-4.0% 
• Inflation (avg.): 5.77% 
• Primary surplus: 1.4-1.6% of GDP 
• Fiscal deficit: Rs6.5 trillion or 5.1% of GDP 

Revenue measures

• GST on petroleum products (3-5%): Expected to raise petrol prices by Rs8-13/litre 
• Higher Petroleum Development Levy (PDL): Targeted at Rs1.3-1.4 trillion, up Rs5/litre 
• Pension tax: Proposed 2.5-5% tax on pensions exceeding Rs400,000/month 
• Tax on freelancers, vloggers, social media income: 3.5% tax, potentially generating Rs52.5 billion 

Federal Excise Duty (FED) increases:

• Cigarettes: Increase expected due to WHO pressure 
• Sugary drinks: Proposed increase from 20% to 40% 
• Ultra-processed food: 5% FED expected on 50+ products 
• Fertiliser & pesticides: Additional 5% FED 
• FATA/PATA Exemption Removal: Removal of sales tax exemptions 
• Retailer Tax: Rs295 billion collection target set by IMF 

Relief measures

• Salaried class: Increase in exemption threshold from Rs600,000 to Rs800,000; possible 2.5% tax rate cut across brackets 
• Minimum wage and BISP adjustments: Likely to be indexed for inflation 
• Housing finance subsidy: Loans for 200,000 homes under interest subsidy 

Sector-wise expectations

Oil and gas/OMCs/refineries

• Expansion of PDL on FO and introduction of carbon tax 
• GST of 3-5% on petroleum products 
• Additional levies on coal and gas 

Fertiliser

• FED increase from 5% to 10%, raising urea prices by Rs200-225/bag 
• 5% sales tax on pesticides 

Technology and IT

• Likely continuation of Final Tax Regime at 0.25% 
• No tax harmonisation for salaried vs freelance IT workers 

Cement

• Public Sector Development Programme (PSDP) allocation of Rs900-950 billion expected 
• Housing finance subsidy to boost cement demand by 1.5-2.0 million tons 

Steel

• FATA/PATA tax exemptions to be phased out 

Autos

• Proposal to allow import of used cars up to five years old 
• Gradual cut in tariffs on imported vehicles 

Stock market

• No changes expected in CGT on stocks 
• Pakistan Stock Exchange (PSX) proposals on bonus shares tax rollback and inter-corporate dividend exemption may not be accepted 

As the Shehbaz Sharif-led government prepares to unveil the Finance Bill for 2025-26, all eyes are set on how it walks the tightrope between IMF conditions and local expectations.

With a focus on fiscal consolidation, widening the tax net, and limited but strategic relief for the salaried and business classes, this budget could define Pakistan’s macroeconomic trajectory ahead of the next IMF review in September.

While industries brace for tighter regulations and taxes, the emphasis on stability, reform, and debt control marks a critical pivot in Pakistan’s economic policymaking.

A man walks with sacks of supplies on his shoulder to deliver to a nearby shop at a market in Karachi, on June 11, 2024. — Reuters