- Government aims to achieve 4.2% GDP growth; BISP receives 21% increase ; tax rates for salaried class reduced; Rs1 trillion to PSDP allocated; agriculture loans increased
On June 10, 2025, Pakistan’s Finance Minister, Muhammad Aurangzeb, presented the Federal Budget for the fiscal year 2025-26, articulating a robust framework aimed at strengthening economic resilience, advancing digital transformation, and prioritizing social welfare. The focus of the budget seems to balance sectoral relief, expand tax scope, achieve equitable burden-sharing, and introducing strong enforcement measures. The government expects the digital taxation framework, carbon levies and tax enforcement on e-commerce and digital transactions to help Pakistan adapt to global financial regulation standards. The budget grapples with the challenge of aligning the International Monetary Fund’s (IMF) fiscal consolidation requirements with the ambition of achieving a moderate economic growth rate of 4.2%, a significant increase from the three-year average of 1.65%. However, it lacks a clear and credible roadmap for addressing longstanding structural economic issues necessary for sustainable progress.
Analysts suggest that the government may be relying on the real estate sector as a key driver to stimulate economic growth. Tax relief measures targeting the influential real estate and construction sectors are widely perceived as an attempt to boost transaction activity and elevate the growth rate, though this approach raises concerns about its effectiveness and equity in driving broader economic recovery.
The budget strategically targets debt reduction, export growth, and climate resilience, setting a foundation for sustainable and inclusive development. Total outlay targeted at Rs17.6 trillion, down 7% or Rs1.3 trillion as compared to Rs18.9 trillion budgeted outlay of FY26. The Budget projects a GDP growth rate of 4.2% for FY2025-26, reflecting cautious optimism in navigating global and domestic economic challenges. Notably, inflation has been curtailed from 29.2% two years prior to 4.7%, with a target of 7.5% for the upcoming fiscal year. Emphasizing fiscal discipline, the government aims to achieve a primary surplus of 2.4% of GDP while maintaining a budget deficit of 3.9% of GDP, underscoring its commitment to prudent financial management. On the other hand, Federal non-tax revenue is projected at Rs5.15 trillion. Simultaneously, Interest expense of Rs8.207 trillion for FY26 projected, down 8% YoY from FY25 level of Rs8.9 trillion. Finance Minister Aurangzeb emphasized that the budget is anchored in digitalization, export growth, and anti-evasion measures.
An amount of Rs.1 trillion has been allocated for Public Sector Development Program (PSDP). FBR revenue projected at Rs14.13 trillion, up 18.7% from outgoing fiscal year. The FBR’s reforms aim to increase the tax-to-GDP ratio to 14%, while tariff reductions to 0–15% align Pakistan with competitive economies like Vietnam and Indonesia. Stricter enforcement on non-filers, e-commerce, and cash transactions will further strengthen revenue collection
The Federal Budget 2025-26 reflects Pakistan’s commitment to economic stability, inclusive growth, and global competitiveness. By addressing structural challenges, investing in human development, and embracing sustainability, the government aims to pave the way for a prosperous and resilient future.
Here are the salient features of federal Budget 2025-26
Debt Management
The government has made strides in debt management, lowering the debt-to-GDP ratio from 74% to 70%, with plans for further reductions. Remittances, a vital economic lifeline, surged by 31% to $31.2 billion in the first 10 months of the current fiscal year, with projections to reach $38 billion by year-end. Foreign exchange reserves are also expected to climb to $14 billion, strengthening Pakistan’s economic resilience.
Tax and Revenue Reforms
The Federal Board of Revenue (FBR) is undergoing a digital transformation to enhance efficiency and curb tax evasion. Initiatives such as AI-based audits, e-invoicing, and faceless customs have already yielded impressive results, including a 47% revenue increase from the sugar sector and Rs30 crore recovered from non-filers. To ease the burden on the salaried class, tax rates have been reduced: from 5% to 1% for incomes between Rs600,000 and Rs1.2 million, and from 15% to 11% for incomes up to Rs2.2 million. Additionally, the super tax for firms earning between Rs10 million and Rs500 million has been cut by 0.5%. The new revenue measures include a carbon levy of Rs2.5 per liter on petrol and diesel, set to increase to Rs5 per liter in FY2026-27, and an 18% sales tax on digital goods and services to capture e-commerce revenue. A 5% tax on annual pension income above Rs1 crore for individuals under 70 has also been introduced to broaden the tax base. There is no change in FED on Fertilizer and Pesticide. Moreover, Government removed FED of 7% and also reduced Advance Tax by 150bps on immovable property.
Energy Sector Transformation
Significant reforms in the energy sector have resulted in savings of Rs3,000 billion through renegotiations with Independent Power Producers (IPPs) and the closure of 3,000MW furnace oil-based plants. The privatization of distribution companies (DISCOs) in Faisalabad, Gujranwala, and Islamabad is halfway complete, signaling a shift toward efficiency. To promote renewable energy, Rs67.2 billion has been allocated for hydroelectric projects, including the Dasu and Mohmand dams, aligning with Pakistan’s sustainability goals.
Infrastructure and Development
The Public Sector Development Program (PSDP) has been allocated Rs1,000 billion for federal projects, with Rs328 billion dedicated to transportation infrastructure, including the Karachi-Baluchistan highway and the Sukkur-Hyderabad motorway. Water security is another priority, with Rs133 billion earmarked for dams like Diamer-Bhasha and Mohmand, alongside irrigation projects to enhance agricultural productivity. The Reko Diq project, a flagship initiative, is expected to generate $75 billion over 37 years and create 41,500 jobs, boosting economic prospects in Baluchistan.
Social Protection and Welfare
The Benazir Income Support Program (BISP) receives a 21% increase in funding, with Rs716 billion allocated to support 10 million families. Education initiatives include Rs9.8 billion for “knowledge schools” in underserved areas, while Rs14.3 billion is allocated for health projects, including the Jinnah Medical Complex in Islamabad. Federal employees (Grades 1–22) will see a 10% salary increase, and pensioners will receive a 7% hike, ensuring support for public sector workers.
Sector-Specific Initiatives
Agriculture, a backbone of Pakistan’s economy, will benefit from Rs2,066 billion in loans, a 16% increase, with new interest-free loans for small farmers to enhance productivity. The IT sector continues to shine, with ICT exports rising 21.2% to $3.1 billion, and an ambitious target of $25 billion in five years. Housing reforms include a reduction in withholding tax (WHT) on property from 4% to 2.5% and incentives for low-cost housing to address urban challenges.
Climate and Sustainability
Pakistan is prioritizing climate resilience, with $40 billion in green financing expected from the World Bank and IFC over the next decade. The issuance of Pakistan’s first Green Sukuk marks a significant step toward funding climate-friendly projects, reinforcing the country’s commitment to sustainability.
Privatization and SOE Reforms The budget accelerates the privatization of state-owned enterprises (SOEs), with 45 entities slated for privatization or closure. The privatization of Pakistan International Airlines (PIA) and the Roosevelt Hotel is targeted for FY2025-26. Additionally, 40,000 vacant posts in SOEs will be abolished to streamline operations and reduce fiscal strain.
Relief for the salaried class
The government has decided to significantly reduce tax rates in various income tax slabs of the salaried class. Government has proposed to bring down existing 5% slab to applicable on income between Rs. 60k-120k per month to 1%. While in subsequent 2 slabs rates (ppts) have reduced from 15% to 11%, and from 25% to 23%. The surcharge also being reduced from 10% to 9%.
For the salaried class falling under the Rs600,000-Rs1.2 million tax slab, the government has decided to reduce the tax rate from 5% to 2.5%, he said. Whereas, the income tax rate on those earning between Rs1.2-Rs2.2 million has been reduced from 15% to 11%. Those earning between Rs2.2-Rs3.2 million will now pay 23% income tax as compared to 25%. Meanwhile, the government, in its bid to reduce the ongoing brain drain, has decided to reduce the surcharge on those earning over Rs10 million by 1%. The government, in its bid to promote horizontal equity has decided to raise tax rate on interest income from 15% to 20%. However, the country achieved a surplus of around 2.4% of the GDP in FY25, whereas the CPI rate declined to 4.7% with an expectation that a current account surplus of around $1.5 billion this fiscal. The remittance inflows are expected to hit $37-38 billion in FY25. Mark-up Payments of the total expenditure, Rs8.2 trillion has been allocated for mark-up payments, accounting for 47% of the total government expenditure whereas the federal government has allocated Rs1 trillion for the Public Sector Development Program(PSDP).
FBR Tax Target
The Federal Board of Revenue (FBR) is assigned to collect Rs14.13 trillion in FY26, up 9% as compared to Rs12.9 trillion budgeted for FY25. The tax collection for FY26 includes Rs6.9 trillion in direct taxes and Rs7.2 trillion in indirect taxes. The federal government targets to collect Rs5.15 trillion from non-tax revenue measures. Super tax rates under section 4C proposed to be reduced by half a percentage point for income slabs between Rs200 million to Rs500 million against each slab respectively. Government has removed FED of 7% and reduced Advance Tax by 150bps on immovable property. However, No change in capital gain or dividend tax on stocks.
New Taxes
Government has proposed to bring down existing 5% slab to applicable on income between Rs. 60k-120k per month to 1%. While in subsequent 2 slabs rates (ppts) have reduced from 15% to 11%, and from 25% to 23%. The surcharge was reduced from 10% to 9%.
There is a proposal of imposing 18% tax on solar panels. Carbon tax of Rs2.5/liter imposed on petrol, diesel and furnace oil for FY26. The Reduced rate of 12.5% on autos below 850cc is going to be removed and normal tax of 18% is likely to be applied.
Highlights
— Government of Pakistan has allocated Rs2.55 trillion for defense in the incoming fiscal year, higher than Rs2.12 trillion, i.e. an increase of over 20% allocated in FY25.
— The government has allocated Rs1,055 billion for pensions and Rs1,186 billion under subsidies. Meanwhile, Rs1,928 billion has been budgeted for grants.
— The government allocated Rs716 billion for the Benazir Income Support Programme (BISP), which is 21% higher than the previous year.
— The government has allocated Rs90.2 billion for 47 development schemes in FY26; whereas Rs1.19 trillion for subsidies in energy and other sectors.
— Government is preparing for the issuance of the first Panda Bonds is completed to penetrate the Chinese capital market.
— Rs. 39.5 billion allocated for Higher Education Commission
— Rs4.8 billion has been for science and technology.
Business Leaders Critique
Pakistan’s business community has offered a mixed response to the recent federal budget, with some cautiously welcoming minor relief measures while others dismiss it as a “camouflage budget” due to its ambitious, unrealistic targets and lack of substantial support for businesses and the public.
Cautious Optimism
Ehsan Malik, Chief Executive of the Pakistan Business Council, acknowledged the challenges of navigating a fragile economy under International Monetary Fund (IMF) constraints, maintaining fiscal balance, and avoiding economic volatility. “Significant relief was unrealistic given these limitations,” Malik noted. However, he highlighted positive aspects, such as benefits for low-income salaried employees and restrictions on non-filers engaging in high-value transactions or international travel. “We should appreciate these small steps forward,” he added. He further expressed his disappointment over the budget’s neglect of export-oriented sectors, which face taxation under the normal regime or a minimum turnover tax, whichever is higher, without immediate support. He pointed out that the real estate sector emerged as a clear beneficiary, with reduced taxes aimed at boosting transactions. “I wish similar tax relief had been extended to businesses paying significantly higher taxes,” Malik remarked, noting that Real Estate Investment Trusts (REITs), the formal segment of the sector, saw no benefits.
Malik also criticized the budget’s impact on savings, describing the removal of the Rs5 million tax bracket and the increase in withholding tax on profits from 15% to 20% as regressive, particularly for salaried savers in a country with a low savings rate.
Calls for Tax Reform and Fiscal Discipline
Abdul Aleem, Secretary General of the Overseas Investors Chamber of Commerce and Industry (OICCI), voiced frustration over the government’s failure to address inequitable corporate tax rates. He urged a comprehensive tax structure overhaul to enhance Pakistan’s competitiveness and attract foreign investment. Aleem also lamented the lack of significant cuts in government expenditure, which could have narrowed the budget deficit and supported macroeconomic stability. “Fiscal discipline is essential, and expenditure rationalization must be prioritized,” he stated.
While Aleem regretted the missed opportunity to broaden the tax base, he welcomed reforms such as simplified tax returns for salaried individuals and small businesses, the nationwide expansion of e-invoicing, and the rollout of point-of-sale (POS) systems—measures long advocated by OICCI.
Exports and Industrialization Overlooked
Zubair Motiwala, Chairman of the Businessmen Group (BMG), speaking at a Karachi Chamber of Commerce and Industry press conference, criticized the budget for its lack of focus on exports and industrialization, which he deemed critical for sustainable growth. While the budget emphasizes digitalization and a cashless economy, Motiwala argued these measures alone cannot drive economic progress.
Motiwala questioned the government’s overly ambitious targets, given the previous fiscal year’s poor performance, where key goals like GDP growth and fiscal consolidation were missed. “Raising targets without a clear strategy, in an environment of uncertainty, high inflation, and IMF restrictions, lacks credibility,” he said.
He warned that the budget’s reliance on extracting more revenue from existing taxpayers, rather than expanding the tax base, could overburden compliant businesses. “This approach risks granting tax officials excessive discretionary powers, stifling economic activity and shrinking output,” Motiwala cautioned.
Motiwala highlighted the absence of policies to boost exports or industrialization, particularly in energy-intensive sectors like textiles. He criticized the government’s failure to address high gas prices, which render Pakistani products uncompetitive globally. “Without lowering gas tariffs or easing interest rates, growth targets are unattainable,” he asserted. The negligible support for the textile sector, a cornerstone of Pakistan’s economy, was a significant oversight, he added, noting that high energy costs deter both local and foreign investment.
Conclusion
The business community’s response underscores a shared concern: the budget falls short of delivering structural reforms or a pro-business environment essential for economic revival. While minor relief measures and procedural reforms are acknowledged, the lack of support for exports, industrialization, and tax base expansion, coupled with unrealistic targets, raises doubts about its effectiveness in addressing Pakistan’s economic challenges.
The author, Nazir Ahmed Shaikh, is a freelance writer, columnist, blogger, and motivational speaker. He writes articles on diversified topics. He can be reached at nazir_shaikh86@hotmail.com