- Dividend and capital gain tax unchanged, positive for market and investor sentiment overall
The government has announced second budget of its tenor with revenues of PKR19.3 trillion and expenditures of PKR25.8 trillion, translating into a deficit of PKR6.5 trillion or 5% of GDP. This suggests, provinces will have to generate surplus of PKR1.5 trillion in FY26 as compared to PKR1 trillion. The Government has also revised its FY25 budget deficit to PKR6.4 trillion or 5.6% of GDP, lowest in 9 years. During last 5 years, average fiscal deficit has clocked in at 7%.
Additionally, in line with IMF guidelines, primary surplus for FY26 is kept at 2.4% of GDP or PKR3.2 trillion as compared to revised primary surplus of 2.2% of GDP anticipated for FY25. The FY26 will mark the 3rd consecutive year of primary surplus in last 2 decades.
The FBR tax revenues are expected to grow 19% to PKR14.13 trillion. For FY25, the govt. has revised its FBR collection target from PKR12.97 trillion to PKR11.9 trillion.
The government has kept nontax revenues target at PKR5.147 trillion, up 5%YoY as compared to revised target of PKR4.9 trillion for FY25. The nontax revenues includes PDL revenues of PKR1.468 trillion, up 26%YoY from revised number of PKR1.161 trillion for FY25 and central bank dividend of PKR2.4 trillion for FY26.
The government has envisaged interest expense of PKR8.207 trillion for FY26, down 8%YoY from FY25 level of PKR8.9 trillion. The decline in interest expense is primarily due to reduced interest rate.
Federal and provincial PSDP allocation is kept at PKR4.2 trillion or 3.2% of GDP. In last five years PSDP as % of GDP has averaged at 2.3%. Defense expense is proposed at PKR2.55tn, up 17%. The defense as percentage of GDP stands at 1.97% in FY26 as compared to FY25 revised estimate of 1.86% of GDP.
The government has set real GDP growth target of 4.2% for FY26 compared to 2.68% achieved in FY25. Segment wise, agriculture, industrial and services are expected to post growth of 4.5%, 4.3% and 4%, respectively in FY26.
Inflation target for FY26 is set 7.5% as against a revised target of 5.0% for FY25.
The government has set current account deficit target of US$2.1 billion or 0.5% of GDP for FY26 as against a revised target of US$1.5 billion surplus or 0.4% of GDP for FY25.
The government has set export US$35.3 billion and import target of US$65.2 billion for FY26, showing 7.4% and 12% respectively increase from revised numbers of US$32.85 billion and US$58.3 billion for FY25.
Stock Market measures
Contrary to expectations of some changes in tax rates on passive income sources, the government has kept the CGT and dividend rates unchanged, this is positive for market. Similarly, there has been no change in the treatment of the dividend and capital gain, which is also positive for the market.
The budget aims to target primary surplus of 2.4% of GDP, in line with IMF guidelines. This will also be taken as positive as primary surplus target is one of the Quantitative Performance Criteria in IMF program.
Other measures that will contribute positively to market performance are 1) removal of exemptions granted to FATA/PATA region, and 2) reduction in super tax.
The successful passage of budget – in line with IMF guidelines – will serve as catalyst in re-rating of market multiple to historic average of 7x from current level of 4.6x.
The government has proposed to add 114C section in the Finance Bill that will impose restriction on economic transactions for non-tax filers i.e. purchase of securities above a threshold, purchase of autos above 850cc, opening of bank account of IPS account except for Asan account.
Industries operating in FATA/PATA were exempt from taxes, the government has removed sales tax exemption on industries in FATA/PATA and has imposed GST of 10% and will increase by 200bps each in next 3 fiscal years. This was long standing demand of steel, ghee players as products were dumped from FATA to other cities of Pakistan, especially in Punjab.
The government has increased tax on interest income from 15% to 20%. This will encourage greater participation in other asset classes like equities which are taxed at preferred rates, thus positive for market.
Increase in withholding tax on cash withdrawal of over PKR50,000 from 0.6% to 0.8% for non-filers.
In line with commitment to IMF, the government has imposed PDL on furnace oil, but the rate was not disclosed.
The government has imposed carbon tax of PKR2.5/liter on petrol, diesel and furnace oil for FY26.
Increase in local ecommerce sales tax from 1% to 2% for non-active tax payers.
Imposition of pension tax at 5% on above PKR10 million for people below 70 year age.
The reduced rate of 12.5% on autos below 850cc is removed. Normal tax of 18% will be applied. This will be negative for small car manufacturers i.e. Pak Suzuki.
Earlier solar panel imports were exempt from sales tax. The budget propose to levy sales tax of 18% in FY26 budget. We believe this will be neutral for market.
Withholding tax rate increase for specified services from 4% to 6% with the exception of IT and IT enabled Services has been proposed. For other non-specified services, a flat 15% will be imposed and from 10% to 15% on Sportsperson.
The dividend tax rate has been enhanced to 25% and 15% on dividend from mutual funds.
Imposition of off grid levy (captive levy), government has estimated PKR105 billion under this head for FY26.
Carry forward of minimum tax losses is reduced from 3 years to 2 years.
Relief Measures
Salaries of the Government employees is proposed to increase by 10%, while pension income is proposed to be increased by 7%.
The government has proposed to bring down existing 5% slab to applicable on income between PKR60,000 to PKR120,000 per month to 1%. While in subsequent 2 slabs rates (ppts) have reduced from 15% to 11%, and from 25% to 23%. While the surcharge is reduced from 10% to 9%.
Income tax along with withholding tax exemption for erstwhile FATA/PATA areas propose for extension for one year, up to FY26.
Tax rebate of 25% against tax payable by full time teachers and researchers will be restored retrospectively from FY23 to FY25.
Restoration of tax credit on mortgage facility for houses up to 10 marla and flats up to 2000 Sqf.
The government has removed FED of 7% and reduced Advance Tax by 150bps on immovable property. This is positive for construction sector and will thus help in lifting sentiments for construction and allied sectors/ stocks.
Super tax rates under section 4C proposed to be reduced by half a percentage point for income slabs between PKR200 million to PKR500 million against each slab respectively.
Grant of exemption on local sales of Bun and Rusk: Currently these products were charged at 10% GST.
The government has allocated housing subsidy of PKR5 billion for FY26 and mark up subsidy of additional PKR5 billion for FY26.
The government has allocated payments to IPPs to the extent of PKR95 billion in FY26.
Other taxes remain unchanged
Unlike widespread expectations, the government has not increased tax on dividend and capital gain for stocks.
There is no change in bonus tax, this will be neutral to positive for market.
Minimum turnover tax has remained unchanged in line with market expectations.
There is no news/measures with respect to tax on reserves.
Despite committing to IMF last year, the government has managed to keep the FED rate on fertilizer and pesticides unchanged for FY26. IMF would be onboard with this decision as media was also quoting that Prime Minister is expected to take up this issue with IMF personally.
It is believed this budget will serve as a catalyst in re-rating of existing market PE from 5.2 to 7x. However, with higher liquidity, index can cross 150,000 mark assuming successful IMF review in September 2025 and political/ geopolitical stability.