The government has also revised its FY25 budget deficit number to Rs 6.4 trillion, or 5.6% of GDP, the lowest in nine years, thanks to the government’s fiscal consolidation efforts. Over the last five years, the average fiscal deficit has been 7%.
Additionally, in line with IMF guidelines, the primary surplus for FY26 is kept at 2.4% of GDP or Rs 3.2tn compared to the revised primary surplus of 2.2% of GDP anticipated for FY25. The FY26 will mark the 3rd consecutive year of primary surplus in the last 2 decades.
§ FBR Taxes: The FBR tax revenues are expected to grow 19% to Rs14.13trn. For FY25, the govt. It has revised its FBR collection target from Rs 12.97 trillion to Rs 11.9 trillion.
§ Nontax Measures: The government has maintained the nontax revenue target at Rs 5.147 trillion, up 5% year-over-year (YoY), compared to the revised target of Rs 4.9 trillion for FY25. The nontax revenues include PDL revenues of Rs 1.468 trillion, up 26% year-over-year (YoY) from a revised number of Rs 1.161 trillion for FY25, and the central bank dividend of Rs 2.4 trillion for FY26.
§ Interest expense: The Govt. has envisaged interest expense of Rs8.207tn for FY26, down 8% YoY from the FY25 level of Rs8.9tn. The decline in interest expense is primarily due to reduced interest rates, in our view.
§ Development and Defence Expenditure: The federal and provincial PSDP allocation is maintained at Rs4.2 Trillion, equivalent to 3.2% of GDP. Over the last five years, PSDP as a percentage of GDP has averaged 2.3%. Defence expenditure is proposed at Rs 2.55 trillion, up 17%. The defence as a percentage of GDP stands at 1.97% in FY26E, compared to the revised estimate of 1.86% in FY25.
§ Macroeconomic Indicators target: The government has set a real GDP growth target of 4.2% for FY26 compared to the 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. We maintain our FY26 GDP growth forecast at 4%.
§ Inflation target for FY26 is set at 7.5% compared to the revised target of 5.0% for FY25. Our initial estimates for FY26 inflation are 5.5% to 6.5%.
§ The govt. has set current account deficit target of US$2.1bn or 0.5% of GDP for FY26 compared to revised target of US$1.5bn surplus or 0.4% of GDP for FY25. We expect the current account to post a deficit of US$0.25-0.75 billion in FY26, or 0.1-0.2% of GDP.
§ The Government has set export and import targets of US$35.3 billion and US$65.2 billion for FY26, showing a 7.4% and 12% increase, respectively, from the revised numbers of US$32.85 billion and US$58.3 billion for FY25. We expect Exports and Imports for FY26 to be at US$33.6 billion and US$62 billion, respectively (SBP figures).
Stock Market Measures:
§ Dividend tax and capital gain tax: Contrary to expectations of some changes in tax rates on passive income sources, the government has kept the CGT and dividend rates unchanged. We believe this is positive for the market. Similarly, there has been no change in the treatment of the dividend and capital gain, which is also positive for the market, we believe.
§ The budget aims to achieve a primary surplus of 2.4% of GDP, in line with IMF guidelines. We believe this will also be viewed positively, as the primary surplus target is one of the Quantitative Performance Criteria in the IMF program.
§ Other measures which will contribute positively to market performance are (1)the removal of exemptions granted to the FATA/PATA region and (2)a decrease in super tax.
We mentioned in our strategy report dated November 16, 2024, that the successful passage of the budget in line with IMF guidelines would catalyse the rating to the market’s multiple to its historical average of 7x from the current level of 4.6x.
Tax Measures Taken FY26 Budget
§ Introduction of Section 114C: Restriction on economic transactions by certain persons. The government has proposed adding Section 114C to the Finance Bill, which will impose restrictions on economic transactions for non-tax filers, including the purchase of securities above a threshold, the purchase of autos above 850cc, and the opening of bank accounts, except for IPS accounts, except for Asan accounts.
§ Removal of sales tax exemptions on FATA/PATA: Industries (Steel, Ghee, etc) operating in FATA/PATA were exempt from taxes. However, the government has removed the sales tax exemption for industries in FATA/PATA and has imposed a GST of 10%, which will increase by 200 basis points each in the next three fiscal years. This was a long-standing demand for steel and ghee, as products were being dumped from FATA to other cities in Pakistan, especially in Punjab. This will be positive for steel and edible oil cos.
§ Increase in tax on interest income from 15% to 20%: The government has increased tax on interest income from 15% to 20%. We believe this will encourage more participation in other asset classes, such as equities, which are taxed at preferential rates, thus being positive for the market.
§ Increase in withholding tax on cash withdrawals of over Rs50k from 0.6% to 0.8% for nontax filers.
§ Imposition of PDL on Furnace Oil: In line with its commitment to the IMF, the government has imposed a PDL on furnace oil; however, the rate has not been disclosed yet.
§ Imposition of Carbon Tax: The government has imposed a carbon tax of Rs 2.5/litre on petrol, diesel, and furnace oil for FY26.
§ Increase in local ecommerce sales tax from 1% to 2% for non-active taxpayers.
§ Imposition of pension tax at 5% on above Rs10mn for people below 70 years of age
§ Increase in GST on autos below 850cc: The reduced rate of 12.5% on autos below 850cc is removed. In our view, a standard tax of 18% will be applied. This will be negative for small car manufacturers, i.e. Pak Suzuki.
§ Tax on import of Solar Panels: Earlier solar panel imports were exempt from sales tax. The budget proposes levying a sales tax of 1% in the FY26 budget. We believe this will have a neutral impact on the market.
A 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 unspecified services, a flat 15% will be imposed, and a rate of 10% to 15% will be applied to sportspeople.
§ Dividend income from mutual funds: The dividend tax rate has been enhanced to 25% & 15% on dividends from mutual funds.
Imposition of off-grid levy (captive levy): The government has estimated Rs 105 billion under this head for FY26.
§ Carry forward of minimum tax losses is reduced from 3 years to 2 years.
Relief measures unveiled in Budget FY26
§ Salaries of Government employees are proposed to increase by 10%, while pension income is proposed to be increased by 7%, as per news.
§ Reduction in tax rate on three salaried class slabs: The Government has proposed to bring down the existing 5% slab, applicable to income between Rs 60k-120k per month, to 1%. While in the subsequent two 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 exemption for FATA/PATA to continue for one more year: Income tax along with withholding tax exemption for erstwhile FATA/PATA areas proposes an extension for one year, i.e. up to FY26.
§ Tax rebate on teachers: A 25% rebate against tax payable by full-time teachers and researchers will be restored retrospectively, i.e., from FY23 to FY25.
§ Restoration of the tax credit on mortgage facility for houses up to 10 marla and flats up to 2000 Sqf
§ Decrease in advanced tax/FED on immovable properties: The Government has removed FED of 7% and reduced Advance Tax by 150bps on immovable property. We believe this is positive for the construction sector and will thus help in lifting sentiments for construction and allied industries/stocks.
§ Reduction in super tax by 0.5%: Super tax rates under section 4C proposed to be reduced by half a percentage point for income slabs between Rs200mn to Rs500mn against each slab, respectively. We believe this will have a positive impact on the market.
Grant of exemption on local sales of Bun and Rusk: Currentl,y these products were charged at 10% GS;, no,w this GST is removed.
§ The Government has allocated a housing subsidy of Rs5bn for FY26 and a mark-up subsidy of an additional Rs5bn for FY26.
§ The Government has allocated payments to IPPs to the extent of Rs95bn in FY26.
Other taxes which remained unchanged
§ No change in capital gain or dividend tax on stocks: Unlike widespread expectations, the government has not increased tax on dividends and capital gain for stocks.
§ Bonus: There is no change in bonus tax. This will have a neutral to positive impact on the market.
§ Minimum Turnover Tax: Minimum turnover tax has remained unchanged in line with market expectations. This will have a neutral impact on the market.
§ Taxation on Reserves/Retained Earnings: There is no news/measures concerning tax on reserves. This is neutral for the market.
§ No change in FED on Fertiliser and Pesticide: Despite committing to the MF last year, the government has managed to keep the FED rate on fertiliser and pesticides unchanged for FY26. We believe the IMF would be on board with this decision, as the media has also quoted that the Prime Minister is expected to take up this issue with the IMF personally.
§ Outlook on Market: We believe this budget will catalyse the rating of existing market PE from 5.2 to 7 times. Subject to the successful passage of this budget, we will maintain our base-case target of 127,000 for December 2025. However, with higher liquidity, the index can cross the 150,000 mark, assuming a successful IMF review in September 2025 and political/geo-political stability.
Courtesy – Topline Research
