The World Health Organization (WHO) has officially submitted its budget proposals for FY 2025–26 to the Federal Board of Revenue (FBR), urging Pakistan’s tax authorities to revise and reinforce tobacco taxation policies. The global health body emphasized the importance of regular Federal Excise Duty (FED) adjustments and stronger monitoring to prevent manipulation of cigarette production and sales strategies by the industry.

According to WHO’s submission, the reduced tax revenue from tobacco in the first nine months of FY 2024–25 cannot be reasonably linked to illicit trade, as tobacco companies claim. Instead, the primary reason for lower-than-expected revenue is a shift in consumer sales from heavily taxed premium cigarette brands to lower-taxed economy brands. This shift was deliberately facilitated by companies that increased production and stockpiled premium brands in the last quarter of FY 2023–24, taking advantage of the static FED rates.

FED Rates Have Remained Unchanged Despite Rising Inflation

Since February 2023, the FED rates on cigarettes have not been adjusted. In the same period, Pakistan’s inflation has surged by 26%, while cigarette companies only increased the retail prices of their top-selling brands by 10%. This has effectively reduced the real tax per pack, significantly impacting revenue collection.

As a result of unchanged FED rates and strategic manipulation by the tobacco industry, FED revenue from cigarettes grew by just 7.4% during July–March 2024–25, falling short of projections. The increased focus on economy brands—which are taxed at Rs 101 per pack compared to Rs 330 for premium brands—has led to a significant drop in the average effective FED rate per cigarette.

Industry Claims vs. Official Data

While tobacco companies argue that illicit trade has hurt tax revenues, official production data contradicts this claim. In fact, the production of economy brands has increased by nearly 30%, and total cigarette production rose by approximately 22% during the first nine months of FY 2024–25. However, production of premium brands dropped sharply by 53.4%, confirming a strategic shift toward lower-taxed products.

This shift in product mix, combined with the absence of FED adjustments, has diluted the impact of excise duty and reduced the government’s per-pack revenue. WHO stated that to preserve the purchasing power of February 2023’s excise rates, the FBR should have increased the FED to Rs 127 for economy brands and Rs 416 for premium brands. The failure to make these adjustments has cost the government an estimated Rs 82 billion over the past two fiscal years.

Significant Revenue Despite Lower Production

Contrary to industry claims, revenue collection from cigarette taxes surged after the FED rate hike in February 2023. In FY 2023–24, Pakistan saw its lowest cigarette production on record but still achieved record-high revenue from tobacco taxation. The FBR collected Rs 237 billion in FED from cigarettes—well above the revised target of Rs 205 billion—reflecting a 15.7% increase year-on-year.

Govt Eyes Rs500-600bn in New Taxes in Budget 2025-26; Freelancers, Vloggers, Pensioners Likely to Face Tax Net

ISLAMABAD – May 23, 2025:
The federal government is planning to introduce new taxation measures in the upcoming Budget 2025-26, targeting a wide range of sectors including freelancers, vloggers, and pensioners, in a bid to generate an additional Rs500-600 billion in revenue, according to a report released on Thursday by Topline Research.

The report titled ‘Pakistan Federal Budget FY26 Preview’ projects the government will assign the Federal Board of Revenue (FBR) a tax collection target of Rs14.1 to Rs14.3 trillion for the upcoming fiscal year. This marks a 16–18% increase compared to the current year’s tax revenue.

Out of the targeted growth, 12% is expected to come from autonomous growth driven by GDP growth (3.6%) and inflation (7.7%). The remaining 4–5%—equivalent to Rs500–600 billion—is expected to be raised through additional tax measures.

Freelancers and Social Media Incomes to Be Taxed
The report indicates that income from platforms like YouTube, TikTok, and other digital channels may soon be taxed. The Institute of Cost and Management Accountants of Pakistan (ICMAP) has proposed a 3.5% tax rate on such income streams, potentially generating Rs52.5 billion annually.

Tax on Pensioners Under Consideration
Additionally, the government is contemplating a new tax on pensions exceeding Rs400,000 per month. The proposed tax rate ranges between 2.5% and 5%. If implemented, this move could fetch Rs20–40 billion. Last year, the government faced resistance on this proposal, but sources suggest it’s likely to be enforced this year.

Pakistan has already spent Rs673 billion on pension payments during the first nine months of FY24-25, and the annual cost is projected to hit Rs1 trillion.

GST Base Adjustment for Essential Goods
The Pakistan Bureau of Statistics (PBS) has revised how general sales tax (GST) is calculated on key commodities like sugar. Instead of market prices, GST is now based on published rates (Rs72.22/kg for sugar), even though market prices have surged to Rs150/kg. This technical adjustment is expected to contribute Rs70–80 billion in additional revenue.

Health and FED Taxes on the Rise
The government is also reportedly planning to impose a “health tax” on ultra-processed food items such as snacks and biscuits. As part of this initiative, Federal Excise Duty (FED) on such items may rise by 20% in FY26, with a goal to increase FED on these items to 50% by FY29. A simultaneous hike in FED on cigarettes is also anticipated.

Non-Filers to Face Transaction Restrictions
As part of its agreement with the International Monetary Fund (IMF), the government has submitted a bill to parliament aimed at removing the non-filer category. If passed, Section 114C will prevent non-filers from conducting key economic transactions like purchasing vehicles or real estate. The proposal is under Senate committee review, and FBR may require technological upgrades before implementation.

Petroleum Development Levy (PDL) Expansion
To meet revenue goals, the government also plans to increase the Petroleum Development Levy (PDL) on petrol and diesel by Rs5/litre in the form of a “carbon tax” over the next two years. In addition, PDL may be imposed on furnace oil sales for the first time, potentially generating Rs35–80 billion annually.

Retail Sector in IMF’s Crosshairs
IMF has mandated a revenue target of Rs295 billion from the retail sector during the first half of FY26. This target is expected to be met through advance tax hikes on distributors and other retail-related measures.

Other Expected Measures

• A 5% increase in FED on fertilisers and pesticides, potentially raising over Rs30 billion

• Elimination of GST exemptions for FATA/PATA regions

• Full withdrawal of concessionary GST rates on remaining products

• Provincial-level introduction of agriculture income tax

• Higher GST on luxury goods including cosmetics, jewellery, high-end mobile phones, and aircraft

Possible Reliefs
Despite the aggressive tax measures, the government is considering some reliefs, including:

• Income tax relief for salaried individuals

• Incentives for the real estate sector

• Duty reductions or relaxation in the age limit for imported vehicles (from 3 to 5 years)

• Subsidies for housing finance

The Federal Budget for FY2025-26 is scheduled to be presented on June 2, 2025.

Prime Minister Shehbaz Sharif has directed the implementation of a comprehensive National Targeting System to tackle sales tax evasion, smuggling, and under-invoicing across Pakistan. The announcement came during a high-level review meeting chaired by the Prime Minister, focusing on Federal Board of Revenue (FBR) reforms and enforcement initiatives.

According to a statement issued by the Prime Minister’s Office (PMO), the new system will use e-tags and digital tracking devices to monitor the movement of goods through transport vehicles. This will allow authorities to track goods in real time and reduce tax fraud in supply chains.

Key Highlights of the National Targeting System

• e-Bilty Integration:
  A new e-Bilty system will be launched and fully integrated with the FBR’s digital infrastructure. It will digitize consignment records and monitor the origin and movement of goods, helping reduce tax evasion and smuggling.

• Digital Checkpoints Nationwide:
  Digital monitoring systems will be installed on all major highways and entry points of major cities, enabling end-to-end tracking of commercial transportation.

• Customs Targeting System at Ports & Airports:
  To enhance oversight on imports and exports, a Customs Targeting System will also be introduced. This will automate customs checks using artificial intelligence and integrate with both domestic and international databases.

The overarching goal is to digitize the economy, prevent illegal trade, and boost national revenue without increasing the burden on honest taxpayers.

Strong Message Against Tax Evasion

During the meeting, PM Shehbaz Sharif stressed the urgency of reforming a tax system plagued by “70 years of mismanagement.” He reaffirmed that the government would fully support honest taxpayers and legitimate businesses, but warned of strict legal action against tax evaders and those involved in under-invoicing or smuggling.

“We will provide maximum facilitation to compliant businesses, but those who cheat the system will face the full force of the law,” the Prime Minister said.

This reform is part of the government’s broader strategy to expand the tax base, improve fiscal transparency, and reduce reliance on external borrowing.

Federal Board of Revenue (FBR) Chief Commissioner Aftab Alam, in a recent address at the Association of Builders and Developers of Pakistan (ABAD) House in Karachi, emphasized the urgent need to increase Pakistan’s tax-to-GDP ratio in order to reduce the national debt and stimulate economic progress.

Highlighting regional disparities, Alam noted, “India’s tax-to-GDP ratio stands at 17%, while Pakistan’s lags behind at just 9%.”

Meanwhile, Finance Minister Muhammad Aurangzeb has projected that Pakistan’s tax-to-GDP ratio will rise to 10.6% by the end of the current fiscal year—an important step toward the government’s goal of achieving 13% by the end of the 37-month Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF). The IMF, in its recent review, estimated Pakistan’s total tax revenue at 12.6% of GDP for FY2024-25, with FBR collections expected to reach 10.7%.

Broadening the Tax Base is Critical

Aftab Alam acknowledged that the existing tax burden falls disproportionately on a limited number of taxpayers. He stressed the necessity of expanding the tax base to include more contributors. Drawing a national parallel, he remarked, “In times of conflict, the Pakistan Army protects the nation. Now, it’s our duty as citizens to support the country by paying our fair share of taxes.”

Real Estate Sector Seeks Tax Reforms for Stability and Growth

ABAD Chairman Muhammad Hassan Bakshi echoed similar concerns, noting that Pakistan is currently engaged in an economic struggle, and that investment—particularly in the construction sector—will be key to revitalizing the economy.

He emphasized that nearly 50% of the $34 billion remitted by overseas Pakistanis is invested in the construction industry. “The construction sector is Pakistan’s largest employment generator, with 72 allied industries depending on it. If we want sustainable tax revenue and employment growth, we must prioritize this sector.”

Bakshi urged the FBR to implement long-term, consistent, and transparent tax policies to attract both domestic and foreign investment. He warned that frequent changes in tax laws create uncertainty and discourage investors.

Call for Coordination & Valuation Reform

To improve regulatory coordination, Bakshi requested the appointment of a dedicated FBR focal person at ABAD House. He also raised concerns over the issuance of tax notices to builders and developers, recommending that ABAD be notified of such notices to facilitate legal support.

The ABAD Chairman revealed that in Karachi’s South District alone, over 50 real estate projects—collectively valued at $5 billion—are ready for investment. He called on the government to ensure stability in taxation to unlock this investment potential.

Government Housing Scheme Could Boost Revenues

Bakshi also highlighted a forthcoming subsidized housing finance scheme, which would allow homebuyers to pay just 20% upfront, with the remaining 80% covered through affordable installments. He estimated that this initiative could generate trillions in tax revenue for the FBR while addressing the country’s housing shortage.