Executive summary

In June 2026, Pakistan introduced Finance Bill 2026 (Bill), which proposes extensive amendments to Pakistan's tax framework, covering income tax, sales tax, federal excise duty and customs laws. The proposals seek to balance targeted taxpayer relief with stronger enforcement and revenue mobilization, while accelerating the transition toward digitized and centralized tax administration.

The revisions to direct tax provisions include new rate brackets for individuals, significant changes to super tax, removal of deemed income provisions, and new taxation mechanisms for digital income streams.

For indirect tax, the Bill focuses on expanding the scope of taxable transactions, strengthening documentation and traceability, and linking compliance to system integration, particularly through e-invoicing and centralized reporting frameworks.

Overall, the proposed measures signal a fundamental shift toward a data-driven compliance environment in which tax risk will increasingly be evaluated based on transaction visibility, system integration, and analytics-based assessment, requiring businesses to reassess both their tax positions and operational processes.

Capital Value Tax

The Bill would eliminate Capital Value Tax (CVT) on foreign assets owned by residents, which would reduce taxes on offshore holdings and simplify international asset reporting. This change would mainly benefit high-net-worth individuals with cross-border investments and lower administrative complexity.

Income tax measures

Taxation of salaried individuals

The Bill proposes reducing income tax rates for salaried individuals through restructuring of tax slabs. The minimum rate would remain 0% for annual taxable income that does not exceed 600,000 Pakistan Rupee (PKR). The highest rate would remain at 35% but apply if taxable income for the year exceeds PKR7m, instead of PKR4.1m.

In addition, the 9% surcharge on individuals deriving income chargeable under the head "Salary" would be withdrawn.

Abolition of tax on deemed income

The Bill would abolish taxation on deemed income pursuant to a ruling of the Federal Constitutional Court of Pakistan. This means taxpayers would only be taxed on actual income that is realized, rather than on assets without cash inflow.

Super-tax rationalization

Persons deriving income up to PKR500m would no longer be required to pay super tax. Further, the rate would be reduced from 10% to 8% if income exceeds PKR500m. However, banks, petroleum exploration companies and companies in the fertilizer sector with income exceeding PKR150m would pay a 10% super tax instead of progressive rates, which currently vary from 1% to 10%.

Taxation of digital and social media income

The Bill introduces a 5% withholding tax on income from digital platforms and social media, which would expand the tax base into the digital sector. Banks and financial institutions would handle the withholding, making them responsible for compliance. For nonresidents without a permanent establishment, this tax would be final. For residents, it would be a minimum tax that must be reconciled against their final tax bill.

This measure is likely to significantly impact content creators, influencers, freelancers and digital businesses operating through cross-border platforms.

Export taxation

Currently, proceeds that exporters receive from goods they export are subject to a 2% tax (1% minimum tax and 1% adjustable advance tax). The 1% adjustable advance tax would be withdrawn but the minimum tax would increase from 1% to 1.25%. Therefore, although the overall tax from export proceeds would be reduced from 2% to 1.25%, the minimum tax liability would increase from 1% to 1.25%.

Minimum tax for distributors

The minimum tax applicable to distributors in sectors including Fast-Moving Consumer Goods (FMCG), pharmaceuticals and cigarettes would be increased from 0.25% to 1.25%.

Life insurance and takaful payouts

From tax year 2026 and onward, payouts from life insurance/takaful policies (as reduced by the aggregate amount of premiums or contributions paid by the policy holder or participant) would be subject to tax at the following rates:

• 15% if the payout is received within one year from the date the policy/plan was issued
• 10% if the payout is received after one year but before the end of the seventh year from when the policy/plan was issued

Tax withheld by a life insurance company or a takaful operator at the above rates will constitute final discharge of tax liability. No tax will apply on payouts received upon death or disability or if paid out more than seven years after the date the policy/plan was issued.

Property transactions

Advance tax on property transactions would be standardized and reduced as follows, replacing tiered rates:

• Sale: 2.75% (currently 4.5% to 5.5%)
• Purchase: 1.25% (currently 1.5% to 2.5%)

The change would simplify compliance and reduce transaction costs, although higher rates would continue to apply for non-Active Taxpayers.

Withholding tax reforms

The Bill would adjust withholding tax rates as follows:

• Sector-specific rates would increase from 6% to 7%, affecting logistics and similar service providers.
• General services rates would be reduced from 15% to 14%.
• Professional services rates would remain at 15%.
• Port and terminal services would be subject to a new rate of 12%.
• Debt securities rates would increase from 15% to 20%.
• Advance tax on foreign remittances through cards would be reduced from 5% to 0.5%.

Digital compliance and system integration

The Bill introduces a comprehensive compliance framework that would include:

• Mandatory filing in structured formats (XML/XLSX) to enable data analytics
• "Faceless" audit and appellate processes
• Algorithmic dispute settlement, allowing resolution without penalties in certain cases
• Mandatory reporting of accounts with PKR100m+ transactions (semi-annually)

Incentives would include a 10% tax credit for IT/system investments. Taxpayers that do not comply with the new framework would be subject to a 5% expense disallowance.

Limited Liability Partnership (LLP)

LLPs would be included in the definition of an association or person. Further, if the income of the LLP is exempt from tax, the exemption would not extend to the members of the LLP.

Rationalization of powers

The federal government would be empowered to reduce minimum withholding tax rates up to 1% for specific sectors.

Sales tax measures

Integration and enforcement framework

The Bill places significant emphasis on mandatory integration with the Federal Board of Revenue (FBR) systems, including e-invoicing and production monitoring platforms.

Businesses that fail to integrate with these systems could face severe enforcement actions, including suspension or blacklisting of sales tax registration, effectively restricting their ability to operate.

In addition to suspension risks, the Bill proposes additional penalties for system integration noncompliance, signaling a shift toward strict enforcement based on system connectivity and real-time reporting

Tier-I retailer regime

The threshold for classification as a Tier-I retailer would be standardized at PKR200m turnover, whether determined through declarations or inferred from withholding data under sections 236G and 236H.

The Bill proposes removing the requirement to accept payments through point-of-sale (PoS) systems linked to debit/credit cards, simplifying entry into the Tier-I regime from an operational perspective.

At the same time, the tax authority is granted broad discretion to include or exclude persons or classes of persons.

Refund and sector-specific facilitation (steel sector)

Steel melters, steel re-rollers and composite units that integrate with the FBR's production, monitoring and e-invoicing system would be entitled to get a monthly refund, through an automated refund system, of the excess amount of sales tax paid through electricity bills.

Input tax adjustment linked to compliance

The FBR can increase or reduce input tax restrictions for any registered person by notification, based on their compliance with production, monitoring, digital invoicing, e-bility (i.e., digital transport document prescribed by the FBR, generated through the Cargo Tracking System), PoS or other prescribed electronic systems.

Mandatory invoicing requirements

The Bill would require that retailers issue invoices with unique FBR numbers for taxable supplies, exempt supplies and advance receipts.

Faceless audit and appellate mechanisms

The Bill introduces a comprehensive framework that would enable audits, assessments, rectification and appellate proceedings to be conducted in a faceless manner through a National Faceless Centre.

Anti-evasion measures and penalties

The Bill introduces extensive measures to combat fake or fictitious invoicing, including:

• Establishment of a publicly accessible register of fictitious invoice issuers
• Imposition of penalties equal to the value of the invoice issued
• Denial of corresponding input tax claims to purchasers

Additional provisions include:

• Mandatory issuance of audit report prior to any show cause notice, improving procedural transparency
• Introduction of new offenses relating to non-integration and discrepancies in input tax
• Overall increase in penalties for noncompliance

Sale of confiscated goods

Goods confiscated by the FBR under any provision of the Bill could be sold by public auction.

Expansion of the Third Schedule (retail price taxation)

The scope of goods subject to retail price-based sales tax would be significantly expanded, bringing a broad range of consumer goods within this regime.

Newly included categories would include:

• Food items (e.g., confectionery, pasta and sauces)
• Household goods (e.g., plastics, utensils and sanitary items)
• Personal care products (e.g., cosmetics and deodorants)
• Automotive accessories
• Footwear

This expansion aims to capture retail-level value more effectively, particularly in sectors prone to under-documentation, thereby increasing tax collection at the consumption stage.

Specific exemptions introduced under the Sixth Schedule

The following goods would be exempt from sales tax:

• Magazines
• Certain imported "Completely Knocked Down" electric vehicles (until 30 June 2027)
• Contraceptives, female sanitary pads/tampons
• Tankers, dredgers, floating or submersible drilling, and vessels, excluding cruise ships, excursion boats and ferry-boats, provided that the quantity of imported goods is approved by the Ministry of Maritime Affairs
• Imported or leased aircrafts and parts for Pakistan International Airlines, subject to certain conditions

The following machinery/equipment would be exempt from sales tax:

• Certain imported machinery/equipment for upgradation of existing refineries subject to certain conditions
• Imported machinery equipment, raw materials, components and other capital goods, by Karachi Shipyard and Engineering Works Limited

Concessionary rate for electric vehicles under the Eighth Schedule

A reduced rate of 1% available to locally manufactured/assembled electric vehicles is proposed to be extended till 30 June 2027.

A reduced rate of 1% has been introduced for electric trucks in Completely Built-Up condition.

Sales tax withholding and value-added tax (VAT) enforcement

The scope of withholding agents is expanded to include Associations of Persons (AOPs) and individuals, irrespective of registration status.

Manufacturers using toll manufacturing arrangements with unregistered parties would be required to withhold four times the applicable sales tax on conversion charges.

To prevent misuse of VAT exemptions if goods imported for in-house consumption are diverted for onward supply, authorities may recover 3% minimum VAT, along with default surcharge and penalties, and treat the conduct as a punishable offense.

Federal Excise Duty (FED) measures

Digital compliance and procedural reforms

The Bill would require mandatory electronic invoicing for FED-applicable transactions, requiring a unique and verifiable invoice number issued by the FBR.

Similar to income tax and sales tax requirements, a faceless audit, assessment and appellate framework has been introduced, indicating a uniform move toward centralized and technology-driven tax administration across all regimes.

FED on electric and imported vehicles

The period for imposing FED on imported electric vehicles, including station wagons and racing cars, at the rate ranging from 2.5% to 40% would be extended until 30 June 2027.

For electric vehicles imported for personal use (Completely Built Unit condition) exceeding PKR20m in value, FED would be 30% to 40%.

Special excise duty on vehicles

A special excise duty of 40% or 41% as applicable, is proposed for imported vehicles with engines exceeding 2,000cc. The duty currently applies to electric vehicles, station wagons, double-cab 4x4s and racing cars until 30 June 2027.

FED on air travel

The Bill proposes reducing FED on international air travel for passengers traveling in business class, first class and club class.

Customs duty measures

Rationalization of customs duties (CD)

CD on certain industrial input goods would be reduced to the following rates:

• 15% and 10% (from 20%)
• 10% and 5% (from 15%)
• 5% (from 10%)
• 0% (from 5%)

Reduction of additional CD (ACD)

ACD would be reduced by 2% for various items.

Regulatory duty (RD) rationalization

RD greater than 20% for various items would be capped at 20%. RD rates between 1% and 20% for various items would be reduced by 20% or completely eliminated.

Exemptions and concessions

The Bill would delete entries from the Fifth Schedule if concessionary CD equals or exceeds the First Schedule general tariff. The Bill would also exempt CD on cancer-related active pharmaceutical ingredients, defense imports, bulletproof vehicles for the Shanghai Cooperation Organization Summit or by governments. In addition, CD, ACD and RD would not apply to import of agricultural machinery. Finally, CDs on specialized construction-related vehicles for the construction sector would be reduced from 20% to 10%.

Enforcement and compliance measures

The Bill introduces a formal definition of "state warehouse" (where dutiable goods are stored, detained, seized or confiscated for noncompliance with import requirements) and sets out a penalty of up to two times the value of goods, or imprisonment up to five years, or both for the removal, substitution or otherwise tampering with the goods stored in the state warehouse.

The maximum penalty for terminal operators failing to honor Delay and Detention Certificates would be increased from PKR500,000 to PKR10m.

Authorities would also be empowered to freeze assets if illegal cross-border fund transfers are suspected, and require immediate deposit of confiscated goods with customs authorities, even before conclusion of proceedings.

Procedural and administrative changes

The Bill proposes the following administrative changes:

• Continuing exemption notifications issued after 1 July 2016 until 30 June 2027, unless rescinded earlier
• Delegating powers to the FBR to issue penalty notifications and regulate procedures
• Introducing faceless adjudication under the Customs Law

Implications

The proposals set out in the Finance Bill 2026-27 remain subject to enactment and may be revised during the legislative process. Upon enactment, the final provisions, whether in their current form or as amended, will take effect as prescribed. Accordingly, businesses should closely monitor developments and consult with knowledgeable tax professionals for help assessing the potential impact, initiating timely actions to ensure compliance and aligning their tax and operational positions with the evolving legislative framework.