BUDGET 2026-27 COMMENTARY – PART I

By: Muzammil Hemani

The Federal Budget 2026-27 has been presented with a total outlay of Rs. 18.77 trillion, reflecting the Government's continued focus on fiscal consolidation, macroeconomic stability and compliance with commitments under the IMF programme.

The budget targets FBR tax revenues of Rs. 15.264 trillion, while gross federal revenues are estimated at Rs. 20.6 trillion, including non-tax revenues of Rs. 5.336 trillion.

After transfer of Rs. 8.848 trillion to the provinces under the NFC Award, net federal revenues are projected at approximately Rs. 11.75 trillion. The Government has also targeted GDP growth of 4.0%, average inflation of 8.2%, a fiscal deficit of 3.6% of GDP, and a primary surplus of 2.0% of GDP.

The proposed measures seek to broaden the tax base, improve documentation of the economy, strengthen taxpayer compliance through digitization, and reduce administrative inefficiencies through automation and technology-driven enforcement.

A notable feature of the Finance Bill, 2026, is the shift towards data-driven tax administration through algorithmic risk assessment, faceless audits and appeals, enhanced banking information sharing, and increased integration of businesses with FBR's computerized systems.

At the same time, the Government has proposed certain taxpayer-friendly measures, including the abolition of the deemed income tax on immovable properties under section 7E and relief from surcharge for salaried individuals.

Overall, the Finance Bill reflects a policy direction aimed at balancing revenue mobilization with administrative modernization, while increasing reliance on digital compliance and automated tax enforcement mechanisms.

A)    Income Tax

The key income tax proposals under the provisions of Income Tax Ordinance, 2001 [the Ordinance] are summarized below:

1.      Relief for Salaried Individuals

The Finance Bill proposes that the surcharge levied under section 4AB of the Ordinance, at the rate of 10% of income tax payable on taxable income exceeding Rs. 10 million shall no longer apply to individuals deriving income chargeable under the head "Salary". This measure provides targeted relief to high-income salaried taxpayers.

The Finance Bill also proposes rationalization of tax slabs applicable to salaried individuals by reconsidering the thresholds and the respective tax rates. Apparently, the removal of the additional surcharge is paired with a restructuring of the progressive brackets. The existing table for salaried class is to be substituted with the following table:

2.      Social Media and Digital Content Creators

A new withholding tax regime has been introduced under section 154B of the Ordinance, for revenues received from social media and digital platforms including YouTube, Facebook, Instagram, TikTok, and similar platforms.

The tax shall generally operate as minimum tax for resident persons appearing in ATL at the rate of 5% and 5% as final tax for non-residents not having a permanent establishment in Pakistan.

The proposal formally brings influencer and digital creator income within a dedicated withholding tax framework.

3.      Amendments in taxation of immovable property 

a)      Abolition of Deemed Income Tax on Immovable Property

The Finance Bill proposes the omission of section 7E of the Income Tax Ordinance, 2001, which subjected certain immovable properties to tax on deemed income. The proposed withdrawal follows the recent judgment of the Federal Constitutional Court of Pakistan, which declared the provision unconstitutional on the ground that tax could not be imposed on notional or deemed income in the absence of actual income.

The omission is expected to address long-standing concerns of taxpayers and the real estate sector and represents one of the most significant taxpayer relief measures announced in the Finance Bill, 2026.

b)     Revision in the advance tax on sales or transfer / purchase of immovable property

It has been proposed that the rate of tax to be collected under section 236C of the Ordinance where the person appears on the ATL on sale or transfer of immovable property shall be 2.75% of the gross amount of the consideration received as compared to the currently available rates from 4.5% to 5.5%.

It has been proposed that the rate of tax to be collected under section 236K of the Ordinance where the person appears on the ATL on purchase of immovable property shall be 1.25% of the fair market value of the immovable property as compared to the currently available rates from 1.5% to 2.5%.

It has been proposed to omit Rule 1A of the Tenth Schedule of the Ordinance which specifies the concept of later filers.

c)      Capital Value Tax in case of foreign assets of a resident individual

It has been proposed that the Capital value tax in case of foreign assets of a resident individual where the value of such assets on the last day of the tax year in aggregate exceeds Rs. 100 million shall be abolished. 

4.      Revision in the tax rates of super tax

It has been proposed that the existing tax rates of the super tax under section 4C of the Ordinance shall be substituted with the following table:

5.      E-Commerce Tax Regime Rationalized

The existing tax regime applicable to digitally ordered goods and services supplied through locally operated online platforms has been revised under section 6A of the Ordinance. Tax collected under the regime will now be adjustable in the case of persons whose annual turnover exceeds Rs. 200 million, while remaining subject to the existing framework for smaller businesses.

6.      Taxation of Certain Life Insurance and Family Takaful Payouts

A new tax regime has been proposed to be introduced under section 7G of the Ordinance, for gains arising from life insurance policies, family takaful certificates, and similar arrangements. Where payout or benefit is made within one year from the date of issuance of the life insurance policy, family takaful certificate or plan, the tax shall be 15% whereas, Where payout or benefit is made after one year but before completion of seven years from the date of issuance of the life insurance policy, family takaful certificate or plan, the rate of tax shall be 10%.

However, payments arising on account of death or disability of the insured person will remain exempt. The tax deducted shall constitute final tax on such income.

It has also been proposed to insert section 151B of the Ordinance, to ensure withholding of the tax in case of above transactions.

7.      Amendment for tax rates under section 153 

It has been proposed that the tax rate for specified service sector shall be increased from 6% to 7%. It has also been proposed that the tax rate in the case of independent professional services such as doctors, lawyers, architects, accountants, software engineers or developers, working independently shall be 15%. In case of payments to electronic and print media in case of advertising services, it shall be 1.5% of the gross amount payable.

While the standard tax rate for remaining service sector not falling in any of the category mentioned above would be 14% which is currently 15% of the gross amount payable.

It has been proposed to insert a clause (24CC) in Part II of the Second Schedule of the Ordinance, as per which the rate of tax under section 153(1)(b) of the Ordinance from a person rendering terminal or port service shall be 12% of the gross amount of payment.

8.      Amendment in tax rate for export of goods & services

It has been proposed that the tax rate for exporter of goods shall be reduced from current tax rate of 2% to 1.25% keeping the tax regime consistent under section 154 read with proposed to be omitted section 147(6C) of the Ordinance.

In case of export of services relating to IT services or IT enabled services, it has been proposed that the tax rates would remain same at 0.25% till tax year 2029, thereby no change in them.

9.      Incentives for FBR Integration

To encourage digital integration, a new tax credit under section 64D of the Ordinance, has been proposed for businesses required to integrate with FBR's computerized systems for real-time monitoring, sales reporting, or production monitoring. Taxpayers will be entitled to a tax credit equal to 10% of qualifying expenditure incurred on hardware, software, equipment, and related infrastructure used exclusively for such integration. However, this tax credit has been proposed to be available only against normal tax payable.

10. Disallowance for Non-Integration

As per section 21(r) of the Ordinance, businesses failing to install prescribed electronic resources or comply with integration requirements may face disallowance of up to 5% of expenditure claimed in their tax returns, subject to prescribed conditions. The existing law restricts such disallowance to 8% of the allowable deduction, however, the Bill proposes it to reduce it to 5% of the expenditure claimed by the person.

11. Introduction of Faceless Tax Administration

The Finance Bill introduces a comprehensive faceless tax administration framework comprising:

§  Faceless audits and assessment under section 122E of the Ordinance;

§  Faceless appeals under section 129A of the Ordinance;

§  Faceless jurisdiction of income-tax authorities under section 209B of the Ordinance and

§  Establishment of a National Faceless Centre under section 227D of the Ordinance.

The corresponding amendment has also been proposed under section 2(5) of the Ordinance pertaining to the definition of assessment.

The proposed system aims to reduce direct interaction between taxpayers and tax officials, promote transparency, and improve efficiency through centralized and technology-driven processes.

12. Algorithmic Settlement Mechanism

A significant reform proposed through the Finance Bill is the introduction of an Algorithmic Settlement Mechanism under section 134B of the Ordinance.

Under the proposed framework, FBR may offer digitally generated settlement proposals to taxpayers for settlement of tax proceedings at any stage before any assessment or amendment of assessment order under sections 121, 122 or 122E of this Ordinance, based on risk profiling, compliance history, and identified discrepancies. Taxpayers opting to accept such settlements may revise their returns and settle disputes without exposure to separate penalties or default surcharge and no approval shall also be required as per proposed insertion under section 114(6B) of the Ordinance. The corresponding amendment has also been proposed under section 114(6) of the Ordinance.

The proposal reflects a shift towards voluntary compliance and early dispute resolution through technology-based interventions.

13. Enhanced Banking Data Reporting

As per proposed insertion of section 165AB of the Ordinance, Banks and Electronic Money Institutions (EMIs) will be required to electronically report information relating to account holders whose aggregate deposits or withdrawals exceed Rs. 100 million during a reporting period.

The information will be utilized for algorithmic cross-matching and compliance risk assessment through automated systems.

14. Exchange of Banking and Tax Information

The Finance Bill proposes under section 175AA of the Ordinance, to further authorize structured information exchange between FBR, the State Bank of Pakistan, banks, microfinance institutions, and EMIs for identification of high-risk taxpayers through data analytics and automated matching systems.

This measure is expected to further strengthen documentation, risk profiling and compliance monitoring.

15. Mandatory Electronic Financial Statements

Companies will be required to submit financial statements in electronically readable formats (spreadsheets etc. but excluding PDF or images) from Tax Year 2026 onwards as per the proposed amendment under section 114(2A) of the Ordinance.

The measure is aimed at facilitating automated data analysis, risk profiling, and digital processing of corporate tax information.

16. Independent Case Scrutiny Committee

The Finance Bill proposes the establishment of an Independent Case Scrutiny Committee comprising legal and tax experts under section 133A of the Ordinance.

Approval of the Committee will be required before filing references or appeals before higher judicial forums by the Commissioner Inland Revenue. The proposal is intended to reduce unnecessary litigation and improve the quality of tax disputes pursued by the tax authorities.

17. Clarification Regarding Inherited Properties

Two important clarifications have been proposed to be introduced under section 76(8A) and section 79(1)(b) of the Ordinance respectively:

§  The cost of inherited immovable property shall be determined based on fair market value at the date of death of the original owner; and 

§  Family settlements among legal heirs following death shall be treated as transmission of assets for tax purposes.

These amendments are expected to reduce disputes relating to capital gains taxation of inherited properties.

18. Taxation of Associations of Persons and LLPs

The Finance Bill proposes amendments relating to taxation of Limited Liability Partnerships (LLPs) by explicitly covering it under the definition of Association of Persons (AOPs) under section 80(2)(a) of the Ordinance.

In particular, income distributed by an exempt LLP shall be taxable in the hands of members receiving such income, thereby removing the exemption otherwise available in certain cases as per the proposed amendment under section 92(4A) of the Ordinance.

19. Rationalization of Minimum Tax Withholding Rates

The Federal Government has been proposed to be empowered under section 53A of the Ordinance, to reduce certain withholding tax rates operating as minimum tax to as low as 1% for specified sectors or classes of taxpayers, subject to economic considerations and prescribed conditions.

This may facilitate sector-specific relief where existing minimum tax rates adversely impact business viability.

20. Active Taxpayer List (ATL) Consequences Tightened

Taxpayers who fail to file their income tax returns within the prescribed due date shall not be included in the Active Taxpayers List.

Late filers may only regain ATL status upon filing the return and payment of the prescribed surcharge which has been proposed to be significantly increased under section 182A of the Ordinance, thereby strengthening incentives for timely compliance.

For companies, from Rs. 20,000 to Rs. 100,000, for association of persons from Rs. 10,000 to Rs. 50,000 and for individuals from Rs. 1,000 to Rs. 25,000.

21. Expanded Audit and Compliance Powers

The proposed amendments under section 177(6B) of the Ordinance, further empower FBR to:

§  Mandate installation of electronic resources and integration systems;

§  Appoint auditors, audit mentors, and sectoral experts on contractual basis;

§  Require re-audits of accounts;

§  Require inventory re-valuations by cost accountants; and

§  Require actuarial valuations where considered necessary.

These measures are intended to strengthen audit quality and compliance verification.

22. Facilitation for Exemption Certificates

The Finance Bill proposes amendments to section 159 of the Ordinance to streamline the issuance of exemption certificates. Persons that have distributed at least 90% of their accounting income to unit holders, certificate holders or shareholders for the preceding three years, as required under the tax exemption provisions, shall become eligible for exemption certificates for the entire subsequent tax year.

Similarly, entities approved as non-profit organizations under the Ordinance shall also be entitled to exemption certificates for the relevant tax year. The proposal is intended to reduce compliance burden and provide certainty to eligible taxpayers.

23. Shipping Sector Compliance Measures

Comprehensive amendments have been proposed to be introduced for taxation of non-resident shipping businesses under section 143 of the Ordinance, including the introduction of the concept of an "Authorized Shipping Agent" who shall assume specified compliance obligations and liabilities on behalf of non-resident ship owners and charterers.

24. Advance tax on TV plays and advertisements 

It has been proposed to omit the section 236CA of the Ordinance pertaining to the advance tax on TV plays and advertisements.

25. Rationalization of Minimum Tax Regime

It has been proposed that the reduced rate available for distributors of pharmaceutical products, fast moving consumer goods and cigarettes available at 0.25% shall be omitted, which means the same is being proposed to be taxed at the standard tax rate.

It has been proposed to insert clause (24D) under Part II of the Second Schedule of the Ordinance, as per which the rate of minimum tax under section 113(1) of the Ordinance, in the case of distributors, dealers, sub-dealers, wholesalers of packaged food, fertilizer, locally manufactured mobile phones, sugar and electronics shall be 0.5%, subject to the conditions that beneficiaries of reduced rate are appearing on the active taxpayers’ lists issued under the provisions of the Sales Tax Act, 1990 and the Income Tax Ordinance, 2001.

26. Reduction in advance tax on persons remitting amount abroad

It has been proposed to reduce the advance tax on persons remitting amount abroad through credit or debit or prepaid cards under section 236Y of the Ordinance from the existing rate of 5% to 0.5%.

27. Key amendments in Part IV of the Second Schedule

§  It has been proposed to omit clause (46A) which specifies, the provisions of section 153(3) of the Ordinance shall not apply to any payment received by a manufacturer of iron and steel products relating to sale of goods manufactured by him.

§  It has been proposed to extend the scope of clause (47B) by inserting section 151A in it after which this section shall not apply to any person making payment to National Investment Unit Trust or a collective investment scheme or Approved Pension Fund or an Approved Income Payment Plan or a REIT Scheme including Special Purpose Vehicle or a recognized provident fund or an approved superannuation fund or an approved gratuity fund.

§  It has been proposed to omit clause (57) which specifies that provision of section 153 shall not apply to Trading Houses.

§  It has been proposed to increase the threshold of turnover from Rs. 100 million to Rs. 200 million provided under clause (115), which specifies that the provisions of section 153 shall not apply to traders being individuals as a prescribed person.

The foregoing discussion covers the principal income tax proposals introduced through the Finance Bill, 2026. The proposed amendments reflect a continued policy shift towards digitization, data-driven compliance, faceless tax administration and enhanced information reporting, while also providing selective relief in certain areas.

Part II of this commentary will examine the proposed changes relating to Sales Tax, Federal Excise Duty and Customs laws, along with their implications for businesses, manufacturers, importers and other stakeholders.

Disclaimer:
This commentary is based on the Finance Bill, 2026–27 as presented in the National Assembly and is intended solely for informational and analytical purposes. While every effort has been made to ensure accuracy, completeness, and correctness, the content may contain inadvertent typographical errors, omissions, or interpretation-based variations. The proposals discussed are also subject to change upon enactment of the final Finance Act. Readers are advised to refer to the official legislation and seek professional advice before taking any decision based on this material.

About Author:

Muzammil Hemani is a tax and corporate advisory professional with extensive experience in direct and indirect taxation, corporate structuring, and regulatory compliance. He regularly advises businesses on tax planning, documentation, and compliance strategy, with a focus on aligning practical business needs with evolving legal and fiscal frameworks in Pakistan. He also contributes to professional forums and knowledge-sharing platforms on taxation, public finance, and emerging regulatory developments. Email: mmuzammil309@gmail.com