COMMENTARY ON FINANCE ACT 2026-27

By: Muzammil Hemani

July 01, 2026 (MLN): The Finance Bill, 2026 was presented in the National Assembly on 12 June 2026 as part of the Federal Budget 2026–27. Following deliberation and approval by Parliament, the President of Pakistan, under Article 75 of the Constitution of the Islamic Republic of Pakistan, assented to the Bill, which has now become the Finance Act, 2026 and is effective from 1 July 2026.

The Finance Act introduces amendments to the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, the Federal Excise Act, 2005, and the Customs Act, 1969, with a continued emphasis on revenue mobilization, strengthening tax administration, documentation of the economy, and improving compliance through greater use of technology.

This commentary presents a practical analysis of the significant amendments enacted through the Finance Act, 2026 and their likely implications for taxpayers, businesses, professionals, and other stakeholders. It has been prepared based on our understanding of the enacted provisions and prevailing legal framework.

A)    INCOME TAX

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

1.      Relief for Salaried Individuals

The Finance Act withdraws the surcharge under section 4AB of the Ordinance in respect of individuals deriving income chargeable under the head "Salary". Accordingly, the surcharge at the rate of 9% of the income tax payable on taxable salary income exceeding Rs. 10 million shall no longer apply. This measure provides targeted relief to high-income salaried taxpayers.

The Finance Act also rationalizes the tax slabs applicable to salaried individuals by reconsidering the thresholds and the respective tax rates. The removal of the additional surcharge is structurally offset by a rationalization of the progressive tax brackets, concentrating the impact within higher income thresholds. 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 which shall be withheld by every banking and non-banking financial institution at the time of credit or receipt of any such amount.

This change 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 Act omits section 7E of the Ordinance, which subjected certain immovable properties to tax on deemed income. The 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 Act, 2026.

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

The Finance Act provides 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 last available rates of 4.5% to 5.5%.

The Finance Act provides 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 last available rates of 1.5% to 2.5%.

It has been provided 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

The Finance Act provides 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.

d)     Clarification Regarding Inherited Properties

Two important clarifications have been 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.

4.      Revision in the tax rates of super tax

The Finance Act provides that the existing tax rates of the super tax under section 4C of the Ordinance shall be substituted with the following table:

In addition, as per the Finance Act, the provisions of section 4C of the Ordinance, shall not apply to a person if the export proceeds realized for the tax year represent more than 80% of his total turnover for the tax year.

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. However, a person having turnover up to Rs. 200 million may opt out of the final tax regime at the time of filing of return for the tax year 2027 and onwards.

6.      Taxation of Certain Life Insurance and Family Takaful Payouts

A new tax regime has been introduced under section 7G of the Ordinance from tax year 2026 and onwards, 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 four 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.

An insertion as section 151B of the Ordinance has also been made, to ensure withholding of the tax in case of above transactions w.e.f 1st July 2026. In case of persons other than non-resident persons, not appearing in the ATL, the provision of Tenth Schedule shall become applicable.

7.      Amendment for tax rates under section 153

The Finance Act provides that the tax rate for specified service sectors shall be increased from 6% to 7%. However, it is important to note and revisit the rationale behind why the reduced rates at 2% were earlier introduced for this class which has now reached to 7%. It has also been provided 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.

As per the Finance Act, the rate of tax from the tax to be collected 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

The Finance Act provides 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 with section 113 of the Ordinance, read with omitted section 147(6C) of the Ordinance.

In case of export of services relating to IT services or IT enabled services, the Finance Act provides 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 introduced 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 shall 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 under the law may face disallowance of up to 3% of expenditure claimed in their tax returns, subject to prescribed conditions. The repealed provision restricted such disallowance to 8% of the allowable deduction on failure to integrate under the requirement of the Ordinance, however, the Act reduces it to 3% of the expenditure claimed by the person.

11. Introduction of Faceless Tax Administration

The Finance Act 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 provided under section 2(5) of the Ordinance pertaining to the definition of assessment.

The provided 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 has been introduced through the Finance Act pertaining to Algorithmic Settlement Mechanism under section 134B of the Ordinance.

Under the provided 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 provided insertion under section 114(6B) of the Ordinance. The corresponding amendment has also been provided under section 114(6) of the Ordinance.

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

13. Enhanced Banking Data Reporting

As per the insertion made as 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 Act introduces 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 amendment made 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 Act introduces 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 amendment is intended to reduce unnecessary litigation and improve the quality of tax disputes pursued by the tax authorities.

17. Taxation of Associations of Persons and LLPs

The Finance Act introduces 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 a LLP having exempt income shall be taxable in the hands of members receiving such income, thereby removing the exemption otherwise available in certain cases as per the provided amendment under section 92(4A) of the Ordinance.

18. Rationalization of Minimum Tax Withholding Rates

The Federal Government has been 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.

19. 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 provided 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.

However, the conditions of payment of surcharge as mentioned in section 182A(1) of the Ordinance, shall not apply to an individual who furnishes an undertaking before the Commissioner by declaring that he shall not purchase, acquire, or otherwise obtain ownership or beneficial interest in any property for a period of 6 months commencing from the date of furnishing such undertaking in such form as may be prescribed.

20. Expanded Audit and Compliance Powers

The provided 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.

However, if after the first nomination, if the registered person objects to the nomination of a particular accountant or cost accountant within 15 days of such nomination, the Commissioner, if agreed with objections, may change the said accountant or cost accountant with another accountant or cost accountant.

21. Facilitation for Exemption Certificates

The Finance Act introduces 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. However, in the case of a person who has started business for the first time, the certificate shall be issued on the basis of an undertaking furnished to the Commissioner that the person shall distribute 90% of his accounting income to the unit or shareholders for the tax year.

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

22. Shipping Sector Compliance Measures

Comprehensive amendments have been 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 which previously remained applicable to the master of the ship only.

The Authorized Shipping Agent being the representative of a non-resident ship owner shall jointly and severally liable for payment of tax and all obligations, proceedings, assessments and recovery in respect of such vessel or voyage and will be responsible for fulfilling all other compliance requirements jointly with the master of the ship.

23. Special Procedure for Small Traders and Shopkeepers

The Finance Act has introduced a Fixed Tax System for Small Retailers under section 99B of the Ordinance. The salient features of the scheme as per Budget speech are as follows:

§  Applicable to shopkeepers having annual sales turnover not exceeding Rs. 200 million.

§  Eligible retailers shall pay income tax at the rate of 1% of annual sales, which shall be adjustable against applicable withholding taxes.

§  The minimum tax payable shall be Rs. 25,000, to be discharged while filing the return of income.

§  No routine audit of income tax affairs shall be conducted.

§  No requirement to withhold tax on purchases.

§  No mandatory integration with the Point of Sale (POS) system.

§  Retailers opting for the scheme shall receive a special certification QR Code, which shall be displayed prominently at the business premises.

§  FBR officials shall not ordinarily enter the business premises of retailers displaying the authorized QR Code for routine checks.

§  A simplified one-page income tax return, available in Urdu and other regional languages, has been introduced.

24. Special Provision Relating to Capital Gains

The Finance Act has inserted section 100B into the Ordinance, whereby NCCPL shall compute and determine capital gains of banking companies, insurance companies, and mutual funds in accordance with the mechanism prescribed under section 37A of the Ordinance. However, such entities shall continue to discharge tax on the computed capital gains in accordance with the applicable provisions of the Ordinance.

25. Withdrawal of Opt-Out Mechanism of NCCPL

The Finance Act has omitted Rule 5 of the Eighth Schedule to the Ordinance, thereby withdrawing the opt-out mechanism previously available to taxpayers who, with the prior approval of the Commissioner, elected not to have their capital gains determined and taxed under the Eighth Schedule through NCCPL. Consequently, all eligible taxpayers shall now remain subject to the capital gains tax mechanism administered under the Eighth Schedule.

26. Withholding Tax on Capital Gains Derived by Non-Residents

The scope of withholding tax under section 152(1DA) of the Ordinance has been expanded. Previously, the provision applied only to capital gains arising from investments made through Foreign Currency Value Accounts (FCVA) and Non-Resident Rupee Value Accounts (NRVA) maintained by specified non-resident individuals holding POC, NICOP, or CNIC.

The Finance Act extends the scope to cover Foreign Currency Business Value Accounts (FCBVA) and Non-Resident Rupee Business Value Accounts (NRBVA), thereby broadening the withholding tax regime applicable to capital gains arising from the disposal of debt instruments and Government securities (including Shariah-compliant variants) invested through such accounts.

27. Gain Arising on Disposal of Certain Debt Securities

The Finance Act has increased the tax rate under section 151A of the Ordinance from 15% to 20% on gains arising from the disposal of specified debt securities.

28. Exemption for Non-Resident Investment Account Holders

A new exemption from income tax return filing and NTN registration has been introduced under the Second Schedule to the Ordinance for persons maintaining Foreign Currency Value Accounts (FCVA), Foreign Currency Business Value Accounts (FCBVA), Non-Resident Rupee Value Accounts (NRVA), or Non-Resident Rupee Business Value Accounts (NRBVA) with authorized banks in Pakistan.

The exemption is available where the person's Pakistan-source taxable income is restricted to specified passive income and gains, including:

§  profit on debt taxable as final tax;

§  capital gains on eligible investments or immovable property acquired through such accounts; and

§  dividend income from securities or mutual funds acquired through such accounts.

The exemption shall not apply where the person derives any other Pakistan-source taxable income. Eligible persons shall also remain outside the scope of the Tenth Schedule of the Ordinance.

29. Advance tax on TV plays and advertisements

The Finance Act omits the section 236CA of the Ordinance pertaining to the advance tax on TV plays and advertisements.

30. Rationalization of Minimum Tax Regime

The Finance Act provides that the reduced rate available for distributors of pharmaceutical products, fast moving consumer goods and cigarettes available at 0.25% shall be omitted.

An insertion as clause (24D) under Part II of the Second Schedule of the Ordinance has also been made, 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 specified goods 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.

The specified goods include Pharmaceutical, Fertilizer, Cigarette, Sugar, locally manufactured mobile phones, Fresh and frozen food in canned or packaged form, Electronics, Beverages and dairy products, Pasta, cereals, biscuits, nuts, snacks and similar packaged food items, Condiments and baking items in bottled or packaged form, Skincare and cosmetics, haircare, oral care, baby care, Cleaning agents like laundry detergents, dishwashing soaps and floor cleaners, Toilet paper, paper towels, facial tissues, napkins, and similar products, Trash bags, aluminum foil, air freshener and insect sprays.

31. Reduction in advance tax on persons remitting amount abroad

The Finance Act reduces the advance tax on persons remitting amount abroad through credit or debit or prepaid cards under section 236Y of the Ordinance from the last available tax rate of 5% to 0.5%.

32. Key amendments in Part IV of the Second Schedule

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

§  The Finance Act increases 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.

33. Tax Exemption for Private Equity and Venture Capital Funds

As per the Finance Act, a new tax exemption has been introduced for income derived by a Private Equity and Venture Capital Fund registered under the Private Funds Regulations, 2015, provided that at least 90% of its accounting income (after adjustment for accumulated losses and unrealized capital gains) is distributed to its unit holders, certificate holders, or shareholders. However, the exemption shall not be available where the fund is established to acquire a public listed company that has not been converted into a private limited company following the acquisition.

B)    SALES TAX

The key sales tax amendments under the provisions of the Sales Tax Act, 1990 [the Act] are summarized below:

1.      Amendments in Definitions

The Finance Act introduces several new definitions under section 2 of the Act, including "Advance Receipt Invoice", "Algorithmic Settlement Mechanism", "Electronic Invoicing System", "National Faceless Centre", and "Production Monitoring System" to facilitate digital tax administration.

The definition of "Tier-1 Retailer" has also been amended by including a turnover threshold of more than Rs. 200 million for a wholesaler-cum-retailer engaged in bulk import and supply of consumer goods on wholesale basis to the retailers as well as on retail basis to the general body of the consumers. Likewise, a similar turnover threshold has been introduced for a retailer either by way of declaration or from worked back value of turnover from tax deduction under section 236G or 236H of Income Tax Ordinance, 2001 during the immediately preceding twelve consecutive months. The condition for retailer having acquired point of sale for accepting payment through debit or credit card has been withdrawn.

2.      Time and Manner of Payment 

The Finance Act expamds the scope of section 6(2) of the Act, by introducing a special mechanism for collection of sales tax from steel melters, steel re-rollers, and composite units based on per-unit electricity consumption, including electricity generated through captive power plants or other alternative energy sources, at rates to be notified by FBR. The tax collected shall be adjustable as input tax in the relevant tax period. FBR has also been authorized to prescribe lower rates for digitally integrated and compliant manufacturers based on input tax paid on imports or electronically issued invoices, with the objective of minimizing refunds. The per-unit sales tax shall be determined with reference to the notified minimum value and prescribed electricity consumption benchmarks for steel production.

3.      Adjustable Input Tax

The Finance Act amends section 8B of the Act by empowering the FBR to enhance or reduce the permissible adjustment limit depending upon the taxpayer's level of compliance with production monitoring, digital invoicing, e-bilty, POS integration and other prescribed electronic systems.

4.      Debit and Credit Notes

The Finance Act introduces a provision that issuance and adjustment of debit and credit notes shall be governed through an electronic mechanism to be prescribed by the Board, thereby further promoting digitization of tax adjustments.

5.      Introduction of Faceless Tax Administration and Algorithmic Tax Governance 

The Finance Act introduces to introduce a comprehensive digital tax administration framework under the Act, including faceless audits and assessments, faceless jurisdiction, establishment of the National Faceless Centre, faceless appeals, an Algorithmic Settlement Mechanism and an Independent Case Scrutiny Committee. These provisions are substantially similar to those introduced under the Ordinance.

6.      Suspension and Blacklisting of Registration 

The Finance Act expands the scope of section 21 of the Act by empowering the Commissioner to suspend registration or blacklist registered persons involved in non-compliance with electronic invoicing or production monitoring provisions, in accordance with procedures prescribed by the FBR.

7.      Amendments relating to Tax Invoices

The Finance Act introduces several amendments relating to tax invoices including issuance of invoices for exempt supplies, introduction of advance receipt invoices, mandatory generation of verifiable and unique FBR invoice numbers with effect from the date notified by the FBR. The Act also empowers FBR to notify any person or class of persons who may be allowed to issue an advance receipt invoice within the notified system.

8.      Strengthening of Audit Framework

The Finance Act strengthens the sales tax audit framework by empowering the Commissioner, with the prior approval of the Chief Commissioner, to require a registered person to obtain a re-audit of accounts by a nominated Chartered Accountant or revaluation of inventory by a nominated Cost Accountant where the complexity, volume or nature of transactions, doubts regarding the correctness of accounts, or the interests of revenue so warrant. The amendments also require issuance of a formal audit report after considering the taxpayer's explanation before any assessment proceedings are initiated. Furthermore, the existing provisions relating to voluntary payment of tax have been rationalized by prescribing reduced penalties where the taxpayer voluntarily discharges tax liabilities before or during audit proceedings and thereby broadly aligning the voluntary compliance framework with the corresponding provisions provided under the Ordinance.

9.      Amendments relating to Penalties

Consequential amendments have also been provided under section 33 of the Act to support implementation of the newly introduced digital compliance, faceless administration and enforcement framework. 

10. Monitoring and Tracking through Electronic Means 

Section 40C of the Act, has been revamped to empower the FBR whereby, no taxable goods shall be removed or sold by the manufacturer or any other person unless such goods are affixed with tax stamps, banderols, stickers or labels, or are monitored through a Production Monitoring System, video analytics or any other prescribed monitoring mechanism. Such tax stamps, banderols, stickers, labels, barcodes, production monitoring equipment etc., shall be acquired by the registered person from a licensee appointed by the FBR.

Goods manufactured, transported or supplied without compliance with prescribed monitoring requirements shall become liable to seizure and confiscation along with the conveyance used for transportation.

For this purpose, "Production Monitoring System" has been defined under section 2 of the Act, to mean any system or technology used for monitoring production and sale of goods, whether in real time or otherwise, including such systems as may be prescribed by the FBR from time to time.

11. Sale of Confiscated Goods

The Finance Act inserts a new section 40F into the Act providing that confiscated goods shall be disposed of through public auction, in accordance with PPRA Rules. Sale proceeds shall first be utilized towards auction expenses, taxes, penalties and surcharge, while any remaining balance shall be paid to the owner subject to prescribed conditions.

12. Insertion under Third Schedule

Note: Where the Federal Government has notified that the sales tax shall be charged, levied and paid at a rate higher than 18%, the same rate shall continue to be charged, levied and paid after their inclusion under the Third Schedule.

13. Amendments under Sixth Schedule

 a)      Amendments in Table-1 - (Imports or Supplies)

b)     Amendments in Table-3

1.      Amendments under Eighth Schedule

2.      Amendments under Eleventh Schedule

3.      Amendments under Twelfth Schedule

The Finance Act amends the Twelfth Schedule of the Act, to continue the exemption from 3% value addition tax on import of raw materials and intermediary goods imported by manufacturers for in-house consumption, while specifically excluding compressor scrap, motor scrap and copper cable cutting scrap from the exemption. However, where such imported goods are subsequently supplied in the same state whether in the same packing, repacked, or in bulk instead of being used in the manufacturing process, the manufacturer shall be liable to pay the 3% value addition tax of imports on an ad valorem basis along with the applicable default surcharge.

As per the Finance Act, the rate of minimum value addition tax shall be 1% in the case of import of coal, subject to the conditions that such imported coal is exclusively and directly supplied to Independent Power Producers.

C)   FEDERAL EXCISE DUTY

The key Federal Excise Duty amendments under the provisions of the Federal Excise Act, 2005 [the FED Act] are summarized below:

1.      Amendments in Definitions

The Finance Act introduces several new definitions under section 2 of the FED Act, including "Algorithmic Settlement Mechanism", "Electronic Invoicing System", "National Faceless Centre" and "Production Monitoring System" to facilitate digital tax administration and align the Federal Excise framework with the corresponding digital tax administration framework provided under the Sales Tax Act, 1990.

2.      Levy of Special Excise Duty

The Finance Act inserts sub-section (3B) in section 3 of the FED Act to levy a Special Excise Duty, in addition to the existing Federal Excise Duty, on specified goods listed in Table-IA of the First Schedule, at the rates prescribed therein. The FBR has also been empowered to prescribe the time, procedure, mechanism and manner for collection of such duty.

3.      Seizure of Goods

The Finance Act substitutes section 26(1) of the FED Act to expand the scope of seizure provisions. In addition to counterfeited cigarettes or beverages and other dutiable goods on which Federal Excise Duty has not been paid or which do not bear the prescribed tax stamps, banderols, stickers, labels or barcodes, the amended provision also extends to goods required to be monitored through a Production Monitoring System but manufactured, produced, transported, removed or otherwise dealt with without such monitoring in the prescribed manner. Such goods, together with the conveyance used for their movement, carriage or transportation, shall become liable to seizure.

4.      Confiscation of Goods

The Finance Act substitutes section 27(1) of the FED Act to correspondingly expand the scope of confiscation provisions. Accordingly, goods liable to seizure on account of counterfeiting or non-compliance with the prescribed tax stamps, banderols, stickers, labels, barcodes or Production Monitoring System requirements shall become liable to outright confiscation and destruction in the manner prescribed under the FED Act.

5.      Introduction of Faceless Tax Administration and Algorithmic Tax Governance

The Finance Act introduces a comprehensive digital tax administration framework under the FED Act, including faceless audits and assessments, faceless jurisdiction, establishment of the National Faceless Centre, faceless appeals, an Algorithmic Settlement Mechanism and an Independent Case Scrutiny Committee. These provisions are substantially similar to those introduced under the Income Tax Ordinance, 2001 and the Sales Tax Act, 1990 and discussed earlier in this commentary. Accordingly, the detailed discussion is not repeated herein.

6.      Amendments relating to Invoices

The Finance Act introduces amendments relating to issuance of advance receipt invoices, mandatory generation of verifiable and unique FBR invoice numbers and the prescribed electronic invoicing framework. These amendments are substantially similar to the corresponding amendments provided under the Sales Tax Act, 1990 and, accordingly, the detailed discussion is not repeated herein.

7.      Monitoring and Tracking through Electronic Means

The Finance Act introduces an electronic monitoring and tracking framework for specified excisable goods through tax stamps, banderols, stickers, labels, barcodes, Production Monitoring Systems and other prescribed technologies. This framework is substantially similar to that introduced under the Sales Tax Act, 1990 and, accordingly, the detailed discussion is not repeated herein.

8.      Strengthening of Audit Framework

The Finance Act strengthens the audit framework by introducing electronic audit proceedings, mandatory issuance of audit reports, re-audit of accounts, revaluation of inventory and rationalized voluntary payment provisions. These amendments are broadly aligned with the corresponding amendments provided under the Sales Tax Act, 1990 and, accordingly, the detailed discussion is not repeated herein.

9.      Strengthening of Offence Relating to Electronic Monitoring Systems

The Finance Act has expanded the scope of the offence under section 19(4) of the FED Act. Previously, the provision applied to unauthorized destruction, alteration, or manipulation of data stored in or used in connection with a computer to evade federal excise duty. The amended provision now expressly extends to electronic monitoring equipment and systems used for production, manufacturing, sales, clearances, stock monitoring, and other activities prescribed under the Act, including production monitoring systems and video analytics systems.

Accordingly, unauthorized tampering with or manipulation of such electronic monitoring systems to evade federal excise duty or defeat the provisions of the Act shall continue to constitute an offence punishable with a fine of up to Rs. 75,000 or ten times the amount of duty involved, whichever is higher, imprisonment for a term of up to five years, or both.

10. Amendments under First Schedule

a)      In Table I – Excisable Goods

The Finance Act exempts the import and supply of white spirit and solvent oil from Federal Excise Duty where such goods are purchased solely for in-house consumption by persons holding a valid Form-L licence issued by the Department of Explosives. The exemption is available where the manufactured goods are either exempt from sales tax or, if taxable, both the supplier and manufacturer are integrated with FBR's computerized digital invoicing system. The exemption is subject to the quota approved by FBR or the Directorate General of Input Output Coefficient Organization, and FBR has been empowered to prescribe rules for adjustment of input tax and duties.

b)     Substitution in Table-I for Restriction 2

The Finance Act amends Restriction No. 2 of Table-I by strengthening the restrictions on introduction of new cigarette brand variants at lower price points. Under the amendment provision, no manufacturer or importer shall be permitted to introduce or sell a new variant of an existing brand at a price lower than the lowest actual price of that existing brand.

The Act also introduces to revise the definition of "brand variant" by restricting it to cigarette brands having identical, rather than merely similar, names, trademarks, designs, patterns or other unique distinguishing marks associated with an existing brand.

c)      Insertion of Table IA

d)     Substitution under Table II – Excisable Services

11. Insertion in Second Schedule – Goods subject to sales tax mode

12. Insertion in Third Schedule – Conditional Exemptions

 Disclaimer:

This commentary is based on the Finance Act, 2026, as enacted by the Parliament of Pakistan, and is intended solely for informational and analytical purposes. While every effort has been made to ensure the accuracy, completeness, and reliability of the contents, inadvertent typographical errors, omissions, or interpretation-based differences may remain.

The views expressed herein represent our understanding of the relevant legislative provisions as at the date of publication and should not be construed as legal or professional advice. Readers are advised to refer to the applicable laws, rules, notifications, and other official pronouncements, and to seek professional advice before taking any action or making any decision based on the contents of this publication.

About Author: Muzammil Hemani is a tax and corporate advisory professional with extensive over a decade of experience in direct and indirect taxation, corporate structuring, and regulatory compliance and is currently leading Hemani & Associates. 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