How FBR calculates tax concessions: Revenue foregone model unpacked

June 12, 2026 (MLN): To accurately quantify the fiscal cost of tax concessions across Income Tax, Sales Tax, and Customs Duty for Fiscal Year 2024-25, the Federal Board of Revenue (FBR) employs the widely recognized "revenue foregone" methodology.

This approach measures tax expenditure by calculating the difference between the actual tax collected and the notional tax liability that would have been payable under standard statutory benchmark rates, according to Finance Bill.

The analysis meticulously identifies only genuine, discretionary policy departures from the core design of the tax system as tax expenditures, actively excluding structural elements like constitutional immunities or international treaty obligations.

The FBR has clearly defined the benchmark tax systems against which these deviations are measured.

For Income Tax, the statutory rates prescribed in Schedule-1 of the Income Tax Ordinance act as the standard, utilizing a 24.5% average effective corporate rate for non-banking companies and a 39% rate for banking companies.

The Sales Tax benchmark relies on the standard 18 percent rate applied under the "destination principle," where tax is imposed at the point of consumption within Pakistan, effectively removing exported goods from the calculation.

Meanwhile, the Customs Duty benchmark utilizes standard Most Favored Nation (MFN) statutory tariff rates.

Crucially, the report issues a strong caveat regarding the interpretation of these massive multi-billion rupee estimates.

The reported tax expenditure figures are entirely static and do not account for behavioral responses; therefore, the elimination of a particular tax exemption will not necessarily result in an equivalent increase in actual government revenue.

Taxpayers may alter their investment behaviors or economic activities if exemptions are abruptly withdrawn, and the government may also currently offset some of these targeted revenue losses through alternative parallel collections, such as the Petroleum Development Levy (PDL)

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