Islamabad: Finance Minister Muhammad Aurangzeb on Tuesday announced federal budget 2025-26 with revenues and expenditures of Rs19.3trn and Rs25.8tn, respectively, translating into federal deficit is of 5% of GDP or Rs6.5tn. While overall country deficit is expected at Rs 5.0trn or 3.9% of GDP. This suggest, provinces will have to generate surplus of Rs1.5trn in FY26 compared to Rs1tn surplus anticipated in FY25.
According to Topline Securities the Govt. has also revised its FY25 budget deficit number to Rs6.4trn or 5.6% of GDP, lowest in 9 years, thanks to the fiscal consolidation efforts of the Govt. During last 5 years, average fiscal deficit has clocked in at 7%.
Additionally, in line with IMF guidelines, primary surplus for FY26 is kept at 2.4% of GDP or Rs 3.2tn compared to revised primary surplus of 2.2% of GDP anticipated for FY25. The FY26 will mark the 3rd consecutive year of primary surplus in last 2 decades.
FBR Taxes: The FBR tax revenues are expected to grow 19% to Rs14.13trn. For FY25, the govt. has revised its FBR collection target from Rs12.97trn to Rs11.9trn.
Non-Tax Measures: The government has kept nontax revenues target at Rs5.147trn, up 5% YoY compared to revised target of Rs4.9tn for FY25. The nontax revenues includes PDL revenues of Rs1.468tn, up 26% YoY from revised number of Rs1.161tn for FY25 and central bank dividend number of Rs2.4trn for FY26.
Interest expense: The Govt. has envisaged interest expense of Rs8.207tn for FY26, down 8% YoY from FY25 level of Rs8.9tn. The decline in interest expense is primarily due to reduced interest rate, in our view.
Development and Defense Expenditure: Federal and provincial PSDP allocation is kept at Rs4.2trn, 3.2% of GDP. In last five years PSDP as % of GDP has averaged at 2.3%. Defense expense is proposed at Rs2.55tn, up 17%. The defense as % of GDP stands at 1.97% in FY26E compared to FY25 revised estimate of 1.86% of GDP.
Macroeconomic Indicators target: Government has set real GDP growth target of 4.2% for FY26 compared to 2.68% achieved in FY25. Segment wise, agriculture, industrial and services are expected to post growth of 4.5%, 4.3% and 4%, respectively in FY26. We maintain our FY26 GDP growth forecast at 4%.
Inflation target for FY26 is set 7.5% compared to revised target of 5.0% for FY25. Our initial estimates for FY26 inflation are 5.5-6.5%.
The govt. has set current account deficit target of US$2.1bn or 0.5% of GDP for FY26 compared to revised target of US$1.5bn surplus or 0.4% of GDP for FY25. We expect current account to post deficit of US$0.25-0.75bn in FY26 or 0.1-0.2% of GDP.
The Government has set export and import target of US$35.3bn and US$65.2bn for FY26, showing 7.4% and 12% respectively increase from revised numbers of US$32.85bn and US$58.3bn for FY25. We expect Export and Imports for FY26 at US$33.6bn and US$62bn, respectively (SBP figures).
Stock Market Measures:
Dividend tax and capital gain tax: Contrary to expectations of some changes in tax rates on passive income sources, the government has kept the CGT and dividend rates unchanged. We believe, this is positive for market. Similarly, there has been no change in the treatment of the dividend and capital gain, which is also positive for the market, we believe.
The budget aims to target primary surplus of 2.4% of GDP, in line with IMF guidelines. We believe, this will also be taken as positive as primary surplus target is one of the Quantitative Performance Criteria in IMF program.
Other measures which will contribute positively to market performance are (1) removal of exemptions granted to FATA/PATA region, and (2) decrease in super tax.
We mentioned in our strategy report dated Nov 16, 2024, that successful passage of budget in line with IMF guidelines will serve as catalyst in re-rating of market multiple to historic average of 7x from current level of 4.6x.
Tax Measures taken FY26 Budget
Introduction of Section 114C: Restriction on economic transactions by certain persons. The govt. has proposed to add 114C section in finance bill which will impose restriction on economic transactions for non tax filers i.e. purchase of securities above a threshold, purchase of autos above 850cc, opening of bank account of IPS account except for Asan account.
Removal of sales tax exemptions on FATA/PATA: Industries (Steel, Ghee etc) operating in FATA/PATA were exempt from taxes, however, government has removed sales tax exemption on industries in FATA/PATA and has imposed GST of 10% and will increase by 200bps each in next 3 fiscal years. This was long standing demand of steel, ghee players as products were dumped from FATA to other cities of Pakistan, especially in Punjab. This will be positive for steel, edible oil cos.
Increase in tax on interest income from 15% to 20%: The government has increase tax on interest income from 15% to 20%. We believe, this will encourage more participation in other asset classes like equities which are taxed at preferred rates, thus positive for market.
Increase in withholding tax on cash withdrawal of over Rs50k from 0.6% to 0.8% for nontax filers.
Imposition of PDL on Furance Oil: In line with commitment to IMF, the Govt. has imposed PDL on furnace oil, however rate is not disclosed yet.
Imposition of Carbon Tax: The government has imposed carbon tax of Rs2.5/liter on petrol, diesel and furnace oil for FY26.
Increase in local ecommerce sales tax from 1% to 2% for non active tax payers.
Imposition of pension tax at 5% on above Rs10mn for people below 70 year age.
Increase in GST on autos below 850cc: The reduced rate of 12.5% on autos below 850cc is removed. Normal tax of 18% will be applied in our view. This will be negative for small car manufacturers i.e. Pak Suzuki.
Tax on import of Solar Panels: Earlier solar panel imports were exempt from sales tax. The budget propose to levy sales tax of 18% in FY26 budget. We believe this will be neutral for market.
Withholding tax rate increase for specified services from 4% to 6% with the exception of IT and IT enabled Services has been proposed. For other non specified services, a flat 15% will be imposed and from 10% to 15% on Sportsperson.
Dividend income from mutual funds: The dividend tax rate has been enhanced to 25% & 15% on dividend from mutual funds.
Imposition of off grid levy (captive levy), government has estimated Rs105bn under this head for FY26.
Carry forward of minimum tax losses is reduced from 3 years to 2 years.
Relief measures unveiled in Budget FY26
Salaries of the Government employees is proposed to increase by 10%, while pension income is proposed to be increased by 7%, as per news.
Reduction in tax rate on 3 salaried class slabs: The Govt has proposed to bring down existing 5% slab to applicable on income between Rs60k-120k per month to 1%. While in subsequent 2 slabs rates (ppts) have reduced from 15% to 11%, and from 25% to 23%. While the surcharge is reduced from 10% to 9%.
Income tax exemption for FATA/PATA to continue for one more year: Income tax along with withholding tax exemption for erstwhile FATA/PATA areas propose for extension for one year i.e. upto FY26.
Tax rebate on teachers: 25% rebate against tax payable by full time teachers and researchers will be restored retrospectively i.e. from FY23 to FY25.
Restoration of tax credit on mortgage facility for houses upto 10 marla and flats up to 2000 Sqf.
Decrease in advanced tax/FED on immovable properties: The Government has removed FED of 7% and reduced Advance Tax by 150bps on immovable property. We believe, this is positive for construction sector and will thus help in lifting sentiments for construction and allied sectors/stocks.
Reduction in super tax by 0.5%: Super tax rates under section 4C proposed to be reduced by half a percentage point for income slabs between Rs200mn to Rs500mn against each slab respectively. we believe this will positive for market.
Grant of exemption on local sales of Bun and Rusk: Currently these products were charged at 10% GST, now this GST is removed.
Government has allocated housing subsidy of Rs5bn for FY26 and mark up subsidy of additional Rs5bn for FY26.
Government has allocated payments to IPPs to the extent of Rs95bn in FY26.
Other taxes which remained unchanged
No change in capital gain or dividend tax on stocks: Unlike widespread expectations, the government has not increased tax on dividend and capital gain for stocks.
Bonus: There is no change in bonus tax. This will be neutral to positive for market.
Minimum Turnover Tax: Minimum turnover tax has remained unchanged in line with market expectations. This will be neutral for market.
Taxation on Reserves/Retained Earnings: There is no news/measures with respect to tax on reserves. This is neutral for market.
No change in FED on Fertilizer and Pesticide: Despite committing to IMF last year, the government has managed to keep the FED rate on fertilizer and pesticides unchanged for FY26. We believe , IMF would be onboard with this decision as media was also quoting that Prime Minister is expected to take up this issue with IMF personally.
Outlook on Market: We believe, this budget will serve as a catalyst in re-rating of existing market PE from 5.2 to 7x. Subject to successful passage of this budget, we maintain base case target of We maintain our base case Index Target of 127,000 for Dec 2025. However, with higher liquidity, index can cross 150,000 mark assuming successful IMF review in Sep 2025 and political/geo-political stability.
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