18.8 billion rupees outlay targets growth

ISLAMABAD:

Backed by the first-ever provincial grants of more than 1 trillion rupees, Finance Minister Muhammad Aurangzeb on Friday unveiled an 18.8 trillion rupees federal budget, proposing to significantly roll back punitive taxes on the salaried class and the real estate sector while deepening economic liberalization.

The expansionary budget of Rs 18.8 trillion was 20 per cent, or Rs 3.1 trillion, higher than the revised outlay of the outgoing fiscal year, indicating the government’s intention to shift gears from consolidation to spending.

Despite significant contributions from four provinces, the federal government announced a deficit of Rs7,000 billion, higher than that of this financial year and which will be filled by taking out more loans. The government also plans to secure $23.4 billion in foreign loans, including $2 billion in euro and panda bonds.

Prime Minister Shehbaz Sharif’s government has also reintroduced a ban on large purchases of more than Rs 100 million if such assets are not backed by declared white money. But he also tried to encourage capital formation by removing the super tax on annual income up to Rs 500 million and lowering it to 8% beyond that threshold. However, the super tax rate will remain at 10% for banks, fertilizer and oil companies.

This is the fifth budget overseen by Prime Minister Shehbaz Sharif since 2022 and the third of his current five-year constitutional mandate.

The government’s ally Pakistan People’s Party and the opposition party – Pakistan Tehreek-e-Insaf – staged protests, but for different reasons.

The Finance Minister’s speech was inaudible due to the noise created by the PTI which demanded the release of its leader Imran Khan. The PPP protested against high taxes on mobile phones and water shortage in Sindh.

Opposition leader Mehmood Khan Achakzai visited Prime Minister Shehbaz Sharif’s headquarters and shook hands with him. There was also a scuffle between some assembly members of PTI and PML-N.

The proposed budget appears to be a step towards growth, but a closer look suggests that the higher spending is mainly for defense purposes and construction of projects in the water sector to combat Indian aggression on water.

The 2026-27 finance bill aimed to find a balance between repairing the injustice inflicted on the working class, helping the real estate sector to revive activity and reducing the tax pressure on the business sector. Social media revenues have once again been targeted by the imposition of a 5% income tax.

The government proposed in the budget a total of over Rs 306 billion in tax measures, but also provided relief worth Rs 360 billion. Additionally, the government has proposed enforcement measures worth Rs 354 billion. But the FBR’s tax-to-GDP ratio would remain around 10.5% in the next fiscal year.

Oil and carbon tax targets have been set at Rs 1.748 trillion for the next financial year, through a tax of Rs 80 per liter. The minister also announced a 7% increase in salaries and pensions, which did not make public sector employees happy.

The salaried class received tax relief of Rs 52 billion, while tax relief worth Rs 115 billion was given to the real estate sector. The government has imposed a federal excise duty of 30 per cent on electric vehicles worth up to Rs 30 million and 40 per cent on electric vehicles costing above Rs 30 million.

The sources said discussions with the IMF on tax relief for the real estate sector were still ongoing, with the IMF not in favor of halving withholding tax rates.

It also imposed a 5% income tax on income from social media platforms and reintroduced a ban on the purchase of major assets if declared income does not justify the purchase. The 18% sales tax was imposed on hybrid vehicles.

The government imposed 306 billion rupees in additional taxes and took enforcement measures worth 354 billion rupees to meet the new tax target of 15.264 billion rupees set by the Federal Board of Revenue. The oil tax target is set at Rs 1.68 trillion, climate support levy at Rs 50 billion and electric vehicle adoption tax at Rs 22.8 billion.

Some of these measures are expected to revive the economy, including the decision to abolish or reduce regulatory duties on 1,914 tariff lines. The government also proposed to reduce customs duties on 3,125 tariff lines, including removing the 5% customs duty.

For the first time, three provinces, except Balochistan, have provided Rs 1,035 trillion in grants to the FBR based on a target of Rs 15,264 trillion. In the event of slippage, the amount of the subsidy would be automatically reduced. The finance minister said the provincial shares would be determined based on Rs 13.35 trillion in taxes and the additional amount of Rs 1.9 trillion would go to the federal government, including the provincial share of Rs 1.035 billion.

For the next financial year, four provinces would receive a total of Rs 8.85 trillion, but out of this Rs 1.035 trillion would return to the federal kitty as grant. Punjab would receive Rs 4.4 trillion, but would return a significant portion of it to the Centre. Sindh would receive Rs 2.2 trillion. Khyber-Pakhtunkhwa would receive Rs 1.44 trillion gross, including grants.

Muzzammil Aslam, the financial advisor to the KP chief minister, reiterated on Friday that his province would give money only after holding a meeting with the party’s founding president Imran Khan. Khan is serving a prison sentence and is not allowed to meet visitors.

For the first time, the government attempted to ease budgetary constraints by proposing a higher spending envelope. The total budget amount is Rs 18.8 trillion, which is Rs 3.1 trillion more than this year’s revised budget.

The proposed federal budget deficit is 4.9 per cent of GDP or Rs 7 trillion, which is significantly higher than this fiscal year. The federal deficit is at Rs 1.9 trillion, 36% higher than that of the previous fiscal year, showing that the government is no longer taking the path of fiscal consolidation.

The defense budget has been proposed at Rs 3 trillion, 16 per cent or Rs 413 billion higher than this fiscal due to hostilities with India and Afghanistan. Of the provincial grant of Rs 1 trillion, Rs 335 billion was allocated to the declared defense budget.

In addition, the cost of military pensions amounts to Rs 822 billion and Rs 319 billion has been allocated for the armed forces development program.

The government expects gross federal revenue to reach a record high of 20.6 trillion rupees for the next fiscal year, an increase of 1.3 trillion rupees, or 7 percent. The gross revenue is based on the FBR’s tax target of Rs 15,264 trillion and non-tax revenue of Rs 5,300 billion.

The non-tax revenue will mainly come from the oil tax which the government wants to collect nearly 1.7 trillion rupees and profits of 1.435 trillion rupees from the State Bank of Pakistan. The 1 trillion rupee reduction in central bank profit due to lower interest rates is offset by provincial subsidies that are shown as non-tax revenue in the budget.

The finance minister said the provinces would provide grants for three consecutive years.

Of the Rs 15,264 trillion collected by the FBR, the provinces will receive Rs 8,800 billion as their share of federal taxes under the National Finance Commission allocation.

This leaves the federal government with net revenues of Rs 11.8 trillion for the next financial year, which will not be enough to meet interest payments and include all defense spending. The government will borrow Rs7,000 billion in the next financial year to finance the total federal budget of Rs18,800 billion.

More than 8 trillion rupees, or 43% of the total budget, is allocated for interest payments. Pensions would consume 1.17 trillion rupees, subsidies 1.1 trillion rupees, functioning of civil government 1.07 trillion rupees and only 1.0 trillion rupees would be spent on development.

Under the IMF program, the four provinces also need to save 1.8 trillion rupees from their revenues as cash surplus to bring down the national budget deficit to 5.2 trillion rupees, or 3.6 percent of GDP. THE

The Finance Minister announced a Rs838 billion BISP program aimed at expanding the net to over 12 million beneficiaries and adding more children to the conditional cash transfer programmes.

The government also expects the privatization of power distribution companies to fetch Rs 160 billion this fiscal year.

The government estimates receiving $23.4 billion in foreign loans in the next fiscal year, including the refinancing of $12 billion in debt from China and Saudi Arabia.