The passage of the Finance Bill 2026 by the National Assembly marks another important milestone in Pakistan’s ongoing fiscal reform agenda. However, while lawmakers approved 35 amendments to the bill, many of the changes appear to be aimed at fine-tuning tax measures rather than addressing the deeper structural weaknesses that continue to undermine the country’s public finances.
With Pakistan still operating under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF), the government has limited room for fiscal manoeuvring, and many of the approved amendments may still require the IMF’s endorsement before they can be fully implemented.
One of the most significant amendments relates to the aviation sector. The National Assembly extended sales tax exemptions on the lease and import of aircraft, spare parts and aviation equipment to all eligible operators instead of limiting the benefit exclusively to Pakistan International Airlines (PIA), as proposed in the original Finance Bill. Parliamentary committee members argued that restricting the exemption solely to PIA would have contradicted existing legal provisions governing the aviation industry.
Officials from the Federal Board of Revenue (FBR), however, cautioned lawmakers that the revised exemption may require prior approval from the IMF because it could affect the government’s projected revenue targets. Since Pakistan remains bound by the conditions of its IMF programme, even relatively modest tax concessions are subject to scrutiny to ensure they do not undermine fiscal objectives.
The aviation tax exemption itself has a long history. In December 2024, the IMF approved a 15-year exemption from sales tax and customs duties on the purchase or lease of aircraft, aviation equipment and spare parts as part of the Sales Purchase Agreement related to PIA’s privatisation. At the time, government officials expressed confidence that these incentives would significantly increase the airline’s market value, with estimates suggesting that the sale price could reach around Rs350 billion.
The eventual outcome fell well short of those expectations. In December 2025, PIA was sold to a consortium of local investors for Rs135 billion in exchange for a 75 percent controlling stake. The government retained the remaining 25 percent, valued at approximately Rs45 billion. However, the immediate cash inflow to the national exchequer amounted to only Rs10.1 billion, highlighting the gap between projected and realised proceeds from the privatisation process.
Apart from the aviation-related amendment, lawmakers also introduced several revisions covering taxation, climate policy and investment incentives. One notable development is that while the proposed climate support levy—an important commitment under the IMF-backed Resilience and Sustainability Facility—remains part of the legislation, provisions relating to late payment surcharges and recovery mechanisms have been dropped. This suggests that the government may still be refining the implementation framework before fully enforcing the levy.
The Finance Bill also introduces incentives for environmentally friendly transportation by maintaining zero federal excise duty on completely built-up (CBU) imported electric vehicles and sport utility vehicles valued at up to 75,000 US dollars. However, manufacturers importing such vehicles will remain liable to pay a three percent value-added tax on imports. In cases where imported goods are sold without undergoing any manufacturing or processing, importers will also be required to pay a default surcharge.
Another important amendment is aimed at encouraging private investment. Income earned by private equity and venture capital funds registered under the Private Funds Regulations 2015 will qualify for income tax exemption, provided that at least 90 percent of their annual accounting income—after adjusting for accumulated losses and unrealised capital gains—is distributed among unit holders or shareholders. The measure is intended to promote investment in emerging businesses while encouraging the development of Pakistan’s private capital markets.
Despite these amendments, significant uncertainty remains over whether the IMF will accept all of the revised provisions. Since Pakistan is awaiting completion of the fourth review under the Extended Fund Facility and the third review under the Resilience and Sustainability Facility, every major fiscal decision must remain broadly consistent with programme commitments.
If the IMF determines that some of the newly approved tax concessions reduce projected revenues beyond acceptable limits, the government could be required to offset the shortfall through alternative measures. These could include reversing some of the amendments, introducing new taxation through a mini-budget or implementing further expenditure cuts. Of these options, a mini-budget appears the more likely scenario, particularly if contingency revenue measures agreed with the IMF need to be activated.
Such measures would most likely involve increasing indirect taxes, particularly the General Sales Tax on selected goods and services. Since sales taxes disproportionately affect lower-income households by raising the cost of everyday necessities, any future tax increases would place additional pressure on consumers already coping with elevated living costs.
Equally concerning is the limited attention given to expenditure reforms during parliamentary debate. Discussions in both the National Assembly and Senate committees largely focused on specific tax proposals while giving comparatively little attention to the composition of government spending.
Pakistan’s current expenditure continues to absorb the overwhelming majority of public resources. For FY2026-27, total current expenditure has been budgeted at approximately Rs17.49 trillion, compared with revised estimates of Rs15 trillion for the outgoing fiscal year, representing an increase of about 16.5 percent—well above projected inflation.
The largest component of this expenditure remains debt servicing. Mark-up payments alone are expected to reach Rs8.05 trillion, assuming the State Bank of Pakistan does not increase interest rates during the fiscal year. Should borrowing costs rise further, debt servicing obligations would expand even more, placing additional strain on an already tight fiscal position.
Pension liabilities also continue to grow steadily. Pension expenditure has been estimated at Rs1.16 trillion, reflecting the absence of meaningful reforms for existing retirees. While contributory pension arrangements have been introduced for newly recruited government employees, these reforms will not generate substantial fiscal savings for many years because current pensioners will continue to receive benefits under the old system.
Government employees have also been granted a seven percent salary increase, adding further pressure to recurrent expenditure. Although public sector wage adjustments may be justified in light of inflation, they nevertheless contribute to a rising expenditure burden that remains difficult to finance without expanding revenue.
The Finance Bill 2026 demonstrates the government’s effort to balance IMF commitments with demands for economic relief and investment promotion. Several of the approved amendments offer targeted support to sectors such as aviation, electric vehicles and private investment. However, Pakistan’s broader fiscal challenges remain largely unchanged. Without meaningful reforms to contain current expenditure, broaden the tax base and improve revenue collection, the country will continue to face recurring fiscal pressures. The coming months, particularly the IMF’s assessment of the approved amendments, will determine whether the government can maintain this delicate balance without resorting to another round of painful fiscal adjustments.