FPCCI proposes major tax reforms, export incentives in FY 2026-27 budget plan

KARACHI: The Federation of Pakistan Chambers of Commerce and Industry (FPPCI) unveiled its budget proposals for fiscal year 2026-27, calling for sweeping tax rationalization, export-led growth incentives and a fundamental shift away from what it called a “revenue-driven” economy model.

FPCCI President Atif Ikram Sheikh urges the government to adopt an “economy-driven revenue approach” focused on industrial competitiveness, value addition and formalization of undocumented sectors.

Sheikh, who took office in January 2024, framed the proposals as essential to sustaining Pakistan’s economic recovery following the 2022 Standby Arrangement with the International Monetary Fund.

He also cited the May 2025 military operation, which he called “Marka-e-Haq,” and Pakistan’s mediation between Iran and the United States as demonstrations of national resilience that should translate into tangible economic gains.

“The business community firmly believes that the Federal Budget FY2026-27 must reflect Pakistan’s strong diplomatic profile and convert these diplomatic gains into tangible economic outcomes,” Sheikh said.

Income Tax: Lower Rates, Broader Slabs

The FPCCI recommended reducing the corporate income tax rate for manufacturers from 29% to 20%, noting that the effective rate reaches 36% when combined with the Workers Welfare Fund and Workers Profit Participation Fund levies.

For salaried individuals, the chamber proposed cutting the top tax rate from 35% to 30%, abolishing the 9% surcharge and doubling the non-taxable income slab from 600,000 rupees to 1.2 million rupees. Similar relief was recommended for non-salaried individuals and associations of persons, where the top rate would drop from 45% to 35%.

The chamber urged the government to reinstate the Final Tax Regime for goods exporters, which was withdrawn in recent reforms, arguing that current compliance requirements have increased audit harassment and uncertainty. An opt-in option between final and normal tax regimes was also proposed.

For information technology and IT-enabled services exports, which currently stand at approximately $3.8 billion, the FPCCI recommended maintaining the 0.25% tax rate through 2035 to provide long-term policy stability.

The turnover tax under Section 113 should be reduced from 1.25% to 0.5%, the chamber said, calling the current rate “exorbitant” in an era of high energy and raw material costs. The carry-forward period for minimum tax adjustments should also be extended from two years to five years, particularly for large-scale industrial expansions and greenfield projects.

Super taxes imposed under Sections 4B and 4C drew sharp criticism. The FPCCI recommended recovering the 4B levy in reasonable installments without default surcharge and abolishing the 4C super tax entirely for the manufacturing sector.

Sales Tax: Repeals, Rate Reductions and Digital Overhaul

The chamber proposed repealing the “further tax” under Section 3(1A), a 4% additional levy introduced in 2013 and intended to discourage sales to unregistered persons. The FPCCI argued the provision has failed to expand the tax net and instead encouraged “flying invoices” and bogus business transactions.

A three-year roadmap to reduce the standard goods sales tax rate from 18% to 15% was recommended, with 1 percentage point cuts annually starting in fiscal year 2026-27.

The FPCCI called for repealing Section 8B of the Sales Tax Act, which restricts input tax adjustments. The chamber argued that real-time digital verification under SRO 350 has eliminated the risk of fake invoices, making the provision redundant.

Sales tax refunds for all exporters should be processed through the FASTER system, the chamber said, with auto-verified refunds transferred to taxpayer accounts within 72 hours. Refunds should also be adjustable against income tax liabilities, including the super tax under Section 4C.

The chamber recommended removing auto parts from the Third Schedule of the Sales Tax Act, which taxes goods based on maximum retail price rather than transaction value, calling the current regime ill-suited to the sector’s non-uniform pricing structure.

Customs: Export Penalty Reforms and Packaging Tariffs

The FPCCI proposed inserting a separate, lower penalty table for export-related offenses under SRO 499, arguing that applying import-stage penalties to exports is “illogical and fundamentally flawed” when no duty or tax evasion has occurred.

For minor technical contraventions under the Export Facilitation Scheme, the chamber recommended summary adjudication trials with decisions issued within 24 hours to prevent time-sensitive export orders from being canceled due to vessel departures.

The chamber urged splitting tariff lines for imported goods into bulk and retail packaging categories, with retail packs attracting 5% higher customs duty than bulk imports. The measure is intended to boost local packaging manufacturing and employment.

Imported polymer waste should be reclassified as “Industrial Raw Material” for registered recycling units, the FPCCI said, noting that local supply is insufficient to meet industrial demand.

General Proposals: FTZ in Gilgit-Baltistan, SME Support

The FPCCI recommended establishing a China-style free trade zone in Gilgit-Baltistan to transform the region into a regional trade hub connecting Pakistan to China and Central Asia, with easier trade terms for exports from the region to China.

A production rebate mechanism of 30% to 35% on qualifying local expenditures was proposed to attract film production investment, along with government-backed financing facilities through commercial banks.

The chamber called for allocating 8.01 billion rupees for SME development in Hunza, focusing on digital inclusion, youth and women employment, infrastructure and tax incentives. An additional 269 million rupees was recommended for international exhibitions and B2B networking to promote Pakistani exports.

For the gems and jewelry sector, the FPCCI urged government support to establish modern cutting and polishing facilities, noting that Pakistan possesses significant reserves of emerald, ruby, topaz and other precious stones but lacks the technology to maximize value addition.

Federation also proposed a one-time “Past-Period Record Certainty Window” to encourage retail and wholesale formalization, allowing undocumented businesses to enter the tax system without scrutiny over historical turnover or assets.

Mian Zahid Hussain, chairman of FPCCI’s Advisory Council on Federal Budget and a former Sindh information technology minister, said the country must decide whether to continue with a revenue-driven economy or adopt an economy-driven revenue approach for export enhancement and inclusive growth.

“Pakistan has endured a challenging economic landscape in recent years; however, through unified national efforts, the nation has made significant strides toward macroeconomic stabilization and has restored economic confidence,” Hussain said.