ISLAMABAD: The Federal Board of Revenue (FBR) has excluded agricultural income, which falls outside the scope of federal income taxation, from the purview of annual tax expenditure (cost of tax exemptions).
According to the FBR’s new report on tax expenditure-2026, the cost of tax exemptions has not been calculated on the agricultural income. The revenue loss on account of agricultural income is not part of the FBR’s tax expenditure.
The report said that certain concessions and exemptions are treated as structural elements of the tax base or are granted in compliance with international obligations. Such provisions are not regarded as deviations from the benchmark tax system and are therefore excluded from the estimation of tax expenditures in this report.
Examples of such exclusions included the minimum income threshold, below which individuals are not subject to tax; exemptions on inter-corporate dividends, aimed at avoiding double taxation within corporate groups; agricultural income, which falls outside the scope of federal income taxation as per the Constitution of Pakistan; concessions granted to diplomats and foreign missions; tax exemptions for United Nations agencies and other international organisations and tax expenditures resulting from Free Trade Agreements (FTAs), Preferential Trade Agreements (PTAs), and other bilateral or multilateral treaties.
These exclusions are considered integral to the structural design of the tax system or are required under international commitments; accordingly, they do not fall within the scope of tax expenditure estimates.
The report said that the income that falls outside the fiscal jurisdiction of the Federal Government by operation of the Constitution of Pakistan, 1973, does not form part of the benchmark federal income tax base. Agricultural income, assigned to the provinces under the constitutional division of legislative powers, is accordingly excluded. Income arising in territories to which federal tax law applied for the first time following the Constitution (Twenty-fifth Amendment) Act, 2018, is subject to transitional arrangements that are constitutionally mandated rather than discretionary; the revenue foregone during such transition periods is not classified as a tax expenditure.
Certain features of the tax system are determined by the constitutional framework within which the system operates. These are part of the benchmark and are not tax expenditures.
Agricultural income is assigned to the provincial governments under the constitutional distribution of legislative powers and does not form part of the federal income tax base. The non-taxation of agricultural income at the federal level is a structural feature of the benchmark.
Following the Constitution (Twenty-fifth Amendment) Act, 2018, the former Federally Administered Tribal Areas came within the jurisdiction of federal tax laws for the first time.
The constitutional amendment provided for a transitional period during which existing fiscal arrangements were maintained. The non-application of Income Tax and Sales Tax in these areas during the constitutionally mandated transition period is not a discretionary policy preference; it is constitutionally determined.
The revenue attributable to this transitional non-taxation is not classified as a tax expenditure.
The fiscal arrangements applicable to Azad Jammu and Kashmir are governed by specific constitutional provisions. The non-application of certain federal taxes in AJK during specified periods reflects these arrangements and is part of the benchmark, FBR report added.
Copyright Business Recorder, 2026
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