Expiring sales tax, income tax exemptions: related items to be taxed from July 1

ISLAMABAD: The federal government has decided to impose taxes, from July 1, 2026, on all such goods/items on which sales tax and income tax exemptions would expire on June 30, 2026.

Total tax exemptions, concessions/reduced rates, zero-rating, import concessions and special tax treatments had cost the government Rs5,840.2 billion in 2024-25 against Rs3,879.2 billion in 2023-24, reflecting an increase of Rs1,961 billion.

In this regard, the Tax Policy Unit of the Finance Ministry and the Federal Board of Revenue (FBR) reviewed all income tax and sales tax exemptions which are going to be expired on June 30, 2026.

READ MORE: FPCCI seeks extension of tax exemptions

It is reliably learnt that the government will not extend exemptions available to different areas/goods beyond June 30, 2026. Therefore, from July 1, 2026, all such areas and goods/inputs would become taxable. However, tax treatment to auto sector would be considered as per auto policy.

For example, presently the exemption, available under clause (1454) of Part I of the Second Schedule to the Income Tax Ordinance to any income of any individual domiciled or company and association of persons resident in the erstwhile Tribal Areas forming part of the provinces of the Khyber Pakhtunkhwa and Baluchistan under paragraph (d) of Article 246 of the Constitution, was extended up to June 30, 2026.

This exemption may not be extended for another fiscal year.

Similarly, the FBR will increase sales tax from 10 to 12 percent under the plan for gradual withdrawal of exemption on import and supplies for erstwhile tribal areas.

The exemption of sales tax on import and supply by the industrial units located in the erstwhile FATA/PATA was granted till June 30, 2023 which was further extended till June 30, 2024 and then extended till June 30, 2025. The industrial units located in settled areas have raised concerns about the misuse of this exemption as the most of the imported materials destined for FATA and PATA has ultimately landed in the settled areas making the industrial units in settled areas uncompetitive.

ln order to remove the distortion, gradual imposition of sales tax on import and supplies by the industrial units located in erstwhile FATA/PATA has been enacted by adding S. No. 89 in the Eighth Schedule, thereby charging sales tax in phased manner. Thus, sales tax rate would be increased from 10 percent to 12 percent on import and supplies by the industrial units located in erstwhile tribal areas during the period of July 2026 to June, 2027.

Presently, income tax exemption would also expire on June 30, 2026 on any income which was not chargeable to tax prior to the commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 of any individual domiciled or company and association of persons resident in the Tribal Area forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution.

Under the existing law, the provisions of sections in Division III of Part V of Chapter X and Chapter XII of the Income Tax Ordinance for deduction or collection of withholding tax which were not applicable prior to commencement of the Constitution (Twenty-fifth Amendment) Act, 2018 shall not apply to individual domiciled or company and association of persons resident in the Tribal Areas forming part of the Provinces of Khyber Pakhtunkhwa and Balochistan under paragraph (d) of Article 246 of the Constitution with effect from June 1, 2018 to the June 30, 2026.

A number of sales tax exemptions would expire on June 30, 2026. Under existing exemption schedule, sales tax exemption would expire on June 30, 2026 on the import of CKD (in kit form) of electric vehicles (4 wheelers) by local manufacturers covering small cars/SUVs with 50 Kwh battery or below and light commercial vehicles (LCVs) with 150 kwh battery or below.

One percent sales tax is applicable on the locally manufactured or assembled electric vehicles (4 wheelers) till June 30, 2026 including small cars/ SUVs with 50 Kwh battery or below and light commercial vehicles (LCVs) with 150 kwh battery or below.

Lower rate of sales tax (8.5 percent to 12.75 percent) is also applicable on locally manufactured Hybrid electric vehicle till June 30, 2026.

Sales tax at the rate of 12 percent would be applicable on imports of plant, machinery, and equipment for installation in the tribal areas, and import of industrial inputs by industries located in the tribal areas for 2026-27.

The value addition sales tax would not be charged on the electric vehicles (4 wheelers) CKD kits for small cars/SUVs, with 50 kwh battery or below and LCVs with 150 kwh battery of below till June 30, 2026 and electric vehicles (4 wheelers) small cars/SUVs, with 50 kwh battery or below and LCVs with 150 kwh battery of below in CBU condition till June 30, 2026.

Sales tax exemption is available on supplies of electricity, as made from the day of assent to the Constitution (Twenty-fifth Amendment) Act, 2018, till 30th June, 2026 to all residential and commercial consumers in tribal areas.

Sales tax exemption is available on supply of locally produced silos till June 30, 2026.

Copyright Business Recorder, 2026