Pakistan’s Tax Breaks Outstrip Debt Payments

Soaring Exemptions Fuel Economic Concerns

Islamabad is facing a critical financial squeeze as tax exemptions granted to various sectors now exceed the country’s external debt repayment obligations, raising questions about fiscal policy and economic stability.

Exemption Costs Surge

The latest Economic Survey of Pakistan 2024-25, presented by Muhammad Aurangzeb, the country’s finance minister, reveals that tax exemptions totaled over $21 billion this year. This figure surpasses the $17 billion needed to service commercial and bilateral external debt. The total cost of these exemptions reached Rs 5.8 trillion in fiscal year 2024-25, a substantial increase of Rs 2 trillion from the previous year’s Rs 3.9 trillion.

Despite efforts by the current government, led by the Pakistan Muslim League-Nawaz (PML-N), to curtail these benefits—including the removal of several exemptions in the previous budget—tax expenditure has actually risen by Rs 1.96 trillion, representing a 51% increase.

Sectoral Breakdown

Sales tax exemptions accounted for Rs 4.3 trillion in the outgoing fiscal year, a 50% jump from Rs 2.9 trillion in the prior period. Income tax exemptions rose even more sharply, increasing by 68% to Rs 801 billion from Rs 477 billion. Notably, the government has increased the tax burden on salaried individuals while simultaneously maintaining exemptions for sectors like retailers.

Customs duty exemptions also saw a significant increase, rising by Rs 243 billion, or 45%, to Rs 786 billion this fiscal year from Rs 543 billion previously. The report suggests that the substantial rise in tax exemption costs isn’t linked to increased economic activity.

Questionable Reporting

The Rs 5.8 trillion in tax expenditures for 2025 has prompted concerns about the accuracy of previously reported losses. The continuous growth in these expenditures, despite governmental attempts to reduce them, suggests either the implementation of numerous undisclosed exemptions or underreporting of earlier figures.

Pakistan’s overall debt burden is substantial; as of February 2024, the country’s total external debt stood at $130.8 billion, according to the State Bank of Pakistan (SBP). This situation underscores the urgency of addressing the issue of tax exemptions to improve the country’s fiscal health.

Looking Ahead

The Economic Survey highlights a critical challenge for Pakistan: balancing the need to stimulate economic growth through targeted incentives with the imperative of maintaining fiscal discipline. Addressing these rising tax expenditures will be crucial for ensuring long-term economic stability and reducing the country’s reliance on external borrowing.