Budget 2025-26: Govt to increase withholding tax for non-filers

In a major push for tax compliance and revenue generation, Pakistan’s upcoming Finance Bill for 2025–26 is expected to introduce strict new measures targeting non-filers, significantly reshaping the withholding tax regime.

Key Highlights:

• Withholding tax on cash withdrawals by non-filers may increase from 0.6% to between 1% and 1.2%.

• New 1.5% withholding tax on imported goods under consideration.

• Proposed changes to tax rates on services, supplies, contracts, and real estate transactions.

• Interest income tax may also rise.

• 18% sales tax on solar panel imports and e-commerce likely to be introduced.

• Broader sales tax hikes could affect many currently low-taxed items.

Why It Matters:

The Federal Board of Revenue (FBR) plans to widen the gap between filers and non-filers as part of a long-standing strategy to boost tax documentation and bring more individuals and businesses into the tax net.

Withholding taxes now account for over 70% of Pakistan’s direct tax collection, and this share is expected to remain high in the coming year.

The goal is to penalize tax evaders while providing relief to compliant taxpayers. One major reform under discussion is the rationalization of taxes on immovable property starting July 1, 2025, aimed at supporting Pakistan’s real estate sector.

Indirect Tax Changes

In a shift that could impact everyday consumers and the renewable energy sector, the government is set to end the sales tax exemption on solar panel imports, imposing a standard 18% rate. The same rate may apply to e-commerce transactions, which were previously treated with leniency.

What’s Next?

The Finance Bill 2025–26 is expected to be tabled later this month. If passed, the changes would take effect from the start of the new fiscal year on July 1, 2025. Tax experts anticipate strong pushback from industry stakeholders, particularly in solar energy and online retail.