Pakistan: Tax and customs measures in Finance Act 2026, including new 5% withholding tax on social media revenue

The government has enacted the Finance Act, 2026, which introduces significant tax amendments to the Income Tax Ordinance, Sales Tax Act, Federal Excise Act, and Customs Act.

The changes, effective from July 1, 2026, are aimed at broadening the tax base, enhancing compliance, and digitizing tax administration through the introduction of a "faceless" system for audits and appeals.

Income Tax Ordinance

• New “faceless” tax system: The Act introduces a comprehensive framework for faceless tax administration by establishing a National Faceless Center, which will allow for algorithm-based, remote handling of audits, assessments, and appeals, with the identity of the tax officer remaining confidential to ensure impartiality.
• Algorithmic settlement mechanism: A new technology-driven dispute resolution mechanism has been introduced, allowing the tax authority to generate settlement offers for taxpayers based on their compliance history and the nature of the dispute.
• Reduced tax rates for salaried individuals: The Act has reduced the tax rates for salaried individuals in several brackets. For example, the rate for income between PKR 2,200,001 and PKR 3,200,000 is now 20%, and the rate for income between PKR 3,200,001 and PKR 4,100,000 is 25%.
• Tax on life insurance payouts: A final tax regime has been introduced on payouts from life insurance policies. A rate of 15% applies to payouts made within one year of the policy's issuance, and 10% for payouts made between one and four years.
• Withholding tax on social media revenue: A new withholding tax of 5% has been introduced on revenues received by digital content creators and social media influencers from platforms like YouTube, Facebook, and TikTok. This tax will be treated as a minimum tax for residents and a final tax for nonresidents.
• Automated financial data reporting: A framework has been established for the automated reporting of financial transaction data by banks and electronic money institutions for accounts with aggregate deposits or withdrawals exceeding PKR 100 million.

Sales Tax Act

• Expansion of retail price items subject to sales tax: The list of items subject to sales tax on the retail price has been significantly expanded to include a wide range of consumer goods, such as confectionery, sauces, fermented beverages, household utensils, and various plastic and ceramic products.
• E-invoicing and monitoring:
  • The Board is now empowered to de-register or blacklist businesses that fail to integrate with its e-invoicing system.
  • The issuance of debit/credit notes will now be governed by an electronic adjustment mechanism.
• Increased penalties: Penalties for various non-compliance offenses, such as failure to file returns or issue proper invoices, have been substantially increased.
• New exemptions and extended reductions: New exemptions on sales tax have been introduced for items like bullet-proof vehicles for government use and machinery for refinery upgrades. The reduced sales tax rate of 1% on locally assembled electric vehicles has been extended.

Federal Excise Act

• New and reduced federal excise duty (FED) rates:
  • A new FED has been levied on imported electric cars and SUVs valued over USD 75,000.
  • FED rates on international air tickets for club, business, and first-class travel have been significantly reduced.
  • The FED on acetate tow has been reduced from PKR 44,000 to PKR 10,000 per kg.
• Faceless and digital administration: The Act incorporates provisions for establishing a National Faceless Center, an Independent Case Scrutiny Committee, and an Algorithmic Settlement Mechanism, mirroring the changes in the Income Tax and Sales Tax laws.

Customs Act

• New “faceless” adjudication: The Act empowers the Board to create a procedure for faceless adjudication, allowing for customs proceedings to be conducted without face-to-face interaction.
• Reduced duties on active pharmaceutical ingredients (APIs) and other goods: The Act has introduced a 0% customs duty rate on a long list of APIs and has reduced the duty from 20% to 10% on various motor vehicles for construction companies, such as dumpers and transit mixers.
• Independent Case Scrutiny Committee: Similar to other tax laws, an independent committee will now be required to approve departmental litigation before cases are filed in the High Court or Supreme Court, aiming to reduce frivolous lawsuits.

Read a July 2026 report (73 pages) prepared by the KPMG member firm in Pakistan