The government has decided to implement a sweeping reduction in import taxes worth Rs120 billion in the upcoming federal budget, as part of a broader plan to open Pakistan’s economy to foreign competition and stimulate export-led growth. The plan, endorsed by Prime Minister Shehbaz Sharif, aims to gradually overhaul the country’s import tariff regime over the next five years.
Despite resistance from the Ministries of Industries and Commerce, which voiced concerns over the plan’s potential impact on local manufacturing and external balances, the prime minister has given it a green light. According to cabinet insiders, both the Finance Ministry and the Federal Board of Revenue (FBR)—previously proponents of higher tariffs—now support the move, believing it will encourage efficiency and global integration.
The new policy will begin with the 2025–26 budget and marks the first phase of a plan designed to be fully rolled out over five years. It includes reducing the number of customs duty slabs from five to four: 0%, 5%, 10%, and 15%, down from the current 0%, 3%, 11%, 16%, and 20% structure. The proposal by the Commerce Ministry to expand to six slabs was rejected.
In the first year alone, the revenue loss from reduced import taxes is projected at Rs120 billion, including Rs100 billion due to adjustments in slab rates. The broader five-year plan is expected to result in a total revenue impact of Rs512 billion, excluding tariff adjustments for the oil and gas sector. Notably, the automobile sector will remain unaffected by these changes for now.
A major component of the overhaul is the abolition of the 3% duty slab, which includes 972 tariff lines currently subject to 2% additional customs duty and up to 35% regulatory duty. Most of these lines will shift to the new 5% category, projected to recover approximately Rs70 billion in revenue to offset losses.
Similarly, the 11% slab, covering 1,121 tariff lines, will be reduced to 10%, while the 16% slab—currently applying to 545 items—will be lowered to 15%. The 20% slab, the highest, will be gradually phased out. Currently, 2,227 goods are imported under this slab, which also carries a 6% additional duty and up to 60% regulatory duty.
The government has also approved a timeline for the removal of additional customs duties over four years and the phased elimination of regulatory duties over five years. Additionally, the Fifth Schedule of the Customs Act—covering duty concessions on capital goods and raw materials—will be abolished within five years.
A senior FBR official noted that the projected losses from reduced import taxes will be offset through increased domestic revenue collection. In the first year, estimated losses include Rs15 billion from customs duties, Rs50 billion from additional customs duties, Rs35 billion from regulatory duties, and Rs20 billion related to the Fifth Schedule.
The trade-weighted average tariff is expected to decline from 10.62% to 9.57%, while the average customs duty will fall from 5.68% to 5.54% in the next fiscal year. Despite potential short-term revenue challenges, officials argue that reduced tariffs will drive productivity, make local businesses more competitive, and incentivize exports by lowering costs on intermediate goods and capital equipment.
However, officials from the Ministry of Commerce have warned that the plan may not align with cascading tariff principles, potentially limiting cost reductions due to continued high input costs, such as energy and labor. They also cautioned that sudden trade liberalization could increase imports and widen the trade deficit. According to finance ministry estimates, a 1% reduction in tariffs could raise the trade deficit by approximately 1.7%.
Out of the total projected revenue loss, nearly Rs300 billion is expected to occur during Pakistan’s ongoing three-year IMF program. While some officials urge caution, the government remains firm in its decision, seeing tariff reform as a critical step to reviving exports and attracting investment.
