The federal government is likely to raise the capital gains tax (CGT) in the upcoming FY26 budget. Although not yet confirmed, increases in CGT and dividend income tax rates could follow if the tax on income from debt instruments rises from 15 percent to between 17 and 18 percent, according to Topline Securities. Currently, CGT and dividend income fall under the full and final tax regime, and any shift to the normal tax regime may negatively impact market sentiment.
The Pakistan Stock Exchange (PSX) has proposed reducing CGT on derivative and futures contracts from 15 percent to 5 percent, aligning it with commodity futures rates on PMEX. However, approval of this cut appears unlikely. PSX also recommended removing the 10 percent tax on bonus shares introduced in FY24, citing concerns that it discourages companies from issuing bonus shares. The government’s stance on this remains uncertain.
Other proposals by PSX include rationalizing the super tax, which could boost listed company earnings, and a permanent 20 percent tax credit for companies maintaining a minimum 25 percent free float—although this is unlikely to be accepted. PSX has also requested restoration of exemption on inter-corporate dividends within group companies, but the government is expected to maintain the current tax. The exchange has urged abolition of the 1.25 percent minimum turnover tax for listed firms, but no changes are anticipated.
READ MORE: Higher Taxes Ahead for Cash Payments on Fuel, Retail, and Services in Pakistan
Additional potential tax measures include:
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Increase in withholding tax on cash withdrawals for non-filers, doubling from 0.6 percent to 1.2 percent on daily withdrawals exceeding Rs. 50,000.
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Higher sales tax on small cars, increasing from 12.5 percent to 18 percent for vehicles up to 850cc.
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An extra 5 percent levy on gasoline vehicles to encourage electric vehicle adoption, expected to generate Rs. 25–30 billion. However, a blanket tax is unlikely.
Despite these proposals, Topline Securities suggests the FY26 budget could be broadly neutral for the stock market in the short term. In the longer run, better alignment with IMF guidelines is expected to support market sentiment. Currently, the market trades at a projected 2026 price-to-earnings ratio of 5.3x, below the historical average of 7x.
Topline’s base-case target for the KSE-100 Index is 127,000 by December 2025, with potential to exceed 150,000 if the IMF review in September proceeds smoothly.
