Experts highlight pluses, minuses of budget

KARACHI: Pakistan presented its federal budget for the next fiscal year on Wednesday, and experts believe that most of the targets in the budget align with the International Monetary Fund’s (IMF) guidelines, which could help Pakistan secure a new bailout deal from the global lender.

Pakistan aims for a gross domestic product target of 3.6 percent for FY25, compared to 2.4 percent in FY24. The government has projected a significant drop in its fiscal deficit for the new fiscal year to 5.9 percent of GDP, down from an upwardly revised estimate of 7.4 percent for the current year.

Significant tax measures have been implemented in order to generate additional tax revenues of Rs3.7 trillion, bringing the total Federal Board of Revenue taxes to Rs12.97 trillion from the previously estimated Rs9.25 trillion for the current year.

Experts have mixed reactions, with some pointing out both positives and negatives of the budget.

“Pakistan budget will help in fiscal consolidation and is broadly in line with IMF guidelines. Though the tax collection target is high we believe that considering new taxation measures Pakistan may be able to reach closer to the primary and fiscal deficit estimates,” said Mohammed Sohail, the CEO of Topline Securities.

The Pakistan Business Council (PBC) said the expectation was for a budget to contain inflation, revive investment and level the playing field with the informal sector, thus generating higher taxable profits and tax revenue. Also, as exports are the only sustainable way to balance the external account, exports and exporters were expected to be encouraged. The budget proposals failed to live up to these expectations though there are some positives, the PBC said.

“Phasing out the concessional fiscal regime for ex-Fata and Pata, which was being misused to undermine manufacturing in the rest of the country, is a good step. So is raising the penalties for non-filers through higher withholding and advance taxes,” it said.

However, the 2.25 percent advance tax on wholesalers and retailers will only affect supplies by tax-registered manufacturers and eventually lead to higher prices, making their products less competitive vs those of non-tax registered manufacturers and smuggled products, it added.

According to the PBC, an increase in the top tax rate to 45 percent for non-salaried individuals should encourage corporatization. However, it would also provide an added incentive for evasion.

Talking about the negatives of the budget, it said the 20-25 percent salary increase across federal and (eventually) provincial government employees will cost an estimated Rs1.5 trillion. It will also set expectations for the private sector to emulate.

“Reducing the level at which the 35 percent top tax rate is levied on salaries will only accelerate the braindrain of good talent from the country,” it said.

There is also no proposal to arrest the flight of capital of high-net-worth Pakistanis relocating abroad due to the CVT and some surrendering their nationality. This is at a time when the country is looking to attract FDI, it said.

Neither is there any proposal to make investment more attractive by bringing the corporate tax rate in line with other Asian countries. With a super tax of up to 10 percent and double taxation of intercorporate dividends, the effective tax rate for shareholders in a holding company can amount to over 50 percent.

“The withdrawal of the holding period for the levy of Capital Gains Tax will be detrimental to the capital market, which was just seeing the revival of foreign portfolio investment,” it said, and added there is also a proposal to disallow 25 percent of sales promotion and advertising costs if royalties and technical fees are paid to an associated company. This will mainly affect foreign companies.

“The Fixed Tax Regime (FTR) under which exports were liable to 1 percent tax on turnover will be withdrawn and replaced by normal taxation at 29 percent of taxable profit. In exchange, the government promises prompt sales tax refunds, competitive energy, and other facilities. Surely, they need to provide these, irrespective of the fiscal regime but have failed to do so.”

The FTR scheme has been in vogue for decades. It provides the government with a very transparent way to tax export proceeds, it said, and added that under the scheme, exporters were not required to file tax returns and could avoid harassment by tax officers. Revising the FTR rate would have made more sense instead of subjecting exporters to harassment. The budget proposals need to be reconsidered.

Dr Khaqan Najeeb, former adviser to the Ministry of Finance, stated that one can appreciate the authorities’ intention to implement various reforms, including personal income tax reforms and regulatory reforms needed in the country.