KARACHI: Pakistan Business Council (PBC) here Wednesday said that expecting a single year’s budget to cure all the deep-rooted economic ills is unrealistic. This year, another challenge is to win PPP’s support and meet IMF’s conditions.
Nevertheless, 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. However, the budget proposals failed to live up to these expectations though there are some positives.
First, the positives: Phasing out the concessional fiscal regime for 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.
However, the 2.25% advance tax on wholesalers and retailers will only affect the 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.
An increase in the top tax rate to 45% for non-salaried individuals should encourage corporatization. However, it would also provide an added incentive for evasion.
Now, the negatives: The 20-25% salary increase across federal and (eventually) provincial government employees will cost an estimated Rs. 1.5 trillion. It will also set expectations for the private sector to emulate. A lower increase would have made sense if accompanied by a cut in headcount, especially as digitalisation and modernisation of regulations are planned.
Reducing the level at which the 35% top tax rate is levied on salaries will only accelerate the brain drain of good talent from the country. 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.
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% and double taxation of inter-corporate dividends, the effective tax rate for shareholders in a holding company can amount to over 50%.
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. There is also a proposal to disallow 25% 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% tax on turnover will be withdrawn and replaced by normal taxation at 29% 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.
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.
Copyright Business Recorder, 2024
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