Budget: an analysis

Flanked by the Deputy Prime Minister, Muhammad Ishaq Dar, once hailed as the PM-N’s (Pakistan Muslim League-Nawaz’s) strategic brain, and Defense Minister Khawaja Muhammad Asif, the finance minister delivered his inaugural budget speech.

He vowed to promote growth, broaden the tax base, and alleviate poverty, despite a projected fiscal deficit of 6.9% of GDP for the fiscal year 2024-25. During his speech, allies and opposition parties expressed their discontent, with lawmakers from Pakistan Sunni Ittehad Council, supported by Pakistan Tehreek-e-Insaf (PTI), vocally opposing and raising anti-government slogans.

In a bold yet contradictory move, the finance minister of a cash-strapped country pledged relief for the populace while imposing new taxes totaling Rs 1.8 trillion. Despite assurances, these measures are unlikely to stimulate growth and are likely to place additional burden on current taxpayers. Efforts to increase the number of tax filers and enforce compliance through varying rates and penalties appear misguided.

The economic team, seemingly oblivious to the potential of new technologies for expanding the tax base and ensuring compliance, clings to outdated measures. This approach is likely to result in increased tax evasion, adding little to the nation’s financial stability.

Though the size of the budget is Rs 18,880 billion whereas the total projected expenditure is Rs 18,877 billion with an anticipated GDP growth rate of 3.6% for the fiscal year 2024-25.

Inflation is anticipated to rise slightly from 11.8% to 12% in the fiscal year 2024-2025. The government aims to increase tax revenues by 38%, setting a target of Rs 12,970 billion, which includes Rs 7,438 billion from provincial sources and projected non-revenue receipts of Rs 3,587 billion. Despite these efforts, the fiscal deficit is expected to remain at 6.9% of GDP.

In this fiscal plan, Pakistan has dedicated a substantial Rs 9,775 billion, comprising nearly half of the total budget, for interest payments. Additionally, a significant Rs 2.1 trillion is set aside for defense expenditure, while pension disbursements and subsidies are allocated Rs 1 trillion and Rs 1.4 trillion, respectively, for the upcoming financial year of 2024-25.

Public Sector Development Program (PSDP) is set at Rs 1,500 billion, reflecting a remarkable 101% increase from the previous year’s revised volume. With 83% of resources allocated to ongoing projects and 17% for new ones, key allocations encompass Rs. 100 billion for PPP projects, 59% for basic infrastructure, 20% for the social sector, and 11.2% for IT, telecommunication, science, technology, governance, and production sectors. Moreover, 10% of funds are designated for districts in Azad Jammu and Kashmir, Gilgit-Baltistan, and Khyber Pakhtunkhwa.

The government efforts to strengthen financial reserves, the government targets Rs30 billion through privatization. Additionally, adjustments in petroleum levies entail an increase of Rs20 on petrol and diesel, and Rs25 on superior kerosene oil, light diesel, and high-octane, e-10 gasoline. Significant measures cover the zero-rating of imports of raw materials for solar panels, inverters, and lithium-ion battery manufacturing. Social welfare initiatives witnessed a surge, with a 27% hike in the allocation for Benazir Income Support Program (BISP). Finance Minister further underscores a ‘homegrown’ agenda, highlighting the vital necessity of a new IMF programme to avoid default. Key objectives for the fiscal year prioritize achieving sustainable levels of public debt-to-GDP ratio and enhancing the balance of payments’ position.

Apart from tall claims, the amendments proposed in the Income Tax Ordinance, 2001 carry significant implications for various facets of Pakistan’s economy. Firstly, alterations in personal income tax, introducing progressive slabs for both salaried and non-salaried individuals, aim to redistribute the tax burden. While this may enhance revenue collection, it could also impact overall growth by reducing disposable income and consumer spending.

Similarly, higher tax rates for late filers intend to promote compliance but might deter business activities and investment, thus potentially slowing down economic expansion. Moreover, restructuring of taxation on immovable properties and securities capital gains, seeks to streamline revenue streams but could increase the cost of doing business, particularly for property developers and investors.

Additionally, the proposal to strengthen enforcement against non-filers by imposing penalties and restrictions aims to curb tax evasion and promote transparency. However, the stringent measures could inadvertently foster a parallel economy as businesses seek alternative, less regulated channels. Overall, while these reforms address critical issues such as tax evasion and compliance, their implementation requires careful monitoring to mitigate adverse effects on growth, inflation, and businesses, ensuring a balanced and sustainable economic environment.

Similarly, the proposed amendments in the Sales Tax Act for the fiscal year 2024-25 present a mixed bag of measures aimed at streamlining taxation and enhancing revenue collection. Firstly, the withdrawal of various exemptions and zero ratings, along with the imposition of standard rates on mobile phones, indicates a move towards uniformity in taxation. However, exempting phones valued over US$ 500 may create a tiered system that could complicate tax administration and potentially distort market dynamics. Monitoring consumer behavior and market trends will be crucial to assessing the effectiveness of this measure.

Additionally, increase in reduced rate of sales tax on certain products, such as leather and textile items, could potentially inflate prices and affect consumer spending patterns in these sectors. On a positive note, the exemption of iron and steel scrap from sales tax could stimulate activity in related industries and promote recycling efforts. The phased withdrawal of exemptions granted to ex-FATA/PATA regions reflects a broader shift in tax policy towards equitable treatment across regions. However, it’s important to ensure that these measures do not disproportionately burden already marginalized communities.

Empowering the Board to fix minimum prices for goods and aligning the default surcharge rate with the SBP’s policy rate are steps towards enhancing regulatory oversight and accountability. However, it remains to be seen how these changes will be implemented and enforced effectively. Furthermore, streamlining provisions related to tax fraud and audit processes indicate a commitment to combatting tax evasion and ensuring compliance. Nevertheless, success of these measures will depend on the efficiency and transparency of tax administration system.

The Budget for the fiscal year 2024-25 under the Customs Act 1969 introduces several significant features and amendments aimed at promoting economic growth and protecting domestic industries. Guided by principles such as providing relief for the common man and promoting energy efficiency, the budget emphasizes tariff rationalization and incentives for key sectors like agriculture and exports. Relief measures include exemptions on essential items like raw materials for medical equipment and customs duties on specific goods. Regulatory changes focus on encouraging local manufacturing through levies and rationalisation of duties.

Additionally, the budget introduces legislative changes to enhance enforcement capabilities and streamline dispute resolution mechanisms. These measures, combined with efforts to facilitate trade and strengthen enforcement, reflect a comprehensive approach to fostering economic development and ensuring compliance with customs regulations. However, the proposed amendments would potentially increase costs for certain imports and affect trade dynamics. While efforts to streamline regulations and enforcement mechanisms are commendable, the impact on businesses, particularly those reliant on imports, warrants careful consideration to avoid unintended consequences.

The proposed budgetary measures under the Federal Excise Act 2005 for the fiscal year 2024-25 also include imposition of Federal Excise Duty (FED) on specific items. While introduction of FED on acetate tow and nicotine pouches, alongside the enhancement of FED on e-liquids, indicates a move towards taxing certain consumable products, concerns may arise regarding the potential impact on consumer affordability and the overall cost of living. Moreover, increase in FED rates on essential commodities like sugar and cement could potentially contribute to inflationary pressures, affecting businesses and households. Additionally, the proposal to impose FED on commercial properties and the first sale of residential properties may have implications for the real estate sector, possibly dampening investment sentiments.

While exemptions for diplomats and diplomatic missions provide relief, the significant rise in FED on filter rods raises questions about its potential effects on the tobacco industry and consumer behavior. Furthermore, the authority to seal business premises selling illicit cigarettes signals efforts to combat illegal activities, but the efficacy of such measures in curbing illicit trade remains to be seen. Overall, while revenue enhancement is a critical aspect of fiscal policy, policymakers must carefully balance taxation measures to mitigate adverse effects on economic growth and consumer welfare.

The government aims to collect Rs 30 billion through privatisation, although initial work on privatising various institutions appears incomplete. Additionally, the government has allocated Rs 1.363 billion towards subsidies. This includes Rs 1,190 million for the power sector, Wapda, Pepco, and KESC, Rs 18,400 million for petroleum sector subsidies, Rs 12,000 million for food subsidies to PASSCO, and Rs 68,000 million for industries and production. Within this, Rs. 6,500 million is for the Utility Stores Corporation and Rs 3,000 million for the production and supply of urea fertilizer and fertilizer plants. Other subsidies amount to Rs 7,512 million, including Rs 3,000 million for the Metro Bus and Rs 13,860 million for SBP refinancing facilities. Proposed grants in the current budget total Rs 113,000 million, with special grants of Rs 47,000 million for Sindh OZT and Rs 66,000 million for Khyber Pakhtunkhwa. Additionally, Pakistan Railways is allocated Rs 64 billion, up from Rs 55 billion in the previous fiscal year 2023-24.

Pakistan must acknowledge that its subsidies nearly match its development budget, primarily due to government administrative lapses. The burden of these inefficiencies falls on the common man.

Furthermore, heavy taxes on the salaried class and the new provisions for late filers and non-filers, introduced under the guise of broadening the tax base and ensuring compliance, highlight the incompetence of tax officials. Pakistan will not experience genuine growth until the fundamental governance flaws in its system are addressed. Delaying these necessary reforms will continue to burden the public and hinder economic prosperity.

Copyright Business Recorder, 2024