ISLAMABAD: The increase in income tax rates for salaried class will incentivize non-compliance and undermine the government’s ability to raise its revenue and broaden its tax collection base.

According to the newest edition of PRIME Plus, the quarterly economic review by the Policy Research Institute of Market Economy, no serious attempt has been made to eliminate the persistent fiscal deficit by curbing unnecessary expenditures, and this is most reflected in the expansion of the public sector development fund.

The higher tax incidence on private salaried individuals and businesses will curb disposable income and diminish economic activity further. According to the report, monetary expansion was higher than real growth, causing inflation.

At the same time, the announcement of salary increases for the public sector contrasts with policy goals of managing inflation and will result in the unequal distribution of inflationary pressures amongst the population.

Furthermore, private sector borrowing has been declining due to the high cost of borrowing, and manufacturing sector output continues to be subdued amidst higher utility and input prices.

The report also notes that supply-side bottlenecks remained unaddressed, especially those related to the Ease of Business in the country. Concessionary measures to industry are largely in the form of import substitution frameworks and will prove ineffective in the development of internationally competitive businesses.

The report points out that Pakistan remains an unattractive destination for foreign investors and despite improvements in the current account balance, external financial pressures are continuing to mount.

Copyright Business Recorder, 2024