Mixed feelings as economy oracles weigh in on federal budget 2024-25 – Pakistan

Ex-finance minister Miftah Ismail, while speaking to Geo News, rued how the budget could have been more expansive and how PM Shehbaz Sharif has “constrained” his government.

He said the taxes expected to be imposed on retailers do not seem to have been imposed, with the existing voluntary system still in place. However, he lamented that manufacturers have to bear a 2.5 per cent withholding tax.

“Over 95pc of retailers are undocumented so the sales tax has gone up by 2.5pc because prices will rise by 2.5pc,” he said. “That’s the one bad thing.
Manufacturers do not pay for costs out of their own pocket, they charge the consumer.”

He said that the impact of this increase would be felt over the next several months.

Similarly, Ismail said, there were unconfirmed reports that the exemption on medicines had been removed, meaning that they would be subject to 17pc sales tax.

Asked about the impact of taxing exporters, he said the government makes Rs90bn from exporters. “Earlier, exporters were taxed at 1pc as a full and final payment. Now, not only are they being taxed that 1pc but they will also collect taxes like they do with local businesses.”

Ismail predicted that the government can bring in 50pc more revenue this way, but warned that the government has stripped exporters of a major incentive. “There will be some negative impact,” he said, “But if you need the money, it is better to collect from big exporters as opposed to the salaried class.”

He deemed the budget a “lost opportunity”. “I was hoping that with all the acumen and insight they have, the government could bring in a better budget, but Shehbaz Sharif seems to have constrained the government,” he said.

Nasir Jamal, a senior reporter for Dawn in Lahore, said he was not expecting the abolition of so many exemptions, nor was he expecting the government to attempt taxing the real estate market. “It’s a pleasant surprise, it was one of the better speeches,” he said. “I did not expect them to do this much.”

“They have even announced documenting and taxing the retail sector and also bringing exports into the tax regime,” he added.

Asked about taxing retailers and the impact on consumers, Jamal said, “When you document tax, it will become easier to apply taxes. Right now, the details are sparse, it is too early to say anything. But the big problem is tax enforcement and compliance,” he added.

Jamal stated that in real estate, there are many ways to evade tax. “Enforcing loopholes is a challenge. Other than that, they have done whatever else they could with a budget,” he added.

Khurram Husain, a business and economy journalist, said that he does not “see much of a reform effort” in this budget.

“Whether on the revenue side or any other, but further details will reveal how far they are wanting to go in terms of elimination of tax exemptions,” he said.

Former president of the Rawalpindi Chamber of Commerce and Industry, Dr Shumail Dawood, said he saw the budget in a “positive light”, stressing that the biggest thing he picked up on was the government’s focus on creating a market-based economy.

“The government has sent a message stating that they will focus on a market economy,” he said, describing it as a system where “every industry needs to be responsible for themselves” and “the age of protectionism and subsidies is coming to an end”.

He warned that subsidies will now be targeted, not blanketed as they were before. “They will be graduated with exit strategies,” Dr Dawood said. “This is a major shift.”

Dr Dawood said that another thing that stuck out was the focus on improving efficiency and implementing electronic systems in government and management. “There is an emphasis on “E”, he said, referring to the implementation of electronic systems. “They are focused on reducing manpower, this sticks out to me.”

“There is a shift and this project is not linked to any political party,” he added. “Our leaders have to look at the long term for the benefit of the country and get out of the personal mileage.”

Ali Hasnain, an Associate Professor of Economics at LUMS, called the budget “some baby steps in the right direction”, praising the increase in the Capital Gains Tax for non-filers but warned that the country was sinking deeper into a debt crisis, “with more debt accruing each year”.

“At first glance, this budget is in line with what we have come to expect from a party that has now presented nine out of the last twelve budgets,” he said.

“The PPP throwing a brief tantrum at the last minute was just the most visible indicator that it is still politics as usual at the helm,” he added.

“We need a disruptive budget that shakes up the status quo. It appears we will, for now, need to continue seeking solace in promises that major changes are coming soon,” he said.

Economist Maha Rehman said that despite some drawbacks, the budget brought a fresh perspective on certain aspects of the economic policy.

“First and foremost, there is this solid commitment that the tax net will be widened by taxing the non-taxed populace and not burdening the already burdened,” she said. “The taxes for non-filers have been visibly increased and the revised menu of real estate taxes is very welcome.”

Rehman said that one change she hoped to see was a greater incentive for the service sectors to file their returns. “I had personally hoped for a more aggressive tax policy but this is still a good start,” she said.

She highlighted the allocations made for digitisation and automation to improve performance and save costs. While hailing the focus on Information Technology (IT) as a welcome step, she warned that parks alone will not increase productivity and exports.

“We need to build the right human capital and solid countrywide infrastructure that will propel this forward,” she said.

Rehman welcomed the increase in the BISP budget by 27pc, the focus on building climate resilience, climate financing, the increase in budgetary allocations for SMEs, the allocation of Rs206bn for building water resources and the focus on curtailing the circular debt.

“On the flip side, the increase in the development budget remains unaccounted for and unexplained,” she said. “We had hoped to hear of more concrete measures that would boost productivity. But we can hope for revised policies at the federal level to complement this budget that will propel the industry forward.”

Yousuf M Farooq, director of research at Chase Securities, said that what stood out to him was “moving exporters to normal tax regime”.

“Nothing major happened on CGT or tax on dividends and the government seems to be encouraging investments in equity rather than fixed income by having different tax rates for both categories,” he added.

“The proposal to impose duties on hybrid vehicles is positive for the auto sector, and increased duties on glass and paper products will be beneficial of for local manufacturers,” he analysed.

However, he noticed that the petroleum development levy “being increased from 60 to 80 will be slightly inflationary”.

Overall, he said that the budget was a “continuation of tight fiscal policy and will help curb inflation and stabilize the economy.

“The budget is materially negative for the income of exporters, in line with the government’s policy of equal treatment of all sectors,” he said.

Adil Nakhoda, an economist and associate professor at the Institute of Business Administration (IBA), said, “The formal sector again faces a higher burden of taxes, with little discussion on how to bring the informal sector and other sectors with more favourable concessions into the tax net.”

He noted that the issue was that “higher taxes will shift the activities into the informal sector. Moreover, he noted that there was “no discussion on tax of capital goods. No policy to boost industrial policies”.

“Will the government continue to restrict imports as such restrictions have a greater impact on the imports of capital goods than on consumer goods?” he wondered, noting: “There is no policy direction on the measures to discourage imports.”

According to Nakhoda, the budget is likely to be “inflationary with little relief to support growth”.

“Higher taxes on mobile phones and other consumer goods will increase distortions further. Challenging times are ahead,” he added.

Sajid Amin, deputy executive director at SDPI, said, “Despite some positive sound bites on pensions and commitment for privatisation, the budget largely misses structural reforms in tax, governance and exports sectors.”

“It does not offer anything on bringing agriculture, retailers and wholesalers into tax net. The burden has been once again added to salaried class, through shifting the tax slabs,” he added.

Amid observed that the budget was mainly “guided meeting revenue and fiscal deficit targets set by IMF” adding that “GST exemption elimination widening GST scope, increasing PDL and other similar measures are inflationary in nature”.

Raza Jafri, chief executive of EFG Hermes, said that from a stock market’s point of view, “the fears in the run up to the budget have not materialised. The market should react positively to this, all else the same”.

However, he added that “the inclusion of exporters in the normal tax regime is highly negative. It is unclear if the normal tax regime is also applicable on the IT sector”, which was unlikely in his view.

“Business/trade associations have taken sharp exception to this, and I expect significant pushback from them as they will likely attempt to have this reversed,” he added.

Regarding the tax revenue, Jafri said, “The budget is targeting a 40pc increase in tax revenue. I think its too ambitious especially if things like higher tax on exporters/retailers don’t actually materialise.”

Jafri said he expected “there to be shortfalls in both revenue and PSDP targets, with a mini budget possible mid-year that imposes additional measures” for example a super tax.

“If the IMF accepts the budget at face value, it may be enough to secure the IMF programme. But it is premature to be certain on this,” he added.

Fawad Basir, head of research at Ktrade, said that from a capital market perspective, the “positive may be that the capital gains tax (CGT) on filers has remain unchanged at 15pc.

However, previous benefit of holding a security for more than five years would make the CGT exempt. Long term holder may be tempted to sell before implementation of the budget from 1st July-2024“.

“In simple words, banks book two kinds of provision — specific and general. Specific pertains to the company while general is precautionary,” he said, adding that “provisions are charged as expense and, hence, exempt from tax but they come back later as reversal in provisions.

“The new rule indicates that anything over the required provision amount, according to prudential regulations, will be taxed so banks that have over provided will have to pay normal tax rate on the additional amount.”

“The increase in PDL limit by PKR 20/litre, if utilised, can cause inflationary pressures but not as severe, given the broader GST regime has remained largely unchanged,” he said.

On the other hand, he highlighted that “export-based companies coming into the tax net may be slightly negative at the bourse, particularly the textiles, while we await clarity on the sectors and services”.

He said that “exemption of levy on sales tax is positive for the sector as a whole and will be essential in making development affordable across the country may it be public or private projects”.

Meanwhile, Amreen Soorani, head of research at JS Global, said, “The budget seems to bring measures that will increase tax collection and bring a relatively more level-playing field among various segments.”