Finance Bill 2024: Tax Changes Impact on Manufacturing Sector

Finance Bill 2024: Tax Changes Impact on Manufacturing Sector

The cyclical nature of Pakistan’s manufacturing sector plays a pivotal role in shaping the overall economy, as it is intricately linked to the Composite Leading Indicator (CLI).

According to a commentary released by KPMG Taseer Hadi & Co. the manufacturing sector not only promotes domestic production but also bolsters exports and generates employment, which collectively stimulates the overall growth of the economy. Fluctuations in manufacturing output have a cascading effect on other economic sectors, making it a crucial area of focus for policymakers.

According to the Economic Survey, the Large Scale Manufacturing (LSM) sector exhibited a modest growth rate of 0.07 percent. This growth was driven by various groups including food, beverages, textiles, tobacco, petroleum, and pharmaceuticals. This performance, albeit modest, showcased resilience and signs of recovery compared to the previous year, thereby mitigating any offsetting impact on the overall economic growth.

A significant policy shift is on the horizon with the Finance Bill 2024, which introduces several changes impacting the manufacturing sector. Notably, the bill proposes the withdrawal of the reduced rate of sales tax on locally manufactured hybrid electric vehicles. This move, along with the proposed withdrawal of the customs duty concession on the import of electric vehicles valued at over $50,000, signals a major shift in the government’s approach towards promoting eco-friendly transportation.

These changes are expected to have substantial implications. The removal of sales tax relief on food will likely exert an inflationary pressure on food prices, directly affecting the common man. This policy adjustment underscores a shift towards broadening the tax base but may have adverse effects on household budgets and consumer spending.

On the other hand, the Finance Bill 2024 introduces several relief measures aimed at stimulating specific segments of the manufacturing sector. Exemptions from customs duty on raw materials used in the manufacture of PV modules, parts of solar inverters, and lithium batteries, as well as machinery and equipment imported by manufacturing units of solar cells, solar panels, solar inverters, and solar batteries, are among the key proposals. These raw materials currently attract customs duties ranging from 3% to 20%. The proposed exemptions are expected to drive down the costs of solar energy equipment, potentially reducing the pressure on energy production and fostering the growth of renewable energy in Pakistan.

Moreover, the bill proposes exemptions from sales tax on the supply of local iron and steel scrap and on the import and local supply of petroleum products. These measures could lead to a reduction in prices in related construction and manufacturing areas. However, the challenge remains in ensuring that the benefits of these exemptions and relief measures are fully passed on to the end consumers. The lack of oversight and accountability has historically impeded the effective transmission of such benefits.

The Finance Bill 2024 reflects a nuanced approach, balancing the need for revenue generation with incentives to spur growth in specific sectors. The withdrawal of certain tax benefits is aimed at broadening the tax base, while exemptions on critical raw materials and energy equipment signify a commitment to fostering sustainable development and innovation within the manufacturing sector.

In conclusion, while the proposed tax changes present both opportunities and challenges, the overarching impact on the manufacturing sector and the broader economy will depend on the effective implementation and the ability of stakeholders to navigate these changes. The government’s intent to stimulate growth through targeted incentives, coupled with measures to broaden the tax base, indicates a strategic direction aimed at fostering long-term economic resilience and sustainability.