The Karachi Chamber of Commerce and Industry (KCCI) has expressed severe discontent with Pakistan’s Federal Budget for 2024-25, describing it as a template of the International Monetary Fund (IMF).
The budget, announced by Finance Minister Muhammad Aurangzeb, has drawn criticism from various sectors, particularly the business community, for its perceived lack of substantial relief and its alignment with IMF standards.
In a statement issued on Saturday, KCCI highlighted several anomalies within the budget, stating that it had been crafted under the constraints of limited fiscal space and heavy debt obligations. This, according to KCCI, left little room for the Finance Ministry and the Federal Board of Revenue (FBR) to offer significant relief to trade, industry, and the general public.
A major point of contention for KCCI is the exclusion of many budget proposals painstakingly compiled by the Chamber. These proposals, they argue, were critical for the economic health of Karachi’s trade and industry sectors. One of the most concerning measures is the proposed shift from a 1 percent turnover-based Final Tax Regime (FTR) to a 29 percent tax on taxable profit. KCCI warns that this change could be disastrous for exports, exacerbating the trade deficit and putting additional pressure on foreign exchange reserves.
The Chamber also criticized the Finance Bill 2024’s proposal to eliminate zero-rating on local supplies under the Export Facilitation Scheme (EFS). This, they argue, would force exporters to claim refunds of Sales Tax from the FBR, a lengthy and cumbersome process that contradicts the spirit of EFS. KCCI suggested that rather than removing the FTR, the government could have increased the Fixed Withholding Tax from 1 percent to 1.25 or 1.5 percent to enhance revenue without creating compliance complications.
Moreover, KCCI expressed concern over the redefinition of fraud within the budget, which would enable officials to seek records up to 15 years old to prove innocence in fraud allegations. This change, they argue, is unfeasible since taxpayers currently maintain records for a maximum of six years. The Chamber demands that this new definition be withdrawn to prevent undue hardship on businesses.
The budget also introduces a horizontal inequity in tax rates, according to KCCI. The tax rate for salaried individuals remains capped at 35 percent, while non-salaried individuals, non-corporate sectors, SMEs, and AOPs face an increase from 35 percent to 45 percent. This disproportionate tax burden could drive many individuals and AOPs out of the tax net. KCCI suggests raising the threshold of taxable income from Rs.600,000 to Rs.1 million, considering the high inflation and increased cost of living.
KCCI further criticized the new investigative audit powers granted to FBR officials. This measure, aimed at addressing tax fraud, could lead to increased regulatory burdens and potential misuse by tax authorities. The concept of “Investigative Audit” under Section 25 of the Sales Tax Act, 1990, increases the risk of misinterpretation and frequent audits based on vague suspicions, fostering an environment of uncertainty and fear that could deter new investment.
Another major concern for KCCI is the lack of measures to reduce the exorbitantly high government expenditures. These expenditures, financed through domestic bank borrowings, create a substantial burden of interest payments. KCCI pointed out that no relief measures have been provided to businesses, such as reductions in super tax or adjustments to minimum turnover tax. This, coupled with a decline in the investment-to-GDP ratio to 13.4 percent, further dampens the business environment.
KCCI also questioned the ambitious projection of a 40 percent increase in tax revenue for FY25, given the shortfall of Rs2,152.5 billion in last year’s tax collections. Without essential tax reforms and rationalization of the energy sector, achieving these targets seems unrealistic.
The Chamber highlighted that debt servicing is projected to consume 94.2 percent of federal net revenue for the upcoming year, leaving other government expenditures to be financed through increased borrowing. This reliance on external sources for financing raises concerns about the sustainability of the government’s fiscal policies.
KCCI also criticized the 33 percent hike in the Petroleum Development Levy (PDL) and other levies, which they argue will intensify inflationary pressures and increase logistics costs. This reliance on indirect taxation could reduce savings rates, deter investment, and dampen overall economic activity.
The increase in Federal Excise Duty (FED) on cement is likely to negatively impact the construction industry, which is already facing multiple challenges. KCCI argued that such measures would lead to higher construction costs and affect both commercial and residential development.
The proposed 18 percent GST on milk and fat-filled milk, which were previously zero-rated, is another point of concern. As milk is a basic consumable item, this tax would further fuel inflation. Additionally, the increased import duties on paper products and the changes in taxation on surgical instruments and tools used in medical treatments will burden local industries and healthcare providers.
KCCI also criticized the inclusion of waste and scrap plastics into the 11th Schedule, giving concessions on sales tax for imported garbage. This move contradicts provincial efforts to reduce plastic bag production and protect the environment.
Elevating the General Sales Tax from 15 percent to 18 percent for Tier-I retailers in the textile and leather sectors could exacerbate the industry’s struggles, leading to a decline in domestic demand and reduced profitability. The removal of fixed sales tax on locally assembled mobile phones and the increase in import duties on vegetable imports from Afghanistan were also criticized for their potential negative impacts on the local economy and consumer prices.