In a critical response to the newly announced budget for the fiscal year 2024-25, the Pakistan Business Council (PBC) has raised significant concerns over the substantial salary increments granted to government employees.
The PBC highlighted that the 20-25% increase in salaries for federal and, eventually, provincial government employees will impose an estimated additional burden of Rs 1.5 trillion on the national exchequer.
The PBC argued that such a considerable salary increase is not aligned with the current economic challenges faced by Pakistan. “A lower increase would have made sense if accompanied by a cut in headcount, especially as digitalisation and modernisation of regulations are planned,” the PBC stated. The council fears that this raise will set unrealistic expectations for the private sector to match, exacerbating financial strains across the board.
Further criticisms were directed towards the reduction in the threshold for the 35% top tax rate on salaries, which the PBC believes will accelerate the brain drain from the country. The council also noted the lack of measures to curb the flight of capital, with high-net-worth individuals relocating abroad due to the Capital Value Tax (CVT) and some even surrendering their Pakistani nationality.
At a time when Pakistan is striving to attract Foreign Direct Investment (FDI), the PBC expressed disappointment that the budget did not include proposals to make investments more appealing by aligning the corporate tax rate with other Asian countries. The Super Tax of up to 10% and the double taxation on inter-corporate dividends result in an effective tax rate for shareholders in a holding company that can exceed 50%. The PBC warned that the withdrawal of the holding period for the levy of Capital Gains Tax could harm the capital market, which was beginning to see a revival in foreign portfolio investment.
The PBC also criticized a new proposal to disallow 25% of sales promotion and advertising costs if royalties and technical fees are paid to an associated company, a move likely to impact foreign companies adversely.
In its response, the PBC acknowledged that expecting a single year’s budget to resolve all deep-rooted economic issues is unrealistic. However, it emphasized that the budget should have aimed to contain inflation, revive investment, and level the playing field with the informal sector to generate higher taxable profits and tax revenue. The council also stressed the importance of encouraging exports, the only sustainable way to balance the external account. Unfortunately, the budget proposals fell short of these expectations, despite some positive steps.
Among the positives, the PBC noted the phasing out of the concessional fiscal regime for FATA and PATA, which had been misused to undermine manufacturing in other parts of the country. The increase in penalties for non-filers through higher withholding and advance taxes was also seen as a beneficial measure. However, the 2.25% advance tax on wholesalers and retailers is expected to increase prices, making tax-registered manufacturers’ products less competitive compared to those from non-tax-registered manufacturers and smuggled goods.
The increase in the top tax rate to 45% for non-salaried individuals was viewed as a step that could encourage corporatization but also incentivize tax evasion.
On the downside, the PBC highlighted the withdrawal of the Fixed Tax Regime (FTR) for exports, which will be replaced by normal taxation at 29% of taxable profit. The council stressed that the government needs to provide competitive energy and other facilities regardless of the fiscal regime, something it has failed to do consistently.
In conclusion, the PBC urged the government to reconsider the budget proposals, emphasizing the need for a balanced approach that supports economic stability and growth while addressing the pressing financial realities of the country.