Pakistan’s economy stands at a critical juncture as it implements the Finance Act 2024, effective from July 1, 2024. This new legislation comes amid a perfect storm of challenges: economic downturn, soaring inflation, political instability, and the lingering effects of the devastating 2023 floods. These factors have collectively dampened business confidence and consumer sentiment, particularly hitting the agricultural sector hard.
ax rates on individuals and Associations of Persons have seen significant increases, with non-salaried individuals facing a maximum rate of 45% and salaried individuals 35%, plus a new 10% surcharge.
The Finance Act 2024 sets an ambitious total revenue target of Rs17.815 trillion for the fiscal year 2024-25, marking a substantial 46% increase from the previous year. This target comprises Rs12.970 trillion in tax revenue and Rs4.845 trillion in non-tax revenue. The government aims to raise the tax-to-GDP ratio from 8.7% to 10.44%, a challenging goal given the current economic climate.
However, critics argue that the Act falls short of addressing fundamental economic issues. The budget for FY 2024-25 was expected to provide direction to the manufacturing and trade sectors, contain inflation, revive investment, and level the playing field with the informal sector. Instead, it appears to focus primarily on revenue generation, potentially at the expense of economic growth and public welfare.
One of the most contentious aspects of the Act is its approach to taxation. Tax rates on individuals and Associations of Persons have seen significant increases, with non-salaried individuals facing a maximum rate of 45% and salaried individuals 35%, plus a new 10% surcharge. The export sector, crucial for balancing Pakistan’s external account, faces particularly challenging changes. The Fixed Tax Regime has been replaced by normal taxation at 29% of taxable profit, along with an additional 1% advance tax on exports.
These measures have alarmed the business community, especially exporters, who fear they might squeeze already strained industrial and export sectors. With the average profitability of exporters around 4%, the new tax structure could push their effective tax rate to over 50%, potentially compromising their global competitiveness.
The Act also introduces the concept of ‘late filers’, a third category alongside active and non-active taxpayers. This new classification aims to encourage timely tax filings but adds complexity to the tax system. Other revenue measures include a flat tax rate on capital gains from securities and immovable properties acquired after July 1, 2024, and an increased tax rate on certain mutual fund dividends.
Critics point out that while the Act increases the burden on formal sectors and existing taxpayers, it does little to broaden the tax base. The agricultural and retail sectors, often described as politically powerful, remain largely outside the tax net. This disparity is evident in provincial budgets, where agricultural income tax contributes minimally to overall revenue.
The government’s projection of 30% growth in tax revenues for the upcoming fiscal year underscores the urgent need for tax reforms. However, achieving this target without expanding the tax base will be challenging, especially as inflation falls and GDP growth remains low.
The Act’s focus on revenue generation is understandable given Pakistan’s fiscal challenges. A significant portion of the budget (Rs9.775 trillion) is allocated for interest payments, leaving the federal government with limited resources for other essential expenditures. The overall fiscal deficit is projected at Rs7.283 trillion, or 5.87% of GDP.
However, economic experts argue that without comprehensive fiscal adjustments and broad-based reforms, Pakistan’s economy will remain vulnerable to both domestic and external shocks. They suggest that to achieve sustainable economic growth, Pakistan needs to:
1. Reduce the tax burden on industrial sectors while broadening the tax base to include agriculture, property, and retail sectors.
2. Improve the quality of public expenditure by reducing distortive subsidies and enhancing the financial viability of the energy sector.
3. Strengthen public debt management through better institutions and systems.
4. Create a more investor-friendly environment by aligning corporate tax rates with regional competitors.
5. Address policy inconsistencies to rebuild trust among taxpayers and investors.
The government’s projection of 30% growth in tax revenues for the upcoming fiscal year underscores the urgent need for tax reforms. However, achieving this target without expanding the tax base will be challenging, especially as inflation falls and GDP growth remains low.
In conclusion, while the Finance Act 2024 aims to address Pakistan’s immediate fiscal challenges, it raises concerns about long-term economic sustainability and equity. The success of these measures will depend on their implementation and the government’s ability to navigate the complex interplay of economic, political, and social factors. As Pakistan moves forward, the need for a more balanced approach that fosters growth, encourages investment, and ensures equitable taxation becomes increasingly apparent.
