A seminar on “SDPI’s response on Budget 2023-24” here on Tuesday. Addressing the seminar, Dr Vaqar Ahmed, Joint Executive Director, SDPI stated the tax collection by Federal Board of Revenue (FBR) is envisaged to be PKR 9.2 trillion – an increase of 28 percent compared with fiscal year 2022-23 (FY-23). This seems like a tall order as economic growth is expected to remain depressed. Almost 50% of FBR taxes are collected at import stage, however, given that only essential items are being imported - that also under a continuously devaluing rupee, trade taxes (in real terms) could also remain lower than anticipated.  Having said this, design and implementation of tax reforms at all times should be guided by principles that include, equity - tax system should not place an undue burden on any one group of people;  certainty - tax system should be easy to understand for all types of tax payers with no hidden levies; convenience - tax system should be easy to administer including a fair appeals process; efficiency - tax system should not discourage any class of working population from working, saving, or investing;  and neutrality - tax system should not discriminate between different types of economic activity. 

This also implies that the tax regime should not favor one industry over another. While the above-mentioned principles provide an ideal direction which ensures that there is no welfare loss from taxes incurred by any segment of the population, however it seems that the task was not so easy for the government.  Those designing the tax policy have on the one hand tried to keep IMF on their side, at the same time announced selective populist measures that can win votes latter this year. On the face of it, changes to tax code seem like a mix bag. On the bright side, there is relief for small and medium enterprises (SMEs), IT and IT-enabled services, agriculture, and some sub-sectors of manufacturing. At the same time, there is a feeling that those within the tax net have been burdened even further – without taking bold steps to go after those who are responsible for tax avoidance and evasion on a regular basis.  This includes incomes from agriculture, property, wholesale and retail trade.

A clear disincentive for formalization and corporate growth can be seen e.g., all firms with revenue above PKR 150 million will face a 9% decline in profit-after-tax, as super tax has been increased and new slabs introduced.  The normal tax from these firms will go up from 34 to 39%. In the case of the financial sector and particularly the banks, the normal tax will increase from 43 to 49% - perhaps the highest in the region. Trading and profits on PSX will also face a higher incidence of taxes.  One is also not clear on the criteria used to allow various preferences and exemptions in the tax code. We are certain that IMF has not agreed to several of these including amnesty allowed to foreign inflow of funds – opens way for money laundering (could also threaten review of Financial Action Taskforce). Preferential tax treatment is allowed for Exim Bank, Riko Dik, real estate and construction, film and drama funds etc. 

Furthermore, time limit for the exemption allowed to tribal areas in Balochistan and Khyber Pakhtunkhwa has been extended, despite of the government’s own recognition that this has opened vast space for smuggling and unfair competition is faced by local firms. The Sustainable Development Policy Institute (SDPI) has long advocated for tax harmonization across the federation particularly in the aftermath of the 18th constitutional amendment. We are therefore encouraged to see an amendment brought through Finance Act, 2022 which brings the federation closer to this objective.  The budget document also reveal that due changes have been proposed in the Finance Act, 2022 to treat transmission and distribution of electricity as ‘goods’ - in line with the consensus amongst the federation and provinces.

This budget should not make the mistake of reversing the good aspects of previous tax regime.  For example, if IT and IT-enabled sector is posting decent gains, we will need to give this sector space and time so that firms grow in size and are able to contribute bigger sums to the exchequer. It comes as a surprise that use of credit and debit card will now be taxed higher in the Islamabad Capital Territory. 

This will discourage new users of digital/online payment methods. Likewise, IT services and IT-enabled services have been made chargeable to sales tax at 5% with no input admissibility. This is bound to discourage many startups several of whom were incubated in government’s own centers led by Ministry of IT and Telecommunication. Finally, inflation is going to persist in the foreseeable future. Every instrument of demand management, including taxes should be revisited with a view to how changes to tax policy and administration can contribute to mitigating the burden of indirect taxes and withholding taxes on the poorest of the poor segment. Syed Wasif Ali Naqvi, Senior Research Associate, SDPI highlighted that

The total attributable cost to smoking-related disease and death for 2019 was Rs. 615.07 billion equivalent to USD 3.85 billion and indirect costs including morbidity and mortality make up around seventy percent of the total cost. Smoking attributable cost from three major diseases is 437.8 billion which makes up around 1.15% of the GDP in 2019. Factors including low prices, disproportionate taxes, and high accessibility and availability have made it an attractive habit for individuals.

The analysis focused on the first nine months of FY 2021-2022 over FY2022-FY2023. The total tax revenue including FED and GST that has been paid was 114.5 billion in March 2022. In March 2023, it increased from 127.5 billion PKR which demonstrates an increase of 11.3%.

Credit : Independent News Pakistan-INP