Anti-digital, pro-realty sector budget

Express Tribune

11-06-2025

Finance Minister Muhammad Aurangzeb on Tuesday unveiled a Rs17.6 trillion budget, which attempted to limit fiscal expansion but taxation measures were clearly self-contradictory that on one hand would promote cash economy and fossil fuels but discourage these too on the other.
The government of Prime Minister Shehbaz Sharif also introduced new taxes on the digital economy, pensioners and clean energy. Some of these measures were contradictory to the stated policy to discourage the cash economy. However, the Finance Bill 2025-26, also gave incentives for clean energy by taxing the internal combustion engine cars and fossil fuels.
Despite high poverty and high unemployment, the government proposed to drastically reduce import duties from raw materials to finished goods, which the industry feared would lead to de-industrialisation of Pakistan.
The economy has been opened for the foreign competition by lowering protection available to local industries. The finance minister said that the maximum custom duty slab has been reduced to 15% while a five-year plan had been given to abolish additional and regulatory duties.
The inaudible budget speech, which Aurangzeb, delivered in the midst of rowdy opposition, clearly lacked in giving any policy direction. While the Finance Division tried to meet the International Monetary Fund's (IMF) requirement to meet fiscal targets, the Federal Board of Revenue (FBR) was not able to come up with the clear taxation policy.
The Finance Bill 2025-26 appeared to be the most confusing document that any government produced in years. It revolved around going after the economy of the youth and the 21st century business practices.
The government has proposed 18% sales tax on import of solar panels but it imposed Rs2.5 per litre carbon levy on use of petrol, diesel and furnace oil, showing the lack of clarity on the part of the government.
Likewise, it increased the tax on cash withdrawals from banks from 0.6% to 0.8% to discourage cash economy and generate more easy money but it also imposed a new tax on digital services platforms in the range of 0.25% to 5%.
The government also increased sales tax on 850 cc cars of the middle class from 12.5% to 18%. A new tax has been introduced on pensioners where the monthly pension of Rs833,000 has been taxed at the rate of 5%.
The FBR was once again lacking in determining the policy, whether the government wanted to promote digital economy or cash economy. FBR Chairman Rashid Langrial cancelled the media briefing on the Finance Bill 2025-26, which was tantamount to compromising transparency and the right of the people to know about the measures that impact their futures.
In his budget speech, the finance minister surprisingly stated that the "rapid growth in the online business and digital market places was creating problems for traditional businesses, therefore, it is proposed that e-commerce platforms, couriers and logistic services should be taxed at the rate of 18%.
A tax official told The Express Tribune that the FBR would earn Rs64 billion by taxing the digital economy. The Finance Bill 2025-26 showed that the economic managers preferred the 19th century economy by providing some relief on purchase of properties but taxed the digital platforms of the 21st century.
It has also proposed to ban economic transactions of ineligible persons, which include ban on purchase of properties, cars and investment in securities by persons whose assets do not match these purchases.
Through the Finance Bill, the government also amended a host of other non-tax laws besides introducing two new legislations, the Digital Presence Proceeds Act 2025 and the New Energy Vehicles Adoption Levy Act, 2025. There might be constitutional questions, whether the new laws can be introduced through the Finance Bill.
The government has proposed a total of over Rs415 billion worth of tax measures in the budget, said the senior tax official. These include Rs292 billion worth of FBR-related measures, Rs111 billion additional earnings by imposing Rs2.5 per litre carbon levy on petrol, diesel and furnace oil and Rs9 billion worth levy on conventional cars.
Finance Minister Aurangzeb said that the IMF had also accepted the Rs389 billion worth enforcement measures. But he admitted that the FBR's tax-to-GDP ratio would remain below the IMF target of 10.6% in this fiscal year.
The government has proposed these measures to extract a minimum Rs2.2 trillion from the sluggish economy in a bid to achieve next fiscal year's Rs14.13 trillion tax target. The petroleum and carbon levy target has been set at Rs1.47 trillion for the next fiscal year on the back of Rs80 per litre levy.
The finance minister also announced some respite for the lower to middle income group salaried persons. He said that on the annual income of Rs1.2 million, the tax rate will be 2.5%, down from 5%.
In the cabinet meeting earlier, there was an exchange of words between the finance minister and the Communication Minister Abdul Alaeem Khan, who had asked the prime minister to further increase the salaries for the government employees.
On that the finance minister stated that this would require additional resources, prompting Khan to say that he was not a street vendor, who did not know that this required additional money, said a member of the cabinet on condition of anonymity.
The prime minister decided that in order to give a 10% increase in the salaries, the tax rate for the lower middle income group should be increased from the proposed 1% to 2.5%, said the sources.
On annual income of up to Rs2.2 million, the government has proposed to reduce the rate from 15% to 11%, on annual income of Rs3.2 million, the rate is reduced from 25% to 23%. There is no relief for the annual salaried income earners of over Rs4.1 million. However, the fine on highest income earners has been reduced from 10% to just 9%, which the finance minister called was necessary to stop "brain drain".
Advance tax on sale or transfer of immovable property has been increased from 3% to 4.5% on the value of Rs50 million property. The rate is jacked up to 5% from 3% on Rs100 million property while it is further increased to 5.5% from 4%, if the value exceeds Rs100 million.
However, on the purchase of the property the rate is reduced from 3% to 1.5%, from 3.5% to 2% and from 4% to 2.5%, depending upon the value of the property. The economic transactions by the ineligible persons have been banned, if the value of the new purchases is more than 130% of the value of the total assets.
Tight fiscal path
In order to stay in the IMF programme, the government has proposed a fiscally tight budget, although it created room for political spending too. The government has proposed a budget deficit of Rs6.5 trillion or 5% of the size of the economy.
The total size of the budget is Rs17.6 trillion, which is 7.3% less than this year's original budget due to relatively lower allocations for the interest payments in fiscal year 2025-26.
The proposed budget deficit is 1.8% of the GDP or Rs2.4 trillion less than the original estimates of this fiscal year. The deficit may still be appearing large in absolute terms. But it is, for the first time, lower than this year's gap, both in terms of size of the economy and in absolute numbers.
The defence budget has been proposed at Rs2.55 trillion, which is 21% or Rs436 billion higher than this fiscal year due to war with India. The armed forces development programme has been marginally increased to Rs300 billion, which is far lower than what the military had demanded.
The government is projecting gross federal revenues at record Rs19.3 trillion for next fiscal year, higher by Rs1.5 trillion.
The gross revenues are based on the FBR's tax target of Rs14.13 trillion and Rs5.2 trillion non-tax revenues. The non-tax income will mainly come from the Petroleum Levy where the government wants to collect nearly Rs1.5 trillion and the Rs2.4 trillion profit by the State Bank of Pakistan.
Out of the Rs14.1 trillion FBR tax collections, the provinces will get Rs8.2 trillion as their shares in the federal taxes under the National Finance Commission (NFC) Award.
This leaves the federal government with Rs11 trillion net revenues for next fiscal year, which will not be sufficient to meet the interest payments and inclusive of all defence spending. The government will borrow Rs6.5 trillion in the next fiscal year to finance the Rs17.6 trillion total federal budget.
Under the IMF programme, the four provinces are also required to save Rs1.46 trillion from their revenues as cash surplus to bring down the national budget deficit to Rs5 trillion or 3.9% of GDP. This is steeper fiscal consolidation and would require all the five governments to meet all their revenue and expenditures related targets.
The interest payments will eat 47% of the budget and the federal government's net income —after paying the provincial shares — will be Rs2.8 trillion more than interest payments. The next year's interest payments are estimated at Rs8.2 trillion, which is lower than this fiscal year due to substantial reduction in the interest rates.
The finance minister announced a Rs716 billion BISP programme aimed at expanding the net to over 10 million beneficiaries and adding more children in the conditional cash transfer programmes.