Tax structure: budget envisages no reform
The business-friendly revisions include zero tariffs applicable on 2201 tariff lines to be extended to an additional 916 lines and reduction of customs codes on 2624 PTC codes. At the outset it is relevant to note that phasing out import taxes has been a long-standing loan condition by multilaterals and this particular amendment to the Finance Act is unlikely to be challenged by the International Monetary Fund (IMF) staff whose approval is critical to the success of the second staff-level review followed by tranche disbursement.
However, it has not yet been clarified as to how much of the budgeted collections by the Federal Board of Revenue (FBR) would be negatively impacted by these measures. This shortfall in budgeted revenue collection would, one may safely assume, generate the need to impose additional taxes (mini-budget) later in the year as part of the contingency measures agreed with the IMF staff under the ongoing Extended Fund Facility (EFF) programme.
Without Fund approval pledged external assistance releases would not be forthcoming to stave off the still looming threat of default. This stands to reason as both the Finance Minister and the Chairman FBR have publicly stated that in the event that the 389 billion rupees budgeted under enforcement measures is not realised there would be a need to impose additional taxes though the amount noted by the two men has varied between 400 and 600 billion rupees.
There is no doubt that the investment climate in the country needs pro-business measures as the large-scale manufacturing sector (LSM) continues to show an increase in negative growth — negative 1.47 percent July-March 2024-2025 against 0.92 percent 2023-24. This deterioration is in spite of the discount rate being slashed from 22 percent to 11 percent (June 2024 to June 2025) and a decline in electricity tariffs though captive power plants will now be taxed, again an IMF condition. The draconian measures that consist of enhancing the powers of the FBR officials, slightly watered down by parliament, may further compromise productivity in the LSM sector.
Be that as it may, successive Pakistani governments have relied on monetary and fiscal incentives to industry though as per the EFF documents uploaded on the Fund website in October 2024, 'The government's intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually 'infant') industries.'
In marked contrast to the reduction in import tariffs, exemptions are vigorously opposed by multilaterals as they are largely, if not entirely, supportive of the rich and influential. It is fairly evident that exemptions on the pension of Pakistani presidents falls in the category of benefiting the rich and the influential and is not justified, especially given the economy's fragility.
The most disappointing aspect of the budget 2025-26 is the fact that there have been no reforms in the tax structure and the reliance on indirect taxes, whose incidence on the poor is greater than on the rich, remaining intact as they are easy to collect. Direct taxes based on the ability to pay principal continue to consist of withholding taxes in the sales tax mode (which are indirect taxes) comprising of 75 percent of total collections.
Copyright Business Recorder, 2025
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