THE federal budget 2024-25 has been presented signaling removal of all incentives, subsidiaries, income tax slabs and increase of indirect taxes and GST clearly indicating inflationary nature posing serious threats to common people, consumers and salaried classes in the country. Social scientists foresee a scenario akin to the French Revolution due to a deep-seated trust deficit among stakeholders and pervasive corruption. Qualified individuals are leaving due to cronyism and denial of merit, exacerbating poverty, unemployment, and social unrest amidst political instability and societal divisions. Unfortunately, real capital remained stranded in unproductive sectors like real estate and stock exchange ultimately losing intellectual capital through excessive taxation measures is akin to killing the goose for the golden egg.
It seems that the government’s focus on appeasing the IMF with the Rs18.9 trillion budget outlay for the $8 billion bailout program; setting a higher GDP growth target of 3.6 per cent; a lower fiscal deficit target; Rs30 billion projections for privatization proceeds played a catalyst role in bullish close. Naturally, exporters and businesses have criticized the withdrawal of tax exemptions in the federal budget. The textile industry is in bad shape and may not be able to pay the new minimum wage as its energy and power costs have made spinning operational unfeasible. Over one-third mills have closed while the remaining is operating at truncated capacities. The country faces challenging times with an anticipated tough budget and increased GST rates that will burden low-income consumers. Businesses passing on these costs will impact household spending, affecting industry sales. Ideally, the government should offset these taxes with austerity measures. The budget’s cautious approach, aiming for a modest 3.6% GDP growth, deepens existing tax burdens without broadening the tax base significantly, neglecting opportunities for more aggressive initiatives.
Income taxes are set to rise sharply by 48%, with salaried individuals facing increased burdens due to changes in tax slabs. Over the past five years, real incomes for this segment have plummeted by over 30%, and higher taxes will further strain post-tax earnings. Middle-income households will also bear a heavier tax burden, reducing disposable income and dampening household sentiment. The growing reliance on consumption-based indirect taxes disproportionately impacts vulnerable households compared to wealthier ones. On the other hand, the tax regime for export-oriented industries has been changed which will raise corporate tax and reduce reinvestment incentives. Most of the increase in direct taxes comes from existing taxpayers, indicating further deepening rather than an expansion of the tax base. A look at indirect taxes shows that sales tax is expected to increase by 36% and the Petroleum Development Levy by 33 percent.
The increase in withholding taxes from 1 percent to 2.5 percent on the manufacturer-distributor-retailer value chain may not effectively convert non-filers to filers, but will likely result in manufacturers passing the cost on to consumers, further contributing to inflation. In summary, despite dismal conditions, the government still hopes that the budget 2024-25 may facilitate macroeconomic stability, targeting a real growth rate of 3.6 percent with minimal reliance on external funding to cover deficits. It seems that economic growth will be largely domestic rather than import-driven. Privatization of loss-making state-owned entities, particularly power distribution companies and the national airline would be a giant step in the right direction. It could reduce recurring losses and subsidies in the power sector.
Frankly speaking, the budget has yet again failed to broaden the tax base, further burdening salaried and formal segments of society. Higher withholding taxes will likely speed up the shift from the formal to the informal economy. An expansion in the cash economy is also probable, as little has been done to discourage it. The budget is cautiously optimistic but inherently inflationary. It continues to penalize existing taxpayers and does little to shrink the informal economy. It aims to encourage investments; it does not implement any policies to accelerate it. Capital outside the system may continue to circulate in cash, leaving the formal economy starved of resources. As a result, overtaxed segments will continue to bear the burden of a narrow tax base, struggling to stay within the system.
Without significant structural reforms and a broader tax base, the burden on the formal economy will be further increased, limiting the country’s ability to foster a truly investment-oriented environment, and a path for sustainable growth. There is an urgent need to have a new social contract pledging fair play, equal opportunity, social justice, rule of the law, upholding of merit, complete denial of corruption and dismantling of cronies and clouts would give a right message to investors and businessmen to invest in the country. Role of the SIFC, initiation of the CPEC Phase-II and trade with the regional countries especially South East Asian and Central Asian would be a wise policy for the revival of economy.
Increase of funds to National Assembly, Senate, Prime Minister and President Offices giving a message of brutal discrimination and height of social alienation which would hurt the government in the days to come because slumps are not ready to act like a millennium dog.
—The writer is President, Centre for South Asia & International Studies.
