While the federal budget 2023-24 has imposed new taxes on the common man, it has also roiled the business community which has expressed extreme unhappiness with the way the country’s economy is being managed. According to some leading lights of the industrial sector, the budget for the next fiscal year has not only failed to generate resources for future development but has also not broadened the tax net.
They have highlighted many budget anomalies which stand in the way of smooth business functioning. Among others, one particular point of concern is the imposition of a 10 percent super tax on the large corporate sector which will act as a disincentive for new investment. In this context, a representative of the Overseas Investors Chamber of Commerce has pointed out that while the regional average for the super tax is 25 percent, the government in the new budget has raised this figure to 39 percent which will surely act as a damper on Foreign Direct Investment. Another glaring failure of the budget is that while raising the revenue target to Rs9.4 trillion, no measures have been taken to broaden the tax base as repeatedly emphasized by economic experts.
On the other hand, the CEO of the Pakistan Business Council has pointed out that no new initiative has been proposed in the budget to expand the tax base, especially to bring retailers and wholesalers into the tax net. According to him, the higher super tax will unnecessarily burden existing businesses that create employment and generate substantial tax revenues. In his view, the harsh taxation measures will result in the flight of capital from the country.
Similar observations have been made by the Karachi Chamber of Commerce and Industry president who said that the imposition of 5pc levy on fertiliser and Rs10 per litre petroleum development levy would increase the burden on the masses and hit the industry hard. At the same time the finance minister did not mention any steps to tap new sources of resources and rationalise power rates which are a prerequisite to run and speed up the wheels of industry.
Various media reports show that the business community is especially concerned about the fresh Rs215bn taxation measures which, apart from having an adverse impact on the consumers, will increase the cost of production and slow down sales. There is a consensus of opinion among businessmen that the government should have brought down the general sales tax (GST) to a single digit on essential items and rationalized customs duty on various goods at a threshold level of 25-30pc to curb smuggling. But nothing in this regard was done in the budget.
The government’s financial indiscipline is also evident from the fact that as against Rs843 billion it had planned to borrow from banks during FY23, it has already borrowed Rs3.176 trillion between July 1, 2022, and June 2, 2023. This not only squeezed the space for the private sector but also crashed the economic growth rate from 6.1 per cent last year to an estimated 0.3pc this year. This in turn pushed up inflation to a five decades high of 38pc.
The government’s economic miscalculations are galore. For FY23, the government had projected Rs3.95tr spending on interest payments on domestic and external debts. But in actual fact, interest payments soared to Rs3.582tr within three quarters of FY23 and are expected to end up higher than Rs5.3tr at the end of the fiscal year.
For FY24, the projected spending under the head of interest payments is Rs7.303tr, and the tax revenue target is Rs9.2tr. In other words, about 80pc of the tax revenue would have to be spent on interest payments alone!
External accounts are also in a deep hole. In FY24, starting from July 1, Pakistan needs a little over $5.5bn for external debt payments each quarter. How the government will arrange for these amounts remains a quandary. Our Arab and Chinese friends cannot endlessly roll over the funds they have placed with the State Bank of Pakistan. Also there is little hope of them providing us new loans because they know that we have limited capacity to service foreign loans.
The SBP’s foreign exchange reserves are in a precarious position. The rupee may come under increasing pressure in the coming months. If forex reserves keep dwindling, the spectre of a sovereign default will stare us in the face.The overall outlook for the economy is gloomy.