Harsh tax measures likely in budget

KARACHI: The government is expected to take harsh tax measures in the federal budget 2022/23 scheduled on June 10, 2022, in order to meet expenses and improve fiscal condition.

Analysts at Arif Habib Limited outlined the expected tax measures to be announced by the government to generate additional up to Rs450 billion.

According to the report, the budgetary outlay is expected at Rs10.4 trillion as against Rs8.8 trillion in fiscal year 2022. The government is set to introduce some new taxation measures in the budget including raising personal taxes, tariff rationalisation and some other measures, in order to improve deficit numbers.

With this, the government expects the fiscal deficit to clock-in at 5.5 per cent of the GDP in fiscal year 2023, compared with 6.5 per cent in fiscal year 2022.

“With the International Monetary Fund (IMF) programme expected to resume soon after Pakistan gets the seventh review through, the government’s taxation approach is expected to be even more rigorous than seen earlier, given the annual Federal Board of Revenue (FBR) collection target of Rs7.26 trillion set by the Fund,” the report stated.

“The government has indicated its intent to achieve this by broadening both the tax base in continuation of previous measures, as well as increasing indirect and direct tax,” it added.

The government is likely to increase general sales tax (GST) from 17 per cent to 18 per cent, increase GST on fertilizer products from 2 per cent to 17 per cent, increase corporate tax rate and windfall levy by 3 per cent and incremental super tax of 3 per cent on commercial banks.

The expected measures also include an increase in personal income tax, increase in federal excise duty (FED) by Rs500/tonne on cement, increase in FED on tobacco, increase in custom duty from 2 per cent to 6 per cent on edible oil imports, FBR’s administrative measures and imposition of additional taxes on real estate.

The taxation system is expected to take on a comparatively progressive approach, with the imposition of higher personal income taxes on salaried personnel falling in the upper category of the tax brackets.

As per estimates, the government projects GDP growth for fiscal year 2023 at 5 per cent buoyed by all the sectors, against GDP growth of 5.97 per cent for the outgoing fiscal year 2022. The government envisages inflation to settle at 11.5 per cent in fiscal year 2023, compared with 8.2 per cent fiscal year 2022.

A growth friendly budget last year with an expansionary fiscal policy coupled with a low interest rate regime helped keep the economy upbeat in the outgoing year.

Similar to last year’s position, sustaining fiscal health and keeping a stable position will be challenging for the incumbent government. Consequent to the extraordinary growth posted by the country, the state of the economy has risen into a state of accelerated demand and subsequent inflation.

The analysts expect the budget to strike a balance between fiscal prudence and economic growth by maintaining fiscal stability and improving fiscal health.

“Successfully striking this balance depends largely on the successful negotiations with the IMF. While there is a clear-cut intention to bring down the deficit over a period of time, tax collection and expense curtailment has been identified as a near-term priority,” they said.

With the IMF approval for the seventh review still awaited, the government is expected to announce some tough measures in the upcoming budget. This would include cutting down on subsidies, increasing tax collection, resolving circular debt.

“For this purpose, we believe, the government would be revisiting the current tax rates and regimes and coming up with measures to broaden the tax base. Moreover, through augmented documentation, tax collection is expected to improve as well,” the analyst added.

The government expects the tax revenue collection to settle at Rs7.9 trillion for fiscal year 2023, a jump of 19 per cent compared with the tax revenue of Rs6.6 billion in fiscal year 2022.