Pakistan: Meeting Ambitious Budget Targets

The FY25 Budget proposals are the initial steps to broaden the tax base in Pakistan (tax to GDP is still paltry 9%). It raises taxes on some key agriculture inputs (DAP fertilizer and tractors), strives to encourage tax filing, and does attempt to tax retailers and real estate, albeit with question marks over sustainability.

The Budget removes a concessionary tax regime for the exporters (barring the services export industry e.g. IT) and introduces hefty punitive measures for non-tax filers, including a restriction on foreign travel.

The key positive from the market’s standpoint is that the feared sharp increase in CGT on securities did not come through. The Budget has made CGT uniform for tax filers at 15%, but hikes to as high as 45% for non-filers. The market is likely to react positively to this.

The tax on exporters has been termed a negative. Business/ trade associations have taken sharp exception to this and significant pushback from them is anticipated to persuade the government to reverse this.

The budget proposals target a 40% increase in tax revenue. Achievement of targets depends a lot on how well the government is able to manage the pushback from exporters/ retailers.

If enforceability is an issue, then the IMF may demand additional tax measures before the Budget is passed in parliament, or there could be a mini budget by mid-year to fill any potential shortfall in tax collection.

An even higher petroleum development levy (PDL) and cuts in the development expenditure, as in the past few years, thus become very likely as well.

If the IMF accepts the budget at face value, it may be enough to secure the IMF program. In part, this may be because of the clear thrust to go after non-tax filers and some effort to bring retailers/ real estate in the tax net.

However, the IMF may wait to see the final approved budget first, and there may yet be changes given the PPP's show of reluctance ahead of the budget presentation.