New budget passed with minor amendments despite backlash

ISLAMABAD: The hostile reaction of the business community to the proposed budget 24-25 did not deter the ruling coalition from securing its passage in parliament. The budget was approved with minor amendments, driven primarily by political considerations.

The opposition’s sloganeering against the budget created ruckus in the assembly. During the session, they highlighted flaws in the proposed budget, labeling it IMF dictated ‘anti-people and anti-business’, and warning of its potentially strangling affects.

Their aggressive stance emboldened the legislators on treasury benches, who set aside their earlier reservations and voted for the budget.

The final budget extended tax coverage to previously exempt businesses and further increased the petroleum development levy (PDL). Initially proposed at Rs60 per liter, the levy was raised by Rs10 to Rs70.

Corporate dairy farms, that were exempted from additional taxes in the Finance Minister’s budget speech, will now be subject to the current higher tax rates like any other business. Additionally, builders and developers are now required to pay 10 to 12 per cent tax on their profit.

However, ignoring pleas from the business community, the government reversed some proposed measures, fearing damage to its already tarnished image and backlash from opinion makers. It retained tax exemptions on medical surgery equipment, educational materials, fertilizer, pesticides, and items for the former Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA).

“Advancing universal education and health, ensuring food security and addressing neglected areas are among priority items on our agenda. Our commitment to these goals prompted the reversal of certain measures, despite economic compulsions. During post-budget deliberations, it became clear that implementing these steps would compromise the government’s set targets in these key areas”, a senior member of the government’s economic team explained in defense of these changes.

“PMLN is known for being business-friendly. Why would we not want growth and prosperity? We understand the critical role of the private sector in such efforts. However, our hands are tied, and we believe business leaders will understand. We envision inclusive sustainable growth if we succeed in securing the 24th IMF programme and follow the reform agenda, which aims to reduce the government’s footprint in the economy and restrict its role, besides other points. This will allow the private sector to compete in a conducive business environment and harness Pakistan’s immense development potential”, he added.

Finance Minister Aurangzeb Khan defended the Finance Act 24-25 on various forums. Although he struggled to provide a convincing justification for the absence of belt-tightening measures in the budget, he promised to implement effective controls on wasteful public spending, the results of which will soon become evident. The budget projects a 25 per cent increase in spending for FY25 compared to the previous fiscal.

Planning Minister Ehsan Iqbal defended the budget by highlighting inherited economic challenges. “No political party could have offered a significantly different budget under the current circumstances. After servicing debt liabilities, the government has very limited room to maneuver,” he said, citing projected revenue and key expenditure figures from the 2024-25 budget. “This is not about politics; the national interest is at stake. We hope the business community will understand and endure the current tough phase with patience. With our collective efforts, the economy will turn around,” he remarked during a telephonic conversation.

Business lobbying began soon after the current government assumed power. Aware of IMF’s pressure for fiscal stabilisation and anticipating revenue-generating measures, they argued for taxing those outside the net or under-taxed to mitigate impact on themselves.

The primary focus, however, was on urging the government to right-sizing the oversized inefficient public sector, which hinders more than it helps in delivering public goods and development efforts. Additionally, they called for rewarding tax-complaint corporates by lowering their tax rates and eliminating the super tax.

They utilized the 17-day window between the budget presentation on July 12 and its passage on July 28 to campaign for their demands, aiming to pressure the government. Their media campaigns socialized their potential loss by highlighting employment and inflation effects, as production cost rises and the economic activity lags, in hope of garnering public support.

A senior expert was skeptical about the business class gaining the traction they hoped for, despite their expensive media campaign. “It is hard to imagine people of Pakistan rallying behind the business class, especially when they are perceived as beneficiaries of a skewed system, rolling in riches. In the public imagination, businessmen are seen as willing partners in perpetuating the status quo, which limits economic opportunities and deprives masses of the basic civic amenities they deserve as citizens”.

Dr Usama Ehsan Khan, head of research, Policy Research & Advisory Council (PRAC), Karachi Chamber of Commerce and Industry (KCCI), strongly supported business community’s position on the budget. “The concerns of businesses are valid, especially since none of the budgetary proposals from their representative bodies, like Federation of Pakistan Chamber of Commerce and Industry (FPCCI) and other trade bodies, were considered in the federal budget.

Harsh measures, such as shifting exporters from the final to the minimum tax regime and raising the maximum tax rate to 45 per cent for non-salaried individuals, have understandably triggered protests. Additionally, certain amendments have significantly increased the discretionary power of the Federal Board of Revenue (FBR).

For example, changes in the definition of ‘fraud’ now allow the FBR to seek records for up to 15 years instead of the previous six years. Empowerment the FBR to declare a minimum value for certain imported goods for advance tax computation at the import stage is likely to increase import costs, strain cash flows, and potentially lead to disputes over valuation. These changes will substantially increase the cost of doing business.

“The budget is disappointing for its failure to include measures to broaden the tax net or reduce expenditures. Instead, it relies on tax measures that disproportionately burden businesses, which are engine of our economy. In this context, urgent actions to reverse these harsh measures are crucial for safeguarding our industries and businesses. It is imperative to redirect shift the tax focus towards sectors that are under-taxed, such as agriculture and services.”

“A collaborative approach between the government and the businesses is essential to formulate more equitable and effective policies that support both economic growth and the broader interests of society”, he concluded.