KARACHI: The Karachi Chamber of Commerce & Industry (KCCI), while identifying several anomalies in the Federal Budget 2024, highlighted that the Budget appears to have been prepared in the standard template of IMF, disappointing both the business community and working classes of Pakistan. Obviously, the limited fiscal space and debt obligations left little room for the Finance Ministry and FBR to come up with significant relief for trade and industry in particular and public in general.

It is of deep concern for trade and industry based in Karachi that a major part of the budget proposals for FY2024-25 compiled painstakingly by the Karachi Chamber of Commerce & Industry were not included in the Finance Bill 2024 presented by Finance Minister Muhammad Aurangzeb in the parliament.

The proposed shift from 1 percent turnover-based Final Tax Regime (FTR) to the standard taxation at 29 percent of taxable profit, would prove to be disastrous for the exports, hence, this proposal to remove exports from FTR must be dropped from the Finance Bill 2024 to prevent further deterioration of trade deficit and resulting pressure on foreign exchange reserves.

KCCI also mentioned that the Finance Bill 2024’s proposal to eliminate zero-rating on local supplies under the Export Facilitation Scheme (EFS) will have significant adverse effects. Removal of zero-rating on local supplies to registered exporters will compel the exporters to claim refunds of Sales Tax from FBR which is a lengthy process which is contrary to the spirit of EFS.

“Historically, the FTR provided transparent mechanism for taxing export proceeds by levying 1% Fixed WHT. Its removal may result in exporters being subjected to super tax, which was previously not applicable under the FTR”, KCCI added that this particular measure has been proposed not with an intention to enhance revenue but to open up the possibility of harassment and corruption. Had there been the intention to enhance revenue, Fixed rate of 1% WHT could be enhanced to 1.25% or 1.5% rather than creating complications in compliance.

KCCI expressed the apprehension that the definition of fraud has been changed, enabling the officials to seek records of up to 15 years to prove innocence in case of any allegation of fraud which would not be possible to comply as under the previous definition, taxpayers have been maintaining records for a maximum period of 6 years so they will not be in a position to produce records older than six years. Hence, KCCI demanded that the new definition of fraud, which was yet another discretionary power, should be withdrawn and the officers should only be allowed to seek explanation or take any action strictly as per previous definition.

KCCI further stated that the tax rate for salaried individuals remains capped at 35 percent, whereas non-salaried individuals, non-corporate sector, SMEs and AOPs will see an increase from 35 percent to 45 percent. “This introduces a horizontal inequity, as it places a disproportionate tax burden on non-salaried individuals compared to their salaried counterparts”, KCCI added while underscoring the need for careful removal of such discrepancies before approval the Finance Act. The decision to raise tax rate up to 45 percent would encourage substantial number of individuals and AOPs to exit from tax net. Current threshold of Rs.600,000 has largely affected non-salaried class such as small shopkeepers, traders and SMEs forcing them to become non-filers. KCCI is of the view that threshold of taxable income should be raised from Rs.600,000 to income exceeding Rs.1.0 million, in view of high inflation and increase in cost of living.

KCCI further stated that extraordinary powers have been conferred to FBR officials through investigative audit which would open up a floodgate of corruption. The newly added concept of “Investigative Audit” under Section 25 of the Sales Tax Act, 1990, aims to address tax fraud but increases regulatory burdens and the risk of misinterpretation, leading to frequent audits based on vague suspicions. The FBR can now conduct investigative audits if it suspects tax fraud, even with the assistant commissioner’s approval. This raises concerns about potential misuse and coercion by tax authorities, fostering an environment of uncertainty and fear that will defeat the efforts to broaden tax base and discourage new investment in such anti-business environment.

KCCI further stated that the budgetary measures lack government’s plans for bringing down the exorbitantly high government expenditures which were being financed through borrowings from domestic banks, creating an unbearable burden of interest payments of trillions of rupees against the domestic debt, particularly in a situation when the key interest rate stood at 22.5 percent.

KCCI pointed out that no concrete relief measures have been provided to businesses, such as super tax reductions, minimum turnover tax adjustments, or further tax reductions. These factors contribute to the overall cost of doing business and have a dampening effect on investment. This is especially concerning given the decline in investment to GDP ratio to 13.4 percent as per latest Economic Survey.

KCCI noted that the shortfall in last year’s tax collections by Rs2,152.5 billion casts doubt on the ambitious projection of achieving a 40 percent increase in the tax revenue for FY25. KCCI was of the view that without essential tax reforms, rationalization and reforms of energy sector and doing away with exemptions to PATA/FATA and AJK, stated objectives of the Budget proposals 2024-25 and revenue targets appear to be a far-fetched idea.

KCCI further stated that Debt servicing was projected to consume 94.2 percent of the federal net revenue for the upcoming year, implying that virtually all other government expenditures, including defense, pensions, and civil administration, will likely be financed through increased borrowing, predominantly from external sources. Current volume of domestic debt has reached an alarming level of 85 percent from commercial bank which has made it impossible for SMEs to avail business financing from banks.

KCCI mentioned that 33 percent hike in the Petroleum Development Levy (PDL) from Rs. 60 to Rs. 80, along with increases in other levies, would intensify inflationary pressures, terribly affect common man’s life and increase the cost of logistics. This reliance on indirect taxation could reduce savings rates, deter investment, and dampen economic activity overall.

KCCI stated that the increase in FED from Rs2 per kg to Rs3 per kg on cement is likely to negatively impact the growth of construction industry, which was already facing multiple challenges. This increase may lead to higher construction costs, affecting both commercial and residential development. The government has proposed certain very harsh taxation measures which directly impact the general public as well as trade and industry.

The government has proposed imposing 18 percent GST on milk and fat-filled milk in the Federal Budget 2024-25 which was zero-rated earlier whereas milk not sold under a brand name will be exempt from this tax. As milk was a basic consumable item, removing exemptions and imposing an 18 percent GST would further fuel inflation.

KCCI further noted that capital gains tax on securities will be 15 percent for filers, while non-filers will be subjected to taxes of up to 45 percent under different slabs, irrespective of the holding period. The withdrawal of the holding period for the levy of Capital Gains Tax will be detrimental to the capital market, which saw the revival of foreign portfolio investment.

According to KCCI, the increase in import duties on paper products would further burden the local printing industry, which was already unable to meet demand with domestic production.

In a worst-case scenario, surgical instruments, tools, equipment and medications required in Cardiac surgery, Neurovascular Electrophysiology and Angioplasty etc. (Serial No.112 of the 6t Schedule of Sales Tax Act) have been omitted from 6th Schedule and added to 5th Schedule. Consequently, the said surgical instruments and tools will be subject to standard rates of Customs Duty, Sales Tax and WHT making the surgical treatment very costly for average citizens. 

Goods used in medical treatment supplied to charitable hospitals (S.No.166 of 6th Schedule) have also been removed from the scope of 6th Schedule and added to 5th schedule which will make the essential medical supplies very costly for charitable hospitals which are serving the poor patients and working for a noble cause. While the government hospitals are unable to provide essential medical services to a population of 240 million, at least the charitable hospitals are providing much needed treatment to the poor. KCCI demanded, while appealing the government to restore the exemption on medical supplies to charitable hospitals, advised to take stakeholder in confidence before taking such decisions related to items of common use.

Ironically, the Finance Bill 2024 proposes to include Waste and Scrap of Plastics into the 11th Schedule thus giving concession in Sales Tax on imported garbage. While the provincial governments of Punjab and Sindh have announced restrictions on production of Plastics bags of a specified thickness in order to protect the environment and clogging of drainage and other environmental issues but on the other hand, the Finance Bill 2024 has allowed the massive influx of Plastic Waste.

Elevating the General Sales Tax from 15 percent to 18 percent for Tier-I retailers in the textile and leather sectors could exacerbate the miseries of struggling industry, particularly as the textile sector has already seen a contraction of 8.3 percent. This could lead to a decline in domestic demand and reduce profitability of both Garment and Leather industries.

KCCI opined that the removal of fixed sales tax on locally assembled mobile phones, replaced by a standard 18 percent tax, might negatively impact the nascent local mobile phone industry, affecting its growth and competitiveness. Referring to a proposal of imposing travel restriction on non-filer, KCCI sought a clear definition for non-filer and unregistered individual as this proposal has created a lot of confusion.

In the finance bills, KCCI noted that the government has taken vegetable imports from Afghanistan out from 6th schedule which needs to be reversed as sometimes both countries face shortage of numerous commodities including tomatoes, potatoes and onions etc.in their markets which are imported from Afghanistan and also exported from Pakistan. Removing vegetables from the sales tax regime means that the prices will increase by 20 to 30 percent. As these were very sensitive consumer items, therefore, vegetables should be reversed back to sixth schedule so that both countries could be saved from shortages during off-season.   

KCCI has, therefore, urged the government to revisit the Budgetary measures announced in the Finance Bill for FY2024-25 and remove the anomalies and certain harsh measures which are likely to have a negative impact on business environment, exports and GDP growth.  Moreover. the budget proposals submitted by KCCI may be taken into consideration after due deliberations with stake holders and included in the final Budget document.

Touching upon some of the positive announcements in the budget, KCCI appreciated the government’s resolve to minimize interaction between tax-payers and tax collectors and also the decision to declare 2024-25 as the year of exports. It was encouraging to hear Finance Minister saying that the government would give top priority to exports by removing all the hurdles and ensure availability of financing to the private sector through some serious action. The government will have to control its expenditures and reduce dependence of borrowings which is making it difficult for the private sector to avail bank financing. The budget documents however do not provide a road map or plan for such actions.