THE government has finally come to terms with ‘IMF-dictated’ budgetary measures and increased target for revenue collection to Rs7.47 trillion for the next fiscal year with net addition of Rs466 billion worth of taxes since the June 10 original budget. It may not be a reformist budget that should have ideally expanded the tax net, but it appears set to increase tax-to-GDP ratio at least for a year with additional tax contribution by almost every sector of economy, except agriculture for obvious reasons.

The additional tax burden on almost a dozen big industries has rattled the manufacturing sector. About a 2,000-point fall in the stock market was the first spontaneous reaction to the surprise tax increase in the shape of ‘super tax’. Their profits have come under further tax. At the same time, sectors like retailers, jewellers, builders, restaurants, automobile dealers — precisely the trading community that has been PML-N’s political capital — have been brought under the fixed tax regime.

But this could be a good start if will is there to graduate this sector a year later to a meaningful taxation according to its tax potential. Finance Minister Miftah Ismail said the government had committed to the IMF that the primary deficit of Rs1.6tr recorded this year would not only be brought down but there would be a surplus of Rs153bn.

The high worth individuals have also come under additional tax in the shape of poverty alleviation tax. The icing on the cake was additional ‘super tax’ on 13 industrial sectors which are estimated to have earned more than Rs900bn in profits this year. Those bracketed under this ‘super tax’ include cement, steel, sugar, oil and gas, fertilisers, LNG terminals, textile, banking, automobile, cigarettes, beverages, chemicals and airlines.

Not all but some of these sectors have prospered on the back of government subsidies, protections and rent seeking. For far too long, the banking sector has enjoyed secure profits on public money through guaranteed government borrowing and owes it to the nation to give back a part of this for one year. But many of these sectors are the key sources of employment, as well. It is not yet clear if these big industries would like or be able to absorb the impact of additional tax burden or pass it on to the people and may increase the cost of living and construction for middle class.

The prices of cement and steel, for example, have already doubled in about three years. While the industry has the capacity to pass on the additional cost to consumers, the citizens would be facing double jeopardy — high cost of taxation if they go for construction and taxation on deemed rental income if they retain open plots out of savings.

This could affect investment sentiment as well. In the words of Ghias Khan, the president of all-powerful Overseas Chamber of Commerce and Industry and Engro Corporation, imposition of a super tax on industries is regressive and will hamper industrialisation, curb manufacturing and not reduce current account deficit. He said Pakistan needs a wider tax base through documentation, taxing the unproductive sectors like real estate, and long-term policy development.

The silver lining is that if the government does not stick to the commitment for one-time super tax as has been the case in the past, big industry may tend to rationalise employment level or else pass on costs to the market — thus inflationary. No doubt, their input costs have increased in recent years, but at the same time they have also benefited from subsidies from the public money through a series of stimulus packages over the past three years.

No doubt, the rich have been taxed as claimed by Finance Minister Ismail and Prime Minister Shehbaz Sharif, but the poor and middle class were also not spared, thanks to the IMF’s stubborn approach. Removal of the tax exemption limit to individuals with Rs1.2m annual income was the last redline the finance minister surrendered last week to secure a supportive statement from the IMF staff and steer clear the final budget.

The underlying effect of the entire updated budget is the squeeze on incomes of almost everybody and every sector. It squeezes the purchasing power of a large population in the middle income groups if taken together with the imposition of petroleum development levy on top of recent increase in oil prices along with ongoing and upcoming series of increases in electricity tariff and gas price rationalisation.

But then, putting numbers on the board is the critical target this year under the ‘IMF budget’. This will slow down economy, affect purchasing power of the common majority and make lives of some others more painful. The year ahead is tough economically for a wide majority but an equitable and fair share of burden appears to be unavoidable and worth bearing if it sets the stage for better days ahead.

Published in Dawn, June 25th, 2022