KARACHI: The Pakistan Business Council (PBC) has expressed fears that some of the budget proposals would have a disastrous impact on the formal, tax-paying sector of the economy since its focus on a sharp increase in the tax-to-GDP ratio without a “meaningful reduction” in government expenditure would exacerbate an already disproportionate burden on existing taxpayers.

The PBC said in a statement released on Thursday that it had submitted proposals to lower the heavy burden of taxes on the formal sector, but none was considered.

The council, however, praised the government for “containing inflation”, reducing the interest rate as well as electricity prices for industrial units.

Ehsan Malik, the PBC chief, said in a letter addressed to Finance Minister Muhammad Aurangzeb that the budget proposal to raise tax rates for salaried persons would accelerate the massive brain drain threatening to reverse whatever little gains the economy had made over the last two years.

“A 119 per cent increase in the number of Pakistani emigrants is a cause for concern. Many of these individuals are experienced, highly qualified professionals that the formal sector is losing.

“The proposed changes in tax slabs, particularly the move to lower the income limit for the highest rate of 35pc, will speed up this brain drain. The formal sector not only loses talent when individuals emigrate but also suffers from their transition to the informal, untaxed sector.

“Salaried employees bear numerous costs that the state is supposed to cover, but fails to do so. The proposal to increase tax revenue from this sector is unjust,” Ehsan Malik said.

The government can print money and resort to borrowing to fund a 20-25pc increase in salaries of its employees, but the private sector cannot do so. It will be badly affected as professionals seek low-tax environments in and outside Pakistan, Mr Malik added.

Super tax

Mr Malik also called for phasing out of super tax, withdrawal of double taxation on inter-corporate dividends, reduction in the corporate tax rate and to stem capital flight from the country.

He further suggested that the government allow an adjustment of the tax liability for previous years and “address the anomaly of minimum tax” on the turnover of businesses that are entitled to tax holidays.

The tax on their dividends should be reduced to 15pc, the PBC chief suggested.

“This government’s first budget could have provided a roadmap to attract and retain investment, but instead the proposals will discourage not only foreign but also local investment,” Ehsan Malik observed.

The PBC said the budget proposals would have a detrimental effect on the export sector, too. “Rather than reducing the cost of exports, the proposals sharpen the disadvantage that Pakistani exporters face vis-à-vis traders from other countries,” Mr Malik said.

Pakistan is handicapped while competing with exporters from India, Bangladesh, Vietnam, Indonesia and Egypt. “Keeping exporters free from the hassle of filing returns and dealing with notices, as in Bangladesh or India, was one concession for Pakistanis that has now been taken away.”

Mr Malik said it was disappointing that the government planned to double the simple one per cent tax on export proceeds.

Furthermore, exporters will be assessed at a 39pc (corporate plus super tax) rate on a normal instead of the current FTR regime. This tax impact will be more than three times that of Bangladesh and twice that of Vietnam and Egypt, the PBC chief said.

Published in Dawn, June 21st, 2024