ONE of the more notable claims made during the budget presentation process was the government’s claim to keep inflation at 12pc in the coming fiscal year. On the face of it, this seems to be rooted in the many planned actions that will aim to keep the rate of inflation low.

But the aggressive tax measures that form a major part of the revenue measures outlined, seem to be designed to do just the opposite, i.e. drive prices up.

While there may be different methodologies to measure inflation, the fact remains that anything higher than 24.9pc, the average monthly inflation rate in the outgoing fiscal year, will result in higher prices for consumers.

Dr Abid Suleri, executive director of the Sustainable Development Policy Institute (SDPI), believes that the government should have adjusted the minimum taxable income to account for inflation while setting personal income tax slabs.

While the govt claims it will keep inflation down to 12pc in the coming fiscal year, the aggressive taxation regime it seeks to put in place makes it seem like an unachievable target

The current exemption of Rs50,000 per month is too little, and doubling the tax on those falling in the first tax slab will reduce their disposable income, exacerbating their economic hardships, he says.

Furthermore, rising fuel costs due to increased levies and higher GST rates in specific sectors are expected to drive inflation further, impacting the cost of living. “There is no mention of taxing agricultural income, which could have broadened the tax base considerably,” he adds.

How 12pc?

In the post-budget presser, Fina­nce Secretary Imdadullah Bosal said that inflation was projected to hover around 12pc, but didn’t explain how it would do that.

The singular explanation Mr Bosal provided was that keeping the policy rate high would effectively manage demands and control inflation.

Dawn reached out to the finance ministry for clarification on the secretary’s opinion, but did not receive a response.

With the high base of FY24, noted economist Dr Ashfaq H Khan thinks that the inflation rate may remain low, but that did not preclude price hikes.

The rate of inflation is slowing due to a downward trend in international commodity prices and a near-static policy rate.

Incidentally, the variables that contribute to inflation in Pakistan are usually driven by supply-side issues, such as shortages, rather than rising demand.

The consumer price index (CPI) basket is made up of 356 items. Of these, 160 items are predominantly perishable food products, which are particularly volatile in terms of price fluctuation due to a variety of factors.

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The other 200 are primarily services and non-perishable products, which see little change in their prices over the course of a year.

But the aggressive nature of the taxation measures announced in the budget will affect both these baskets.

This is why the central bank’s approach of keeping the interest rate at a high level won’t deliver the goods, since the recent deceleration in inflation has been due to a series of supply-side improvements, most notably lower prices of wheat flour and fuel.

The high interest rate has already increased the cost of doing business for entrepreneurs and reduced capital supply for industry.

Basket of goods

An appraisal of the budget reveals that there are around 160 items that will be affected by the newly proposed tax measures (directly or indirectly), which will in turn impact the perishable half of the CPI basket.

Food and beverages make up approximately 35pc of the CPI. While seasonal factors can also contribute to fluctuations, input costs are closely tied to changes in fuel prices.

Incidentally, the government has announced a flat increase of Rs20 per litre in the price of petrol and diesel for the next fiscal year in the form of a levy, which is in addition to any rise in international prices. There is also a possibility that the GST on petroleum products may be reintroduced. Additionally, fluctuations in fuel prices directly impact the transportation index of the CPI, as this carries a weightage of approximately six per cent in the CPI basket.

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Earlier, following the suspension of food imports from India, Afghanistan and Iran had become significant suppliers of vegetables and fruits to make up for shortages in the domestic market.

Retail prices, however, remained high due to expensive transportation. To counter this, the government has not only eliminated sales tax on imported food products, but has also implemented measures to facilitate their import.

This time around, the government has withdrawn all concessionary measures and imposed an 18pc sales tax on vegetables and fruits from Afghanistan. It estimates that duty-free imports had deprived them of Rs7 billion in potential revenue.

So, as the cost of imported vegetables and fruits rises throughout the next fiscal year, so will food inflation soar once more.

On the non-perishable side, the government has imposed 18pc GST on the healthcare sector, ranging from raw materials to diagnoses and the import of health equipment to supplies for hospitals.

The Federal Board of Revenue (FBR) expects to raise Rs30bn from these measures, the cost of which will be passed on to consumers through higher treatment costs and medicine prices. The healthcare sector, for reference, accounts for 2.79pc of the total CPI.

Meanwhile, the removal of exemptions from exercise books, pens, ball pens, markers, pencils, inks, colour sets, geometry boxes, and other items used by the education sector, will affect a head that accounts for around 3.8pc of total CPI weightage. The stationery price rises will also affect offices.

Indirect taxes

The overall increase in sales tax is 36pc in FY25; however, the imposition of indirect taxes, such as customs and excise duties and withholding tax, will also definitely add to inflation.

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Withholding tax (WHT) revenue continues to be the leading source of ‘direct tax’ receipts for the FBR, owing to its easier mode of collection through economic agents, and the failure of tax authorities to tap large undocumented segments of the economy.

More than 70pc of the so-called direct tax revenue comes from the WHT. There are some reports that many businesses treat withholding taxes as expense, and pass on this burden to the consumers.

There is ample proof that withholding agents are not depositing the actual amount they deducted at source from the taxpayers and many such cases have recently been detected by tax authorities.

It doesn’t take an economist to realise that higher fuel prices, increased costs of education and healthcare and more indirect taxes on supply chains will result in costs going up, across the board. Perhaps it would be more prudent if the financial planners told us this rather than trying to sugarcoat.

Published in Dawn, June 16th, 2024