Inflationary and anti-growth

The budget claims to be business- and individual-friendly, but the reality is quite the contrary

Inflationary and anti-growth


xperts, businesses and common people have raised serious concerns about the first annual budget presented by the coalition government led by Prime Minister Shahbaz Sharif.

For the first time, Muhammad Ishaq Dar, deputy prime minister and foreign minister, is not overseeing the treasury. The Finance Ministry is now headed by Muhammad Aurangzeb, a technocrat with a career in banking, who presented his maiden budget on June 12.

The budget size will be Rs 18,880 billion, with a total outlay at Rs 18,877 billion. The GDP growth rate is projected to rise to 3.6 percent, compared to the current fiscal year’s expected 2.38 percent. The inflation rate, currently at 11.8 percent according to the consumer price index released in May 2024, is projected at 12 percent for the FY 2025.

The government is aiming for a 38 percent increase in tax collection, setting a target of Rs 12,970 billion, out of which the share of provinces is estimated at Rs 7,438 billion. The target for non-revenue sources is projected at Rs 3,587 billion. Despite these ambitious targets, the fiscal deficit is expected to be 6.9 percent of the GDP.

Pakistan remains heavily reliant on internal and external borrowings. The total public debts amounted to Rs 67,525 billion as of March 31. This includes domestic debts of Rs 43,432 billion and external public debts of Rs 24,093 billion. Although the government has managed to retire treasury bills worth Rs 0.8 trillion reducing short-term maturities, it has issued Shariah-compliant Sukuk instruments totaling Rs 1.5 trillion.

During the current financial year, Pakistan received external budgetary support of $6.3 billion, which comprises $2.7 billion from multilateral sources and $2.8 billion from bilateral development partners. Contributions from Naya Pakistan Certificates added another $0.8 billion. Additionally, Pakistan utilised the IMF’s standby arrangement of $3 billion, alongside a $1 billion deposit from the UAE. The interest expense on public debt reached a staggering Rs 5,518 billion, with Rs 4,807 billion attributed to domestic debts and Rs 710 billion to external debts.

Pakistan is currently negotiating its 24th Extended Fund Facility programme with the International Monetary Fund that will add to our debt burden. In budget 2024-25, our economic managers have allocated a whopping Rs 9,775 billion, nearly 50 percent of the budget, for debt servicing alone. Additionally, Rs 2.1 trillion is reserved for defence expenditures. Pension and subsidies are estimated at Rs 1 trillion and Rs 1.4 trillion respectively.

The Public Sector Development Programme for FY 2025 is set at Rs 1,500 billion, marking a 101 percent increase over the last year’s revised volume. The government has allocated 83 percent of its resources for ongoing projects and 17 percent for the new ones. Key allocations include Rs 100 billion for PPP projects, 59 percent for basic infrastructure, 20 percent for the social sector, and 11.2 percent for IT, telecommunication, science andtechnology, governance and production sectors.

Additionally, 10 percent of funds are reserved for districts in Azad Jammu and Kashmir, Gilgit Baltistan and Khyber Pakhtunkhwa.

The budget has allocated Rs 593 billion for the Benazir Income Support Programme, as compared to Rs 466 billion in the FY 2024, for 9.4 million beneficiaries. The disbursement for the end of March 2024 was recorded as Rs 313.4 million. This included conditional cash transfers of Rs 56 billion and unconditional cash transfer of Rs 257.5 billion. In the current budget, the Kafalat programme will expand from 9.3 million to 10 million beneficiaries.

Benazir Taleemi Wazaif will enroll one million more children. However, by the end of March 2024, the total enrollment under this programme stood at 2.2 million and the total disbursement at Rs 36.9 billion. Additionally, Benazir Nashwonuma will add 500,000 families for nutritional support. New poverty graduation and skills development programmes are also being introduced.


he raise in the petroleum levy rates signifies a substantial financial burden on the already struggling people. High-speed diesel oil and motor gasoline now carry a maximum levy rate of Rs 80 per litre, up from Rs 60. This increment will exacerbate inflation, impacting transportation and overall cost of goods.

Superior kerosene oil maintains its levy at Rs 50 per litre, yet other fuels like light diesel oil and high-octane blending component see an increase of up to Rs 75 per litre, heightening the economic strain.

Additionally, E-10 gasoline and domestically produced liquefied petroleum gas maintain a consistent levy. These levies risk raising the cost of living and stalling economic growth, challenging both consumers and businesses.

The government is amending the Customs Act, 1969 through the Finance Bill to promote domestic industry and facilitate exports. Exemptions on medical raw materials and incentives for agriculture and increased duties on certain imports are being extended to boost local manufacturing. New regulatory measures will encourage local manufacturing while legislative changes enhance enforcement against trade-based money laundering. Penalties have been increased to deter smuggling and attacks on customs personnel.


elief measures, such as exemptions on raw materials for hemodialyzers, will benefit the public by reducing healthcare costs. The increased focus on local manufacturing and agriculture could strengthen domestic industries and improve self-sufficiency.

However, the higher duties on essential imports like vehicles and industrial components will lead to increased costs for businesses, potentially affecting consumer prices. Legislative changes to enhance enforcement and penalties aim to strengthen customs operations but could face implementation challenges.

The Finance Bill also proposes to amend the Sales Tax Act, 1990, and introduce significant changes with varied impacts on both the public and businesses. The withdrawal of various exemptions, zero ratings, and reduced/ fixed rates will likely increase the tax burden on consumers, particularly with mobile phones now taxed at the standard rate, except those exceeding $500, which remain at 25 percent.

The enhancement of the sales tax rate from 15 percent to 18 percent on POS retailers dealing in leather and textile products could drive up prices, impacting both retailers and consumers. Additionally, the phased withdrawal of exemptions for ex-FATA/ PATA may strain these regions’ economies as they adjust to the new tax regime.

The exemption of iron and steel scrap from sales tax aims to support the recycling industry, but other sectors like lead, coal, and plastic scrap face a withholding regime that could complicate operations.

Empowering the Federal Board of Revenue to fix minimum prices for goods under the Third Schedule, streamlining tax fraud provisions and aligning the default surcharge rate with the SBP’s policy rate are steps towards tighter regulation and compliance, but may also impose additional administrative burdens on businesses. Overall, while these measures aim to increase revenue and streamline tax processes, they could also result in higher costs for consumers and operational challenges for businesses.

The proposed amendments to increase the federal excise duty significantly are going to financially burden across multiple sectors as well. The imposition of FED on acetate tow at Rs 44,000 and nicotine pouches at Rs 1,200 per kg, along with increased rate of e-liquids, could heavily impact the tobacco and related industries.

The hike in FED on sugar to Rs 15 per kg and on cement from Rs 2 to Rs 3 per kg will likely increase costs for manufacturers and consumers, contributing to inflationary pressures. The increase in the price threshold for locally manufactured cigarettes from Rs 9,000 to Rs 12,500 may deter smoking but risks fueling the black market. While these measures aim to boost revenue and promote public health, they could also lead to economic instability and increased regulatory challenges, particularly with the power to seal premises of retailers selling illicit cigarettes.

The impact of imposition of 5 percent FED on allotment and transfer of commercial and residential properties will certainly further strain the real estate market, potentially slowing down investment in this sector.

The proposed amendments in the Income Tax Ordinance, 2001, suggest substantial changes with wide-ranging impacts. For salaried individuals earning more than Rs 600,000 annually, new tax slabs range from 5 percent to 35 percent. Non-salaried individuals face rates between 15 percent and 45 percent. Progressive tax rates on immovable property range from 3 percent to 20 percent, impacting property transactions for both filers and non-filers.

Capital gains on securities acquired after July 2024 will be taxed at a flat rate of 15 percent for filers. Non-filers will face rates up to 45 percent. Enhancing the tax rate on profit from debt (?) for non-filers from 30 percent to 35 percent aims to enforce compliance. Additionally, the introduction of stricter penalties, including blocking SIMs and utility disconnections for non-filers, along with new withholding tax regimes and increased rates on various sectors, indicates a robust effort to increase tax revenue by 38 percent and reduce the fiscal deficit, projected at 6.9 percent of GDP. However, these measures could strain the salaried class and businesses, potentially slowing economic growth and raising the cost of compliance.

The budget claims to be business- and individual-friendly, but the reality belies this façade. Despite the ambitious tax targets, some of the policy measures are poised to exacerbate inflation, ultimately burdening businesses and consumers. Despite the salary raises, the concurrent increase in tax rates leaves little respite against the looming inflationary impact.

Although funds have been allocated for FBR reforms, the budget lacks focus on financial inclusion and documentation of the economy, through centralised business operations. The creation of the Directorate of Trade-based Money Laundering reflects the government’s antiquated strategy to combat such financial crimes. The imposition of higher taxes and penalties may promote compliance but will inflate costs, increase red tape and impede Pakistan’s growth potential.

Dr Ikramul Haq is an advocate of the Supreme Court and an adjunct teacher at Lahore University of Management Sciences

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Inflationary and anti-growth