A Not-So-Happy New Year FY25

July 02, 2024 (MLN): The beginning of FY25 marked the debut of a hot-off-the-press finance bill, making waves from boardrooms to breakfast tables. The new finance bill burdened the salaried and middle-income class with increased taxes, surcharges, and notable changes to pension schemes.

FY25 is not set to be a "Happy Year" for the masses, as higher taxes mean lower take-home pay, combined with rising inflation.

As corporations face increased taxes, they are likely to pass on this burden to the end consumer, squeezing the middle class, particularly mid-management and skilled technical professionals, to the core of frustration.

In an attempt to increase tax revenue, the government has raised tax rates on the already-taxed salaried class while taking inadequate measures to bring the undocumented segment into the tax net.

FY24 was already challenging for the general public with high energy tariffs, leading to significant disappointment and frustration. In FY25, tariffs are expected to rise further, resulting in even higher bills.

How can one expect to ease inflationary pressures when GST has been levied on milk, a basic necessity? Milk sold by corporate farms has been added to the GST list.

The imposition of GST will raise end-product prices and lead to a shift from branded dairy products (mainly UHT milk) to unbranded ones. This inflationary move will raise product prices, pushing consumers towards loose milk.

In comparison to the corporate tax rate of 29%, the salaried class is paying up to 45%. Adding to the disparity, the corporate sector pays tax on net income, whereas the salaried class pays on gross income.

To make matters worse, corporations pass these costs on to the end consumer, burdening the salaried individual further.

Not only middle-income folks, but the high net worth individuals with annual incomes exceeding Rs10 million now face a 10% additional surcharge on their calculated income tax.

On the equity side, the government introduced an important amendment for the PSX related to mutual funds.

For stock funds where dividend receipts fall below capital gains, the tax rate on those capital gains has been revised to 15% from the previously proposed 20%, offering some moderation compared to the initial proposal (12.5% applicable until FY24).

Overall, the finance bill appears to be an attempt at fiscal consolidation in the government's view. Thus, the Finance Minister is confident that Pakistan will secure a new funding program from the International Monetary Fund (IMF).

It seems that the government aims to showcase increased taxes and incoming foreign investment in the PSX, backed by anticipated IMF support.

However, the general public may feel looted, facing higher taxes, prices, and lower incomes.

News reports suggest that an IMF meeting is scheduled for next month, citing anonymous sources without weighting their credibility but it is important to note that the IMF has not yet announced any visit to Pakistan.

Therefore, relying on anonymous sources may be premature.

Recently, Pakistan has been on a monetary tightening spree. Yet, despite squeezing the economy with record-high interest rates, they still missed their annual inflation target of 21%, ending up at 23.4% in FY24.

Let's see how this ‘smart’ fiscal consolidation attempt pans out.

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