Losing intellectual capital due to excessive taxing policies is like murdering the goose to get the golden egg at a time when real capital is stuck in unproductive sectors like real estate.
The taxable are subject to taxation once more, as they were the previous year, the year before, and so on. The untaxed continue to be untaxed, but they receive a small reward for their tax exemption: a small rise in withholding taxes, which raises operating expenses.The budget can be considered conservative in its approach, since it avoids major initiatives and is anything but ambitious, given the estimated real GDP growth rate of around 3.6%. Its actions consist of broadening the present taxpayer base and not doing anything to bring current exempt companies and people into the tax net. The necessity to shift from a consumption- to an investment-oriented economy was made abundantly evident in Finance Minister Muhammad Aurangzeb’s address, but it provided no guidance on how this shift would be made.
Ambitious goals
To raise the tax-to-GDP ratio to 10.4%, the federal budget projects a 37.8% increase in tax revenue. This is a high goal because tax income increase of this magnitude is quite uncommon. Considering that inflation is predicted to be in the region of 15 percent, it is difficult to remember a time when tax revenue climbed by more than 20 percent in real terms without expanding the tax net. It will be difficult to achieve this considerable actual increase simply broadening the present tax base.
Income taxes are predicted to increase by almost 48%, which is another lofty goal. The salaried class’s tax burden has grown despite modifications to tax slabs, even though their tax rate has remained stable.
The salaried segment’s actual incomes have decreased by about 30 percent in the last five years. Raising taxes will further diminish after-tax income, putting further strain on salaried people’s finances.
Additionally, middle-class households’ tax incidence has also grown, further reducing their actual discretionary income. Household attitude is somewhat negatively impacted by this, and the country’s loss of intellectual capital is accelerated. Losing intellectual capital due to excessive taxing policies is like murdering the goose to get the golden egg at a time when real capital is stuck in unproductive sectors like real estate.
Simply put, the budget continues to prioritize current taxpayers while paying little attention to the untaxed population. The updated tax system for export-oriented businesses, which would increase corporation tax and decrease reinvestment incentives, is one significant shift. The majority of the rise in direct taxes is attributable to current taxpayers, suggesting that the tax base is being deeper penetrated rather than expanded.
Indirect levies
Examining indirect taxes reveals that a 36 percent rise in sales tax and a 33 percent increase in the Petroleum Development Levy are anticipated. Roughly 10% of all taxes are already accounted for by the latter. Since these taxes are inflationary by nature, overall costs will increase.
However, the manufacturer-distributor-retailer value chain may not be able to convince non-filers to become filers due to the rise in withholding taxes from 1 percent to 2.5 percent. Instead, manufacturers would probably pass the cost along to customers, which will add to inflation. Because there will be greater incentives to circumvent the official system, this climate will foster the growth of the informal cash market.
It’s unknown if assessments have ever been carried out to ascertain whether raising withholding taxes for non-filers has encouraged more people to file taxes. Moreover, it is debatable if individuals who submit are doing so in a fair manner. The long-standing practice of withholding taxes hasn’t done much to increase the number of non-filers who become filers.
Strict actions like disabling tax evaders’ SIM cards on their phones have made compliance even less likely.
In short, the budget demonstrates the flaws in the design of the tax policy. Without appreciably increasing compliance or tax collections, withholding taxes for non-filers raise operating expenses.
The typical taxpayers—corporations under the formal system, salaried people, and indirect taxes such as the Petroleum Development Levy—remain the primary payers of taxes. Vulnerable households suffer disproportionately from an ever-growing reliance on consumption-based indirect taxes as opposed to wealthy households.
Is there a benefit?
The budget, which aims for a real growth rate of 3.6 percent and places little dependence on outside financing to make up deficits, gives some promise for macroeconomic stability. This implies that domestic, as opposed to import-driven, growth will predominate. The proposal to privatize state-owned businesses that are losing money, especially the national airline and electricity distribution corporations, is another advantageous feature. Privatization may lessen the electricity industry’s ongoing losses and subsidies. But in order to do this, significant structural changes are needed, and the administration has indicated that it is willing to make these.
In terms of revenue, the budget has once again fallen short of expanding the tax base, which puts further strain on the formal and salaried sectors of society. Increased withholding taxes are probably going to hasten the transition from the formal to the informal sector.
Given that not much has been done to prevent it, an expansion of the cash economy is likewise likely. Although the budget is naturally inflationary, it is cautiously hopeful. It does little to reduce the informal economy and keeps punishing current taxpayers. It does not put any policies in place to accomplish this goal, despite its desire to promote investments. Cash-based capital that is not part of the system could nevertheless be moving, depriving the formal economy of resources. Because of this, overtaxed groups will continue to struggle to remain in the system and shoulder the weight of a limited tax base.
In summary, despite its optimistic estimates, the federal budget fails to address important concerns like expanding the tax base and instead implements inflationary policies.
It runs the danger of accelerating the shift from the formal to the informal sector by focusing only on current taxpayers and without providing incentives for non-filers to comply. Indirect taxes’ inflationary character further muddies the economic picture and might jeopardize attempts to attain sustainable development.
The load on the formal economy will only rise in the absence of substantial reforms and a wider tax base, making it more difficult for the nation to promote an atmosphere that is really investment-oriented and provide a route for long-term prosperity.
