Financial Budget 2025

On June 10, 2024, the Finance Minister of Pakistan, Muhammad Aurangzeb, unveiled the Rs 17.57 trillion budget for fiscal year 2025-26. With the country under a $7 billion IMF program, this budget comes as a critical balancing act between meeting IMF obligations and addressing domestic economic issues. The primary focus of the budget remains clear, and that is stabilizing the economy and restoring investor confidence while navigating the complex demands of fiscal consolidation.

The most prominent and much-anticipated relief in this budget comes for the salaried class, who have been under the tax net for the longest time and have paid high-income taxes amid declining real incomes. The new budget has restructured the tax slabs for yearly earnings of up to Rs 3.2 million. For instance, the tax rate for yearly salaries between Rs 600,000 and Rs 1.2 million has been reduced by half to 2.5%. This represents a substantial shift towards improving purchasing power and a gain in real income. 

In contrast, corporate taxation presents a different story, offering mild relief to the selected segments in the corporate sector. Although the corporate tax rate remains unchanged, the government has announced only a 0.5% decrease in the super taxes for companies earning revenues between Rs 200 million and Rs 500 million, which provides limited to no relief compared to the categories of taxes paid by the corporate sector, including dividend taxes. With little relief in sight, corporations can benefit from solutions that optimize their OPEX and reduce overhead costs. Adopting flexible models like coworking can equip these businesses with the agility to scale operations without the burden of heavy upfront investments in land or property ownership.

The digital industry of Pakistan, which includes the online advertisement and e-commerce sector, also faces significant tax burdens. The government has introduced new taxes for local and foreign marketplaces, such as Temu and AliExpress, among others, making online shopping costlier for Pakistani customers, which may inadvertently slow down the adoption of e-commerce. These initiatives aim to expand the tax net and generate revenue from the rapidly growing digital industry, to meet the ambitious tax target of Rs14,131 billion in FY 2026. 

Pakistan E-commerce Association (PEA) chairman Omer Mubeen shared his concerns on the new tax initiatives for the e-commerce sector:

“The rising cost of taxes, coupled with increasing fuel prices and utility charges, particularly electricity, gas, and internet are further squeezing already narrow profit margins for online businesses in Pakistan.”

Perhaps a more promising introduction for the future of the economy of Pakistan would be the introduction of the ‘SME Risk Coverage Scheme’. This scheme addresses one of the most persistent challenges facing small and medium enterprises, and that is access to credit. Under this initiative, the government will cover up to 20% of credit losses for small enterprises and 10% for medium enterprises, thereby significantly reducing the risk profile for banks lending to SMEs. This allows for the encouragement of entrepreneurship and creates employment opportunities, addressing the critical issue of youth unemployment. 

The employment and job creation challenge, thus far, remains one of the greatest weaknesses of the budget. With unemployment at 6.3%, particularly impacting youth aged 15-35, the budget offers limited concrete measures beyond brief mentions of digital transformation and industrial expansion. This proves to be a missed opportunity, particularly given that the government has set an ambitious target for the GDP growth rate of 4.2% for the upcoming fiscal year. In order to achieve such targets and attain sustainable growth, it is important to propose strategies for robust job creation.

The overall market's response to the budget announcement provided mixed signals about investor confidence. The Pakistan Stock Exchange experienced a sharp climb immediately following the budget reveal, suggesting positive sentiment among investors owing to no change in dividend tax and capital gains tax. The budget came as an incentive for equity, real estate, and industrial investors. However, this optimism is not prevalent across all sectors owing to the insufficient initiatives for various industries, such as the SME and VCs, who will have to pay taxes on profits and gains in the coming fiscal year.

While the budget demonstrates fiscal consolidation and provides relief to certain sectors, it still falls short of targeting all aspects needed to sustain an economy, leading to sustainable growth. The new budget is primarily an outlook for debt financing. The challenge lies in creating sustainable strategies that will not only impact economic growth, employment, and the business sector but also meet fiscal targets and improve the standards of living for the citizens.