Hoping against hope for a ‘bold budget'

Business Recorder

06-06-2025

EDITORIAL: The finance minister, Mohammad Aurangzeb, is describing the upcoming budget as a 'bold budget.' However, the FBR (Federal Board of Revenue) is attempting to impose regressive and lazy taxes through the backdoor measures that can be called anything but certainly not bold.
The tax machinery remains fixated on extracting revenue without broadening the tax base, and in doing so it is, in fact, strangling the formal economy. A glaring example is the government's last-minute attempt to impose a Capital Value Tax (CVT) on movable assets such as cash and gold — a move rightly objected to by the IMF (International Monetary Fund).
The government's mindset appears to be to offer relief through populist measures, while making up the revenue shortfall with ad hoc, irrational proposals. There remains no considerable effort to expand the tax base or bring the under-taxed and untaxed segments into the net.
Simultaneously, the government is proposing to increase the withholding tax (WHT) rate on income from bank deposits and investments in mutual funds — while also attempting to apply CVT on cash. Such steps will only push the economy further into informality, encouraging people to withdraw funds from the banking system and divert savings into gold, foreign currency, or even hide the money under their mattresses.
Pakistan's tax system is already highly regressive, with one of the highest sales tax rates and widespread application of Federal Excise Duty (FED) and WHT (Withholding Tax) across transactions of various goods and services running in parallel with sales tax and federal excise duty in VAT mode. A sizeable portion of income tax is collected at the import stage.
Now, the proposal for a wealth tax adds another layer of burden, not reform, but regression. Previously, the government imposed CVT on foreign assets, including those declared under the amnesty scheme — despite the explicit promise that, upon paying the specified tax, wealth would be accepted as legitimate. The government later backtracked on this commitment, and the CVT, therefore, is now being challenged in court.
Those who declared their wealth feel betrayed, while those who did not are reaping the benefits. Now, even those who have fully declared and paid taxes on their assets are being pushed toward informality. The kind of taxes FBR is proposing will only deepen the grey areas of the economy.
Needless to say, Pakistan already suffers from an abysmally low savings rate, which translates into low investment. The savings-investment gap perpetrates current account deficits, triggering recurring balance of payments crises. Regressive tax measures will only worsen this trend by discouraging savings. The continuation of high-income taxes, including super taxes, is also a significant deterrent to investment and capital formation. The talk of a wealth tax causes further uncertainty and dampens investor confidence.
The core issue is that the government seems intent on taxing everything that is documented — merely plugging in numbers wherever feasible. This mindset, along with coercive tactics, erodes trust between the state and the taxpayer and undermines efforts to broaden the tax base. Domestic investors and family business groups are shifting their wealth abroad. Salaried professionals are seeking jobs outside Pakistan.
Talent and capital are both leaving the country. This outflow seriously threatens privatisation efforts, especially since history shows that when domestic investors have earned returns — such as in the case of IPPs — the state has reneged on its commitments.
Foreign investors, on the other hand, have at times been spared the same treatment. This disparity has made local investors reluctant to bid for Discos unless backed by foreign partners — yet foreign interest remains weak, as seen in the case of KE shareholders who have not received a single rupee as dividend in 20 years.
The government urgently needs to improve investor sentiment and foster an enabling environment for investment. However, the current approach — milking the formal sector to implicitly subsidise the informal one — is exacerbating the problem. If the government genuinely wants to be bold, it must do the right things: build trust, broaden the tax net equitably, and create policies that support sustainable, inclusive economic growth.
Copyright Business Recorder, 2025