The coalition government will present its first budget for FY25 on June 10, 2024, in the parliament. This is aligned with recent news suggesting the Staff Level Agreement (SLA) might be formally announced by late June 2024 or early July 2024.

This follows assurance of compliance with prior actions and amendments in some tax laws via Finance Bill 2024-25.

The Budget FY25 is expected to fulfill a prior action of the IMF. This will be crucial for moving Pakistan closer to the SLA.

The budget aims to achieve a primary surplus of Rs. 500-700 billion or 0.4-0.5 percent of the GDP. The FBR revenue target is set at Rs. 11.5-12.5 trillion, marking a 25-33 percent increase from this year’s estimated Rs. 9.2-9.4 trillion.

Major Changes in New Budget: A Detailed Look

The government plans to introduce several new revenue measures in the upcoming budget. These changes are designed to increase the government’s income. Here are some of the proposed changes:

1. The GST could go up by 1% to 19%.
2. Pensioners may have to start paying taxes.
3. Exemptions for FATA/PATA regions might be removed.
4. Higher taxes are expected for those who do not file taxes.
5. A Carbon Tax or an increase in Petroleum Development Levy (PDL) may be imposed.
6. Personal income tax rules could change.
7. Retailers and wholesalers might have to start paying taxes.
8. Taxes on cigarettes may increase.
9. Exemptions on certain goods (like Pharma and food) might be removed, or the sales tax on them could be increased.

Other countries, following IMF programs, have also made changes to their revenue systems. These include:

1. Introducing taxes on gifts, wealth transfers, and inheritances.
2. Removing tax breaks for specific sectors and lowering corporate income taxes.
3. Applying VAT on E-commerce transactions with non-residents.
4. Simplifying VAT laws and getting rid of VAT exemptions.
5. Cutting tax breaks for state-owned enterprises (SOEs).
6. Adding an environmental fee for owning multiple cars.
7. Raising taxes on land registration and foreign travel.

FY25 Budget Aims for Fair Taxation to Fund Essential Services

These changes are aimed at making sure that everyone pays their fair share of taxes and that the government has enough money to pay for important services like schools and hospitals.

Pakistan’s FY25 budget projects an increase in FBR tax collection from direct taxes, aiming for 25% YoY growth. This will come from higher tax rates and bringing more people into the tax system.

Non-tax revenue is expected to provide substantial support, with a target of Rs. 2.1 trillion. This is 28% lower than FY24, but could surpass targets as seen previously.

Economic indicators include a GDP growth target of 3.6% and an inflation target of 12.5-12.7%.

The KSE 100 is expected to see PE re-rating due to approval of a new IMF financing facility. Current forward PE of 3.8x may revert to its historical mean of 6.93x.

Understanding Government Debt Servicing and Fiscal Deficit in FY25

In FY25, expenses are higher, with Rs. 16.7 trillion outlay, up 15% from last year’s budget. Debt servicing stands at Rs. 9.7 trillion, 33% higher YoY than FY24 budgeted levels.

This could mean 10% higher government debt and unchanged interest rates. Or it could mean a higher government debt due to monetary easing.

Assuming a 200bp cut in interest rates, there’s a 23% YoY jump in government debt. Controlled expansion in debt and monetary easing could save money for the country’s fiscal account.

The development expense budget is expected to exceed Rs. 1 trillion, similar to last year. The Public Sector Development Program (PSDP) is set at Rs. 1 trillion.

Subsidy and Pension expenses are expected to increase 42% and 20% YoY, respectively, as a percentage of GDP in the budget. Defense budget is limited to Rs. 2 trillion, up 11% YoY.

FY24 saw its first primary surplus since FY04. FY25 aims for another surplus. But Rs. 10 trillion in interest payments could lead to a 6.8% fiscal deficit (% of GDP), potentially hindering growth for another year.

Impact of Budget on PSX: What Investors Need to Know

Pakistan’s recent budget could have a mixed impact on the PSX, particularly in the short term. However, if the government introduces effective revenue measures as outlined by the IMF, the market could see positive effects in the medium term.

Corporate earnings, although possibly affected, may be overlooked if the tax measures are perceived as realistic.

To achieve its high tax goals, the government might increase taxes on dividends, capital gains, and interest income.

Any changes in these taxes from ‘full and final’ to normal tax could affect net returns for stock market investors.

The PSX Index could potentially rise to 87,000 points by December 2024 and 106,000 by June 2025. This is contingent upon the successful start and completion of the IMF program review.

In anticipation of the ‘reform dividend,’ equity markets are expected to absorb negative impacts of higher taxes on listed companies.

This is crucial as Pakistan seeks a larger IMF program to manage its approximately US$25 billion annual external financing needs.

To read our blog on “Additional tax offered on cigarettes in budget 2024-25,” click here

Bilquees Anwar Content Executive

Content Executive at TechX with over 3 years of experience in Creative Writing and Content Strategy. A published author of eBooks, she is passionate about exploring diverse subjects and adept at crafting engaging content for broad audiences.

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