The Pakistan budget for the fiscal year 2023-24 was announced amidst the political turmoil and the default risk posed by the stagnant IMF program. The government is eager to strike a balance between getting a big win in the imminent elections and a deal with the IMF to release the much-needed funds. It was already evident that there was little to no chance of an expansionary budget for this fiscal year, as it had to be in line with strict IMF prescriptions. Let's look at the budget's main highlights and explore its negative and positive aspects.

In a Nutshell

• Pakistan Budget 2023-2024 Key Proposals
• Government Expenditure
• Budget 2023: The Positive and Negative Aspects
• Positive Initiatives in the Budget
• Negative Aspects of the Budget
• Bottomline

Pakistan Budget FY 2023-24 Key Proposals

The budget for the fiscal year 2023-24 was presented on the floor of the National Assembly on Friday, 16 June 2023. The government has set a modest growth target with a prime focus to curb inflation and meet the IMF conditions for the fund's release. Here are the main highlights of the budget:

• The total budget outlay for the fiscal year 2023-24 is Rs. 14.48 trillion, an increase from the previous year's budget of Rs. 9.5 trillion in FY2022-23
• The budget deficit FY 2023-24 stands at Rs. 6,923 billion or 5.54% of the GDP
• The GDP growth target is set at 3.5% with hopes to unlock funds from International Monetary Fund (IMF)
• Rs. 1.804 billion was allocated for defence which is a 15.4% increase from the previous year
• The revenue target through PDL has been raised by 60% to Rs. 869 billion
• The agriculture credit limit increased from Rs. 1,800 billion to Rs. 2,250 billion
• Fund allocation increased in Benazir Income Support Programme from Rs.400 billion to Rs.450 billion
• External borrowing is expected to increase by 114% compared to the previous year.
• Lower-level Government employees to get a 35% pay raise and a 30% increment announced for officers
• After distributing the provinces' share amounting to Rs. 5.39 tr, the government's income is insufficient to cover debt servicing expenses.

Pakistan Budget 2023-2024 Government Expenditure

We’ve seen an increment in government expenditures this year. Interest payments have been earmarked a hefty sum of Rs. 7,303 billion. The Public Sector Development Program (PSDP) will receive Rs. 1,150 billion to promote infrastructure development across multiple sectors.

To ensure national security, a substantial budget of Rs. 1,804 billion has been allocated for defence. Civil administrative expenses account for Rs. 714 billion, addressing the administrative functions of the government.

Additionally, Rs. 801 billion has been allocated for pension disbursement, supporting retired individuals and their welfare. These allocations reflect the government's priorities and commitments toward economic growth, public services, and ensuring the well-being of its citizens.

Pakistan Budget FY 2023-24: The Positive and Negative Measures

The current government's various challenges call for a people-friendly budget. It's only a matter of time before the actual impact of the measures will be implemented as we progress toward the general elections. Moreover, the public in general is looking for relief from inflation. Retail investors too are keeping a close eye on the budget and its multi-faced aspects. Let's look at the impact of the new budget in Pakistan on various sectors to help you find suitable investment patterns.

The Positive Initiatives in Budget

Increase in Minimum Wage and Government Employees' Salaries

Bringing in some relief to labourers as the minimum wage will be increased from Rs. 25,000 to Rs. 32,000. The government has decided to give federal government employees a 35% ad-hoc relief in their salaries for those in grades 1-16 and a 30% increase for those in grades 17-22. This is intended to improve their purchasing power. Additionally, their pensions will be increased by 17.5%.

Agriculture Sector

The agriculture sector is the clear winner in the Pakistan budget 2023-24. The finance minister announced an increase in agricultural credit limit from 1800 billion to 2,250 billion in the current financial year.

The government has plans to release Rs. 30 billion to convert 50,000 agricultural tube wells to solar energy each year. Moreover, the customs duty on the import of saplings is abolished, and Rs. 6 billion is allocated for the next year to provide a subsidy on imported urea fertiliser.

Combined harvesters are now exempt from taxes and duties to promote rice production. Farmers will be provided with low markup loans for which Rs. 10 billion have already been allocated.

Incentives to Boost the IT Sector

The government has introduced some reforms to help boost the IT sector in Pakistan.

Export-oriented IT companies can make the most of the lower income tax rate of 0.25% available until June 30, 2026. IT businesses will need to pay a reduced tax on their earnings.

The IT sector is now recognised as an industry. IT businesses can benefit from the lower income tax rates available to industries. In addition, the sales tax rate for IT services has been reduced from 15% to 5%.

Creating a Venture Capital Fund with an investment of Rs. 5 billion will encourage innovation and entrepreneurship in the information technology sector. Subsidized loans amounting to Rs. 10 billion to Small and Medium Enterprises (SMEs) will foster their growth and contribution to the digital economy.

In addition to these measures, IT and IT-enabled service providers will be exempt from paying duties on software and hardware valuing 1% of their total export proceeds.

Tax Incentives for Pakistani Freelancers

There is good news for freelancers as well! Those who make up to $24,000 (USD) annually are exempt from sales tax registration as their status is changed to cottage industry. After the status change, freelancers won't have to register for sales tax. Instead, a simple income tax return will be introduced for them.

Provisions for Public Welfare

The budget for FY 2023-24 introduced important provisions aimed at supporting the welfare of the public and addressing key sectors. Subsidies worth Rs. 35 billion have been allocated for essential food items such as flour, rice, sugar, pulses, and ghee. These subsidies aim to ensure that these items remain affordable and accessible to the general population and help reduce the negative aspects of record-breaking inflation in Pakistan.

Pakistan Baitul Maal will also receive Rs. 4 billion to facilitate welfare programs for vulnerable groups, further promoting social support. Subsidies for electricity, gas, and other sectors amount to a significant Rs. 1,074 billion, aiming to ensure that utility services remain affordable for the general public.

The budget also includes substantial Rs. 1,464 billion allocations for various regions and departments such as Azad Kashmir, Gilgit-Baltistan, Khyber Pakhtunkhwa merged districts, BISP, HEC, Railways, and others. These allocations reflect the government's commitment to regional development, social assistance, and infrastructure improvement, ultimately contributing to the overall well-being and progress of the country.

Education and Skills Development

To ensure quality education and enhance infrastructure, an allocation of Rs. 65 million has been made to the Higher Education Commission (HEC). Moreover, Rs.70 billion has been set aside for development expenditure, further supporting educational enhancements nationwide.

In line with promoting educational initiatives, the Pakistan Endowment Fund has received Rs. 5 billion in funds. Recognizing the importance of technology in education, funds amounting to Rs. 10 billion have been allocated to the Laptop Scheme.

Dining out is Cheaper for Debit/Credit Card Holders

Some relief was announced in the Pakistan budget 2023-24 for those who love to dine out! To promote digital payments via debit/credit cards, mobile wallets or QR scanning options at restaurants, the government has reduced the tax rate from 15% to 5%. So if you decide to pay through your card, you're in for a cheaper price.

Initiatives for SMEs

To promote Small and Medium Enterprises (SMEs), the government has introduced a central bank scheme to refinance their loans at a 6% markup. To remedy the bank's hesitation to provide the loans, the government has decided to take on 20% of the loan risk given to SMEs.

Youth and Women Empowerment

To promote women's empowerment, the government has approved funds amounting to Rs. 5bn for programs that will help uplift women in the country. The Youth Skills program will also receive Rs. 5bn for multiple programs to upskill the younger generation.

Solar Energy Equipment to Get Cheaper

As part of the government's efforts to promote solar energy, a waiver on customs duty for the raw materials used in manufacturing solar energy products was also announced.

This exemption applies to important components like inverters, solar panels, and batteries. It's a significant move supporting the country's development of renewable energy.

Moreover, this decision is expected to reduce the costs of using solar energy for the average consumer, making it more accessible and affordable.

Other Exemptions in Pakistan Budget 2023-24

• No customs duties will be imposed on the raw materials used in the production of diapers and sanitary napkins
• Customs duties will be waived for the import of shrimps, prawns, and juveniles for breeding purposes in commercial fish farms and hatcheries
• The regulatory duty on second-hand clothing will be eliminated
• Sales tax exemption will be granted for contraceptives and their accessories
• Nonresident individuals holding National Identity Cards for Overseas Pakistanis/Pakistan Origin Cards will be exempt from the 2% final withholding tax when purchasing immovable property through foreign remittances sent from abroad
• Builders will enjoy a 10% reduction in tax liability or up to Rs5 million, whichever is lower, for three years. Individuals constructing their own houses will receive a 10% reduction or up to Rs1 million, whichever is lower, for the same duration

The Negative Aspects of the Budget

Additional Tax on the Salaries Class

As the government is taking steps to unlock the IMF tranche, other harsh conditions include additional taxes on the high-income salaried class. In the recently revised Finance Bill 2023, the Federal Board of Revenue (FBR) has changed the income tax rates for different income brackets.

According to the new tax slab for salaried individuals, If your taxable income exceeds Rs. 2,400,000 but does not exceed Rs. 3,600,000, you will be subject to a tax rate of Rs. 165,000 in addition to the 22.5% of the amount exceeding Rs. 2,400,000. This means that a portion of your income above Rs. 2,400,000 will be taxed at this rate.

The tax slab remained unchanged for salaried individuals whose taxable income exceeds Rs. 1,200,000 but does not exceed Rs. 2,400,000. The tax rate remains at Rs. 15,000 and 12.5% of the amount exceeding Rs. 1,200,000.

According to the updated tax brackets, if your taxable income falls between Rs. 3,600,000 and Rs. 6,000,000, the new tax rate would be Rs. 405,000 and an additional 27.5% of the amount exceeding Rs. 3,600,000.

For the salaried class, the revised income tax slab indicates that if your taxable income exceeds Rs. 6,000,000, the tax rate would be Rs. 1,095,000 plus 35% of the amount exceeding Rs. 6,000,000.

Imported Cars Likely to Get Expensive

The government has proposed to remove the cap on fixed duties and taxes for importing old and used vehicles of Asian manufacturers with an engine capacity above 1300cc.

This change is expected to further increase prices for refurbished 1300cc cars from Japan and China, which are quite popular in Pakistan. However, this adjustment will not affect smaller cars like Mira and Alto.

Traditional Fans and Light Bulbs will be Pricier

As part of the Pakistan Budget plan for the year 2023-24, the federal government has introduced Federal Excise Duty (FED) on bulbs that are not energy-efficient and incandescent bulbs.

The government has imposed a FED of Rs 2000 per fan to discourage the use of energy-inefficient fans. The federal cabinet has also implemented a 20% ad-valorem tax on incandescent bulbs to discourage their usage.

Moreover, a 20% regulatory duty (RD) has been imposed on tungsten filament incandescent lamps and their parts to discourage using these energy-inefficient bulbs.

Withholding Tax for Non-Filers

Some measures will affect the general public, like reintroducing a 0.6% advance adjustable withholding tax on non-active taxpayers when they withdraw cash exceeding Rs.50,000. Measures to tax cash withdrawals discourage saving, which was the primary reason the previous government removed withholding tax on cash.

Reimposing this tax, even at a high rate, but only for non-filers, may not effectively encourage people to become taxpayers. However, in some cases, it would be unfair to impose this tax on individuals who are not expected to become taxpayers such as senior citizens who have retired or have no source of income but some cash saved up in the bank.

Super Tax is here to Stay

The Finance Bill proposes to continue the super tax and ensure fairness for individuals earning over Rs150 million. Under the new plan, there will be three different income brackets: Rs350 million to Rs400 million, Rs400 million to Rs500 million, and above Rs500 million. People in these brackets will be subject to tax rates of 6%, 8%, and 10%, respectively.

The Bottomline

In conclusion, the Pakistan Budget 2023-24 has presented many opportunities and challenges for the country. On the one hand, the budget has introduced commendable incentives for the IT sector and freelancers, as well as price reductions and duty exemptions on solar panels and associated machinery are expected to boost the economy and promote sustainable development.

On the other hand, the budget has also introduced some potentially damaging measures, such as an increase in withholding tax on cash withdrawals for non-filers and the removal of the cap on duties for imported used cars from Japan and China with engines above 1300cc.

While these measures may generate additional revenue for the government, they could also adversely affect specific population segments. Ultimately, the success of the Pakistan Budget 2023-24 will depend on the government's ability to strike a balance between promoting growth and ensuring equity while also addressing the diverse needs of the nation's citizens.

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