A Case of False Alarm
FY25 Budget Commentary | JS Investments
Syed Hussain Haider, CFA, CIPM
Chief Investment Officer
JS Investments
Published June 2024
A Case of the False Alarm
To begin with, contrary to the pre-budget
environment shaped by social media, the actual
outcome has turned out to be significantly more
favorable. This positive development warrants
celebration, at least from the perspective of the
financial markets.
Despite a fairly balanced IMF Staff Report released
earlier last month, the discourse abruptly shifted
towards a more dire narrative, suggesting the Fund
was inclined to impose extremely stringent fiscal
conditions as the budget date approached. While the
bond market remained stable and unperturbed during
this period, the stock market exhibited significant
volatility, largely driven by social media speculation.

Additionally, the timing of the government’s
trip to China exacerbated the situation, causing
widespread confusion, particularly in light of
the IMF’s concerns regarding Pakistan’s power
sector debt obligations to China. Overall, the
situation was markedly overblown, and the
resulting business-as-usual budget now
appears more palatable.
What was particularly different and concerning
this time was the unusual silence in the
corridors of power. Typically, the flow of news
in the days leading up to the budget helps set
the stage for its expected contours. However,
there was a complete lack of information this
time, and the rumor mill was rampant. It was
unsurprising when even the ruling party’s
closest allies within the government expressed
their ignorance about the forthcoming budget
details.
A Case of the False Alarm
Furthermore, there were no significant
contemplations on legislation, economic policy-
making, or innovative problem-solving in the
months leading up to the budget season.
Taxation Without Comprehensive
Reforms
Let us now examine the situation in greater
detail. It is encouraging to see some initial
deliberation in the real estate sector, although
there was potential for more comprehensive
reforms. The introduction of advance tax slabs,
with higher rates applicable to higher market
value categories, on the purchase, sale, or
transfer of immovable property is a positive
step. Additionally, a new taxpayer category has
been introduced for individuals who appear on
the active taxpayer list but have not filed by the
due date, falling between non-filers and filers.
Furthermore, a standardized capital gains tax
(CGT) rate of 15% will now apply irrespective of
the holding period, eliminating previous
exemptions based on different holding periods.
Additionally, it has been indicated, although
further clarity is required, that a higher CGT rate
will apply to individuals not appearing on the
Active Taxpayers’ List.
However, the information asymmetry in the real
estate market, resulting from the different
property rates defined by various entities,
continues to undermine its fundamental role in
the efficient allocation of resources in the
economy. Addressing this issue could have been
a pivotal step toward the reform process in the
real estate sector.
2
 BUDGET AT A GLANCE FY24-25

All figures are in PKR bn FY24 B FY24 R FY25 B

FBR Taxes / Total Tax revenues 9,415 9,252 12,970
Direct 4,255 3,721 5,512
Indirect: 5,160 5,531 7,458
Sales Tax 3,411 3,607 4,919
Customs Duties 1,211 1,324 1,591
Federal Excise 538 600 948
Other Indirect Taxes
Total Non- Tax Revenues 2,963 2,948 4,845
SBP Profits 1,113 972 2,500
Petroleum Levy 869 960 1,281
GIDC 40 3 3
Dividends 121 93 139
Other Non-Tax Revenues 820 920 923
Gross Federal Receipts 12,378 12,200 17,815
Provincial Share (5,399) (5,426) (7,438)
Net Federal Receipts 6,979 6,773 10,377
Total Expenditure 14,485 15,160 18,877
Debt Servicing 7,303 8,251 9,775
Defense 1,804 1,854 2,122
PSDP 950 659 1,400
Subsidies 1,064 1,071 1,363
Civil Govt 714 753 839
Other Expenditure 2,650 2,572 3,378
Federal Budget Deficit (7,506) (8,387) (8,500)
Add:Provincial Surplus 600 539 1,217
Overall Budget Deficit (6,905) (7,848) (7,283)
Add: Debt Servicing 7,303 8,251 9,775
Primary Deficit 398 403 2,492
Nominal GDP 105,817 106,045 124,150

Source: Ministry of Finance

A Case of the False Alarm 3

The Burden on the Salaried Class
On the other hand, the salaried class, as the
more obvious low-hanging fruit, has once again
been targeted, burdened, and adversely
affected. This comes on top of a constant
annual growth rate (CAGR) of 36% in direct tax
collection from the salaried class over the past 5
years, compounded by an average annual
inflation rate of 17% during the same period.

This translates into an almost 60% erosion in

the purchasing power of the common salaried
person. If that wasn’t sufficient, the proposed
changes in the slabs and the minimum annual
income threshold are highly regressive,
disproportionately affecting those in the lowest
income brackets the most.

The salaried class would have been better off if

additional indirect taxes were imposed instead.
For example, according to budgetary estimates,
an additional Rs 20 per liter (+7.5%) in the
Petroleum Development Levy (PDL) proposed in
this budget is expected to generate over Rs 300
billion in additional revenues. This illustrates
that each 1% increase in indirect taxes on fuel
contributes nearly Rs 40 billion in additional
revenues for the government.
In such a scenario, options would have
remained available to the general public, such
as carpooling or reducing their fuel expenses
through other means. However, the imposition
of a direct withholding tax has instead reduced
their disposable income. At the same time,
trillions of rupees’ worth of tax exemptions
continue to exist while the salaried class
remains in peril.

WHT on Salaries
Direct Tax Collection
400
350.0
350 5-Yr CAGR
300
36% 276.1
PKR in bn

250
196.2
200
151.8
150 129.4
100 76.4
50

0
FY19 FY20 FY21 FY22 FY23 FY24E
Source: State Bank of Pakistan (SBP)

A Case of the False Alarm 4

Domestic Dependence in Deficit Financing
The FY25 total FBR tax revenue of Rs 12.97 trillion exceeds the revised estimate for FY24 by a
substantial 40%. Deficit financing is anticipated to be predominantly sourced from domestic funding.
The federal fiscal deficit is projected at 6.8% of GDP, amounting to Rs 8.5 trillion. The two most critical
highlights are: 1) debt servicing costs remaining nearly equivalent to net federal receipts and 2) an
unprecedented SBP profit of Rs 2.5 trillion, indicating a continuation of OMO injections to ensure
sufficient domestic funding for the fiscal deficit. Additionally, it is worth noting that with the
commencement of anticipated monetary easing, further rate cuts from here will create fiscal space
moving into the fiscal year. Given approximately Rs 40 trillion in floating debt, a 1% rate cut implies
gross savings of Rs 400 billion in debt servicing.

Net Federal Receipts vs Debt Servicing

Net Federal Receipts Debt Servicing

10,377
12,000

9,775
8,251
10,000

6,773
8,000
PKR in bn

5,831
4,656
6,000
3,739
3,528
3,278

3,182
2,750
2,620
2,583

2,479
2,218

4,000
2,124

2,091
2,038
1,500
1,348
1,304

1,263

2,000

0
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Fiscal Deficit Financing Sources Privatization

Proceeds
FY24-25 0.4%

Net External
Financing
7.8%

Net Domestic
Financing
91.8%

Source: Ministry of Finance

A Case of the False Alarm 5

Undermining Savings and Investment
Lastly, the proposal to increase the tax on
dividends from mutual funds earning 50% or
more of their income from profit on debt to
25% from 15% presents another setback to
mutual funds as a savings vehicle. While the
local asset management industry has
significantly promoted the savings culture in
Pakistan, particularly over the past two decades,
there continues to be a lack of much-needed
support from the government. Pakistan’s Gross
National Savings rate as a percentage of GDP
remains one of the lowest in the region,
highlighting the urgent need for us to focus on
this issue. Regarding the change in the CGT, had Overall, we would like to emphasize that the
there not been a false alarm (surrounding the budget represented a significant opportunity for
rumored excessively high tax measures ahead of the reform process. The areas needing
the budget), the implementation of a flat 15% improvement are well recognized; an effective
rate would not have been favorable for the implementation mechanism is most crucial
equity market. A flat rate renders investors now. In this regard, clear direction-setting is
indifferent regarding the duration of their stock essential, which appeared to be insufficiently
holdings, whether short or long-term. Note that emphasized in this budget rather than reflecting
the same applies to the CGT on equity mutual a business-as-usual approach.
funds.

Gross National Savings Rate (% of GDP)

40% 37%
33% 33% 34%
35% 31%
30%
30% 27%
25% 22%
20%
15% 11%
10%
5%
0%
India
Pakistan

Vietnam

Indonesia
Nepal
Philipines

Malaysia

Srilanka

Bangladesh

Source: World Bank (2022)

A Case of the False Alarm 6

Conclusion for our Valued Investors Another noteworthy point is that Real Estate
Investment Trusts (REITs), an attractive
and Readers… investment product particularly for small
income groups looking to hedge their purchase
Indeed, the FY25 budget announcement has
power towards real estate, have not received
been significantly better than expected for the
the attention they deserve. REIT management
financial markets, especially considering the
company offerings remain limited due to the
concerns raised before the Budget. However, it
expiration of the tax sunset clause on June 30,
presents mixed outcomes, with specific
2023, which previously allowed for the tax-
measures potentially detrimental to savings and
neutral conversion of real estate holdings into
investment vehicles such as mutual funds. In
REIT units. The reinstatement of this clause was
light of the challenging fiscal environment,
crucial as it facilitates capital creation for
where the domestic savings rate is likely to
common man, ensuring the sustained growth
plummet further from an already concerning
and viability of REITs as an investment vehicle.
low level of 7.3% of GDP as opposed to 9.8% in
This issue was expected to be addressed in the
FY2010, leveraging the Voluntary Provident
budget but remains unresolved. We hope it will
Scheme (VPS) becomes essential. This tax-
be included in post-announcement
efficient saving mechanism offers substantial
clarifications.
relief, making it imperative for all salaried
individuals to actively save through VPS. It is
Current equity market valuations are
also advisable for corporates to facilitate this by
attractively low, presenting a prime opportunity
channeling their provident funds through VPS in
for investors. With the uniformity of tax rates,
order to maximize tax credits and enhance
investing in equity funds and hybrid offerings is
employees' financial security.
highly encouraged. This strategy leverages low
valuations and acts as a hedge against inflation,
The proposed increase in the dividend tax rate
ensuring that savings retain their value over
to 25% for funds deriving more than 50% of
time.
their income from debt raises significant
concerns. While clarity on this regulation is still
We suggest considering personalized guidance
pending, investors can mitigate some impacts
and innovative solutions to adeptly navigate the
by considering an investment in capital
intricacies of the evolving fiscal environment.
preservation funds with low to medium-risk
Drawing on the expertise of an asset
profiles. These funds will continue to offer
management company (AMC) will assist
similar net returns under allowable allocations,
investors in identifying optimal opportunities
presenting a safer haven for investments.
and strategies, ultimately enhancing their
Despite the increased tax impact, we still
financial growth and security.
believe that corporations investing their surplus
in cash funds will continue to benefit. These
investments can still secure savings of 4% and
better rates offered by mutual funds.

A Case of the False Alarm 7

Disclaimer:
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of Pakistan. However, it is important to note that the information provided in this report is based on the assessment and interpretation
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