Category: Business

The prices of packaged milk and other essential items in Pakistan are set to rise following the government’s decision to impose an 18 per cent General Sales Tax (GST) in the Budget 2024-25, effective from July 1.

The National Assembly (NA) approved the Federal Budget for the fiscal year 2024-25 today, which includes this new tax measure.

Along with packaged milk, the 18 per cent GST will also be applied to herbal and homeopathic medicines, and food items such as branded flour, packaged rice, and lentils. The sales tax will additionally extend to charitable and welfare hospitals.

Despite the Senate Standing Committee on Finance rejecting the proposal, the government has moved forward with the decision. This move is anticipated to increase the cost of living, particularly affecting low-income families who rely on these essential goods.

The approval of the Federal Budget comes amidst rising concerns over inflation. Reports indicate that the International Monetary Fund (IMF) has urged Pakistan to further reduce sales tax exemptions, which is likely to contribute to the inflationary trend in the coming fiscal year. Consequently, the prices of milk, tea, sugar, rice, and flour are expected to rise.

The National Assembly passed the Finance Bill, 2024, following a clause-by-clause reading and amendments process.

All amendments proposed by opposition members were rejected. Minister for Finance and Revenue Muhammad Aurangzeb presented the motion for the consideration of the Finance Bill, which was passed by a majority vote.

The budget has a total outlay of Rs18,870 billion and aims to address various economic challenges facing the country.

However, the imposition of the 18 per cent GST on essential items is likely to put additional financial pressure on the population, raising concerns about the affordability of basic necessities for many Pakistanis.

Remittance flows to Pakistan are expected to rebound and grow by approximately 7 per cent, reaching $28 billion in 2024, with a further increase of 4 per cent to around $30 billion in 2025, according to the World Bank’s ‘Migration and Development Brief 40’ released on Wednesday.

In 2023, Pakistan experienced a 12 per cent decline in remittance inflows, dropping to $27 billion, due to weak economic conditions, including a balance of payments crisis. Despite these challenges, Pakistan emerged as one of the top five recipient countries for remittances in 2023.

“The top five recipient countries for remittances in 2023 are India with an estimated inflow of $120 billion, followed by Mexico ($66 billion), China ($50 billion), the Philippines ($39 billion), and Pakistan ($27 billion),” the report stated.

Despite the global demand for labour in countries like the USA and those within the OECD, Pakistan’s internal economic struggles caused remittances to drop.

The World Bank noted that many remittances were likely sent through informal channels in 2023, due to robust labour market conditions in destination countries.

“Recent economic crises in Pakistan highlighted that delays in reforms not only deterred Foreign Direct Investment (FDI) but also negatively impacted formal remittance flows,” the report added.

Home remittances play a crucial role in supporting Pakistan’s external account, stimulating economic activity, and supplementing the incomes of remittance-dependent households.

During the first 11 months of FY24, workers’ remittances recorded an inflow of $27.093 billion, a 7.7 per cent increase compared to $25.146 billion during the same period in FY23.

The report also revealed that with a share of 8 per cent of GDP, Sri Lanka and Pakistan are tied as the second most remittance-dependent countries in South Asia. Overall, remittances to South Asia grew by 5.2 per cent in 2023, reaching $186 billion, though this growth rate slowed from 12 per cent in 2022.

This growth was primarily driven by India, which saw a 7.5 per cent increase to $120 billion, supported by strong labour markets in the United States and Europe.

The slowdown was partly due to reduced outflows from GCC countries, impacted by declining oil prices and production cuts. Remittance flows to South Asia are projected to grow by 4.2 per cent in 2024.

The World Bank highlighted that the economic conditions in South Asia’s largest recipients—India, Pakistan, and Bangladesh, which collectively receive 91 per cent of the region’s remittances—will be crucial in driving remittance growth.

However, a weak economic recovery in Pakistan and Bangladesh poses a significant risk, potentially leading migrants to favour informal money transfer channels, thus reducing formal remittance growth.

The government is contemplating new measures to enforce tax compliance and amend taxation policies as part of the amended Finance Bill 2024.

Among the key proposals is the potential blocking of bank accounts for non-filers of tax returns, and changes to the sales tax on mobile phone imports.

According to informed sources, the proposal to freeze bank accounts of non-filers was initially included in the original Finance Bill 2024 but was not passed. Under the new plan, if non-filers do not respond to tax notices, their bank accounts may be blocked until they are listed on the Active Taxpayers List (ATL).

Non-filers would still be able to deposit money into their accounts but would be prohibited from withdrawing funds until they comply with filing requirements and their names appear on the ATL.

The Federal Board of Revenue (FBR) will issue an income tax general order (ITGO) listing the names of non-filers whose accounts are to be blocked if this proposal is incorporated into the amended Finance Bill 2024.

Additionally, the amended Finance Bill 2024 proposes replacing the current 18 percent sales tax on imported mobile phones with a fixed sales tax amount, which will vary depending on the brand of the imported phones.

The government is also revising the policy on disallowance of sales promotion and advertising expenses. In the 2024-25 budget, 25 percent of these expenses under royalty arrangements were disallowed. The government is now considering three options to amend this policy.

Firstly, the FBR may reduce the disallowance rate from 25 percent to 20 percent, subject to specific conditions being met. Secondly, the FBR could restore the original status of the law prior to the Finance Bill 2024, which would grant the FBR the authority to create rules for handling such cases.

Lastly, the government might permit a certain percentage of sales promotion and advertising expenses to be allowed.

These proposed changes aim to improve tax compliance and adjust tax policies to better suit economic conditions and business needs. The final decisions will be confirmed once the amended Finance Bill 2024 is formally presented and approved.