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Economic Survey reiterates a Financial Regression for Pakistan as per the Budgetary Outlay

Tax exemptions to various sectors have burdened Pakistan more than USD 21 billion this year, a higher amount than the USD 17 billion the country is required to repay against its maturing commercial and bilateral external debt, according to the latest economic survey. Unveiled by Finance Minister Muhammad Aurangzeb on Monday, the Economic Survey of Pakistan 2024-25 documents various economic developments and indicators in a fiscal year.

According to the document, the cost of tax exemptions surged to a record Rs 5.8 trillion in the current fiscal year (2024-25), a rise of nearly Rs 2 trillion in the first year of the present government from the previous fiscal year’s Rs 3.9 trillion. Pakistan is required to repay this year against its maturing commercial and bilateral external debt owed to China, Saudi Arabia, the United Arab Emirates, and Kuwait.

The survey showed that the jump in tax expenditure figure this year reflects a Rs 1.96 trillion or 51% increase, despite the Pakistan Muslim League-Nawaz (PML-N) government removing several exemptions in its last budget. Despite multiple rounds of withdrawing tax concessions and exemptions, the amount has continued to rise annually, according to the economic survey. These exemptions, approved over the years, are protected under three distinct tax laws.

The survey reported sales tax exemptions worth Rs 4.3 trillion in the outgoing fiscal year, compared to Rs 2.9 trillion in the previous year, a nearly 50 per cent rise. Income tax exemptions have summed Rs. 801 billion in the outgoing fiscal year, up 68% from Rs 477 billion last year, according to the Federal Board of Revenue’s estimates. This increase came despite the government’s decision to shift more tax burdens onto salaried individuals while sparing other sectors like retailers.

Customs duty exemptions increased to Rs 786 billion this fiscal year, up Rs. 243 billion or 45% from Rs. 543 billion last year, the survey showed. The reported Rs. 5.8 trillion in “tax expenditures for 2025” casts doubt on the credibility of previously published losses, according to the report.

Despite efforts by successive governments to scale back and eliminate tax expenditures, it continues to grow steadily. According to the newspaper, this indicates either the introduction of numerous hidden tax exemptions during the fiscal year or the understatement of the prior year’s figures. There has been no extraordinary increase in economic activity to justify such a sharp spike in tax exemption costs, according to the report.

Meanwhile, Pakistan will unveil on Tuesday its annual federal budget for the next fiscal which is likely to see a substantial hike in defence expenditure. The total budget size is expected to be Rs. 17.6 trillion. The government eyes a record revenue target of nearly Rs 14 trillion for FY-2025-26, a 22% increase over projections for the outgoing fiscal year. It is set to target 4.2% GDP growth and limit inflation to 7.5%.

The proposed tax-to-GDP ratio target for FY26 is 12.3%, which is still short of 14%.

The highlight of the budget would be the defence expenditure, which is expected to get broad support from the lawmakers following Pakistan’s recent confrontations with India. Though there is no official word about the increase in the defence expenditure, the government had endorsed an 18% increase in defence spending during the budget-making process.

Both, Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N) agreed to increase the defence budget by 18% to over Rs 2.5 trillion in light of the prevailing security threats. In the current fiscal of 2024-25, the government allocated Rs 2,122 billion for defence spending, reflecting a 14.98% increase over Rs. 1,804 billion budgeted for the fiscal year 2023-24. The defence sector expenses are the second-biggest component of the annual expenditure of the country after debt payments. In the current year, Rs 9,700 billion allocated for debt servicing constitutes the single biggest expense of the country.

Team Maverick

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