Super ‘Smart’ Tax

The Pakistan government has imposed super tax on 13 sectors, including sugar, banking, textile, cement, steel, automobiles, and LNG terminals, with the purpose of reducing the budget deficit. Such policies will negatively impact economic growth.

By Dr. Aadil Nakhoda | August 2022

The Pakistan government faces yet another predicament as it continues to introduce measures that are intended to reduce the burgeoning deficits and stabilize the economy. Although, the goal is to secure the much-needed financing from the IMF, the route to the ‘golden treasure’ is laden with contentious unpopular decisions that can hurt the economy at a time when business confidence is particularly low. One such measure adopted by the government was to impose a super tax on several sectors, some that are crucial in generating much needed exports from Pakistan, while the other is to tax the rich by imposing a ‘poverty alleviation’ tax. The purpose of such tax is to meet financing needs by increasing the tax burden on those already in the tax net rather than seeking to expand the tax net by targeting the undocumented. Further, a super tax could deter larger firms from investing in productive activities if they believe that the government could impose super tax on the profits earned, particularly at times when the economic conditions are poor.

The super tax is imposed on 13 sectors, including sugar, banking, textile, cement, steel, automobiles, and LNG terminals, with the purpose to reduce the budget deficit. However, such policies can have implications on economic growth, particularly if large businesses curtail their activities due to increased uncertainty from government policies. The overall quantum index of large-scale manufacturing was reported at 197.95 on 31st March 2022, the highest level reported. It decreased to 152.85 on 30th April 2022. Although, the fluctuations in the index have a seasonal effect, the sharp increase in the index between July 2021 and March 2022 has been unprecedented. The subsequent collapse in April 2022 is also disconcerting, indicating the rising challenges faced by the industries. Specific industries such as the cement, automobile and fertilizer industries had performed relatively better as they recovered from the COVID-19 induced adverse shock. These industries were provided incentives to boost their production and had responded by increasing their production. According to the data from the Pakistan Economic Survey 2021- 2022, the large-scale manufacturing sector had grown at 10.4%, faster than the industrial sector that grew at 7.2%. The banking sector too had expanded considerably in FY22. It points to the vibrancy of the large-scale businesses, which will be adversely impacted with a poor set of policies.

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