Taxing Nation’s Savings: At What Cost?
Understanding the Impact of Budget Decisions on Your Investments
Pakistan’s Federal Budget 2024-25 continues a trend we’ve seen for years—more taxes and fewer relief options. While the goal remains to reduce the country’s budget deficit, the way it’s being done may do more harm than good, especially for ordinary citizens trying to save and invest responsibly.
What’s Changing?
The primary recommendation of this budget is to do away with tax incentives that encourage people to save money by:
• Purchasing health and life insurance
• Voluntary pension plans and mutual funds
These refunds are currently permitted by Sections 62 and 63 of the Income Tax Ordinance of 2001, which reduce investors’ tax obligations in these official savings vehicles.. The government now seeks to eliminate these advantages.
Why Is This an Issue?
On paper, these adjustments might not seem like much, but they have a big impact on the economy:
- Pakistan’s savings rate is already low.
While nations like Bangladesh and India save between 28 and 30 percent of their GDP, our national savings rate is less than 15 percent. Investments remain low when little money is saved. Additionally, economic growth and job creation slow down when investments decline. - Our Capital Markets Are Getting Smaller
Among the lowest in the past 20 years, the total value of businesses listed on the Pakistan Stock Exchange (PSX) is only around 10% of the GDP. Reducing tax incentives deters people from investing in mutual funds and capital markets. - Fewer Individuals Will Purchase Insurance or Invest
The majority of pension plan and mutual fund investors are salaried people who depend on tax credits. Many might quit investing or cancel insurance plans if these incentives are removed.
• Only 300,000 Pakistanis invest in the stock market—compared to 50 million in India.
• Insurance coverage in Pakistan is just 0.6% of GDP, compared to India’s 3%.
• Mutual fund industry in Pakistan has only 1.3% market cap, compared to 15% in India.
So why take away the little motivation people have to invest?
Is the Tax Gain Worth It?
The government expects to save Rs. 3.9 billion by ending these tax incentives. But here’s the catch:
• If fewer people buy insurance or invest, companies like insurance providers and mutual funds will earn less.
• These businesses also pay dividends to investors, which are subject to taxation; lower profits translate into less corporate tax collected by the Federal Board of Revenue (FBR). Reduced profit means fewer dividends, which means less total tax income. Therefore, rather than raising taxes, this action may ultimately result in a decrease in the overall amount of taxes collected.
What’s at Stake?
These sectors—insurance, pensions, mutual funds—are essential for Pakistan’s financial health and economic growth. Right now:
• The mutual fund sector manages over Rs. 340 billion in regular investments and Rs. 39 billion in pension schemes.
• Insurance companies have invested around Rs. 2 trillion, much of it in capital markets and government securities.
If fewer people invest due to lost tax benefits:
• These companies will shrink.
• Less money will flow into the stock and bond markets.
• Capital markets may collapse further, leading to job losses and economic instability.
Final Thoughts: Let’s Encourage, Not Punish, Saving
At a time when we need to encourage formal savings and investment in Pakistan, these proposals send the opposite message. Rather than helping the government raise revenue, they might actually reduce it—and hurt the financial future of everyday Pakistanis.
We hope that the government will reevaluate this anti-savings policy and keep assisting the industries that form the foundation of our economy.
Do You Need Assistance with FBR Issues or Investment Taxation?
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