ISLAMABAD: The Pakistan Business Council (PBC) has labeled tax policy in Pakistan as regressive in nature and one that penalizes growth and profits; it concentrates on a very narrow base for tax collection and encourages the informalization of the economy.
In its agenda document for the incoming government, PBC said the tax collection mechanism suffers due to a lack of technology and trained and motivated HR. The lack of transparency and accountability along with lacunas in the law has resulted in a demoralized tax collection machinery which is viewed with suspicion by the taxpayers.
It said Pakistan’s Tax to GDP ratio will remain more or less at the current rate unless there is political will and capacity/capability in the enforcement machinery to formalize the economy and broaden the tax base.
To ensure fiscal space through a broadening as well as a deepening of the tax base, PBC has highlighted a number of issues that need to be addressed:
Tax policy in Pakistan is inconsistent and subject to kneejerk reactions in the face of tax collection pressures. This discourages long-term investments in industry. As an example, entities operating in Special Economic Zones (SEZs) are exempt from all taxes on their income – they, however, have to pay a minimum turnover tax on their revenues.
The corporate sector which by the nature of its structure needs to be transparent and compliant is at a disadvantage when it comes to other forms of business such as AOPs. The tax rate on AOPs is lower than that on corporates discouraging firms from corporatizing. It is important to have a minimum or no tax arbitrage when it comes to various forms of businesses
The formation of Groups and Holding Companies is a prerequisite for consolidation and growth of businesses. Pakistan in 2007 started down this path with a Holding Company law aimed at encouraging the formation of Groups & Holding Companies. However, by taxing intercorporate dividends since 2016 it has reduced the momentum of Group formation. A shareholder in a Holding Company may end up paying tax as high as 61 percent on profits.
The minimum tax regime in Pakistan taxes turnover as opposed to profits, this discourages investments in large-capital-intensive projects where a tax loss is normal in the initial years of operations. Pending the development of FBR capability, as a first, the listed sectors be exempt from turnover tax as listed firms are well audited with multiple audits and transparent accounts.
Pakistan’s corporate tax rate of 29 percent is one of the highest in the region. In addition, to the high tax rate, there are contributions from income to the Workers Welfare Fund (WWF) at 2 percent & Workers Profit Participation Fund (WPFF) at the rate of 6 percent. In addition, successful firms are also subject to a Super Tax. In addition, personal income tax rates of up to 35 percent are leading to an exodus of Pakistan’s best professional talent.
