Huzaima Bukhari and Dr Ikramul Haq
It is heartening to know that the Federal Board of Revenue (FBR) has at last started a meaningful dialogue with experts and stakeholders on vital issues related to policy flaws and operational inadequacies in enforcing tax laws and attracting investment leading to accelerated economic growth and creation of much-needed employment in the country. The myopic approach of meeting revenue target has been the main impediment to devising a rational tax policy for encouraging industralisation through corporatization of business leading to export-led growth and documentation of economy.
A seminar on ‘Tax Policy for Overseas Investors/Non-resident’, held in the Directorate General of Training & Research (Inland Revenue) in Lahore on December 4, 2018, highlighted that the sole stress on irrationally-fixed revenue targets—with main incidence on the weaker sections of society—has created an ugly fiscal mess. The persistent failure of successive governments—military and civil alike—to broaden the tax net, crack down on untaxed assets and ill-gotten wealth, spend public money prudently and remove socio-economic imbalances has pushed Pakistan into a ‘debt prison’. We can get out of it if the political leadership shows an unshakeable determination to pursue a pragmatic reform agenda to transform Pakistan into an egalitarian State—true social democracy with justice for all. Foreign investors will never come to Pakistan unless our own investors first repose confidence in the system and enter into joint ventures with foreign investors.
Abdul Aleem, Chief Executive and Secretary of Overseas Chamber of Commerce & Industry (OICCI), in his well-prepared presentation, highlighted that OICCI members are actively engaged in the economic growth of Pakistan and reinvested US$ 2.7 billion in 2017—US$ 10.4 billion in the past six years. The 189 members of OICCI, representing 35 countries, employing one million people in 14 key sectors, have total asset base of US$ 90 billion. The disincentives, negative perceptions and irritants for not attracting Foreign Direct Investment (FDI) pointed out by Secretary of OICCI were:
1. Taxation Policy and its implementation are focused on organized sector only and resultantly unregistered businesses are flourishing at a rapid pace as compared to the registered ones.
2. Lack of predictable, transparent, and consistent policies e.g. super tax, regulatory. duty, group taxation etc.
3. Pendency of tax refunds for years. Apart from the imposition of higher duties, a long delay in the release of tax refunds is another major issue afflicting the local industry. Many businessmen prefer to sell their finished goods in Pakistan as the government is not clearing tax refunds of different exporters.
4. Substantially large, undocumented economy.
5. Highly complex withholding tax regime. There are over 65 withholding taxes with very high tax rates.
6. High tax burden for compliant taxpayers and multiplicity of taxes, dealing with many tax agencies. Normal Tax Regime (NTR), Presumptive Tax Regime (PTR), Minimum Tax Regime (MTR), Alternate Minimum Tax (AMT), Super Tax (ST) etc.
7. The number of provincial and local taxes and no clarity about Workers Welfare Fund (WWF), Workers Profit Participation Fund (WPPF) in the case of companies having trans-provincial operations.
8. Lack of harmonization and confusion about jurisdiction between FBR and provincial tax agencies as well as among Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA).
9. No centralised authority to focus on FDI.
10. High cost of doing business for manufacturing sector. For example, steel industry is contributing 82% in different types of taxes and duties on the import of raw material whereas the government has imposed only 5% duty on Chinese goods under the free trade agreement.
11. Poor rating on World Bank’s ‘Ease of Doing Business’ parameters.
One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector for enhancing investment resources for economic development. In Pakistan, we have failed to achieve this goal. Recent years have experienced closure of large industries and stagnation in growth. Inconsistent tax policies have forced the business community to search for safe havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding.
Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on retrogressive taxation and incompetence of our economic wizards (sic), Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those who can develop them as quickly as possible.
For technological transfers, rapid industrial growth and employment generation, FDI is desirable. In Pakistan when local investment is dying, expecting FDI is like living in a Fool’s Paradise. Tax incentives play an important role in attracting FDI—which has nose-dived in Pakistan during the last decade. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.
Economic challenges faced by Pakistan are multiple and grim—we are ensnared in a deadly debt trap, but there is no plan or strategy on the part of the rulers to come out of it by exploiting the untapped assets, revolutionizing agriculture and stop wasteful and unproductive expenses. Pakistan faces the herculean task of providing jobs to at least two million young people every year. For achieving this task we will have to ensure that economy grows at the rate of 8% per annum over a long period of time—for this we need investment of 20% of GDP. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, who are our greatest asset—imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth. The prevalent pessimism is due to the attitude of rulers and financial managers, who cannot think beyond what they are “commanded” or “trained” to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness.
The corporate sector is the worst sufferer of FBR’s arid policies—top management of FBR has myopic outlook as evident from over-emphasis on withholding taxes. With low tax rate of 20%, we could have promoted corporate growth. On the contrary, in 2015 FBR imposed ‘Tax on undistributed reserves’ [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move. In 2014, FBR imposed ‘Alternative Corporate Tax’ [section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and expropriatory taxation would further retard corporate sector and discourage future growth.
Pakistan has been facing an ever-worsening unemployment crisis and a perpetual challenge of rapid industrial growth. But no government has ever thought of ‘earmarking of revenue’ for ‘employment zones’. Such employment zones can cater for:
* Creation of employment
* Technological renovations
* Export promotions
* Town renovations; and/or
* Experimentation with new economic management systems.
Pakistan is in dire need of establishing a number of “Employment Zones’, which should be low-tax or tax-free for corporate income and for companies creating new jobs. It will be an effective tool to reduce the mounting unemployment burden and to help boost industrial/business growth. The government should identify areas where structural employment is particularly high and then earmark revenue for establishing employment zones in those areas. Out of total collection of taxes at least 25% should be transferred directly to an independent fund for establishment of ‘employment zones’.
Devising an efficient tax model for attracting FDI, rapid economic growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritants are inconsistent policies, inefficiency, red-tapism, lack of coordination, highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses—both at federal and provincial levels. We need public debate for suggesting solutions to remedy the situation and promote business growth attracting domestic and foreign investment aimed at promoting exports and ensuring much-needed employment generation. On our part for initiating such a debate, we have written a paper, Towards Flat, Low-rate, Broad and Predictable Taxes, available at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf that can be a starting point for remedying the main maladies through holistic reforms aimed at attracting FDI, ensuring ease of doing business, incentivising growth, employment generation and voluntary tax compliance.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty Members at Lahore University of Management Sciences)