Finance Act 2019 and Doing Business
FACILITATING business is one of the key agendas of any government across the world by introducing different measures. These measures usually revolve around the cost of doing business and indicators associated to it. Every time when new government comes in, they term as their agenda for economic reforms and development of country.
After coming to power, Pakistan Tehreek-e-Insaf led government came up with amendments in finance bill or to be more precise budget announced by PML (N) government in 2019. They announced in that amended bill initiatives such as health card schemes, building of new houses for the middle-income group. This was followed by tax to be paid by parliamentarians for accommodations and benefits in their possession. Such measures were though somehow encouraging but significant incentivization for the business community was not reflected.
Within their 6 months of power, government introduced some more amendments while bringing in pro-business moves to encourage more businesses and investments to come in. Significant moves in this regard were reduction of taxes on small and medium businesses, abolishing of withholding taxes for filers on bank transactions, giving relief to industries within and outside Special Economic Zones under China Pakistan Economic Corridor (CPEC).
Further to facilitate businesses and encouraging trade withholding tax abolish was also announced showing desperate move to improve exports. Similarly, to promote value addition, certain chemicals and raw materials associated to it were also brought in under zero percent tax and also there was PKR 5 Billion revolving fund was also put on the table. Revolving fund was introduced with the sole objective of financing the state functions on regular intervals.
To facilitate businesses such as sports industry and environment friendly industries there were moves to reduce tax burden and encourage more investors to come in.
Within this whole incentive structure and tax related measures for encouraging business in the country micro, small and medium enterprises were the key targets in this regard. Key measure in this regard include the amount of interest income offered for tax arising from additional advances to micro and small enterprises for the tax year 2020 to 2023 shall be taxed at reduced rate of 20 percent as per the definitions and estimates of State Bank of Pakistan (SBP).
Government within this announcement also mentioned that there will be another medium-term economic reform package coming in highlighting more measures to facilitate business which will be in addition to these above measures. Though encouraging steps being taken, what goes missing from the finance act.
First, there is no significant voice raised for the reduction in compliance cost within tax reforms and tax management system. This compliance cost primarily includes time and documentation involved in filing taxes be at national or provisional level. Therefore, businesses even for reduced tax rates have to file and document for higher number of taxes.
Second, there is no clarity in the definition of filer and non-filer across Pakistan. Ones who are not regular and active part of labor forces are also termed as non-filers and they are taxed at higher rates. E.g. if a student is providing consultancy services at PKR 30,000 and this is the only amount, he is getting for the services over the period of one year but payment is done at once.
He is also taxed and defined as non-filer. This also becomes challenge for small businesses or sole entrepreneurs.
Third, though encouraging but how much medium-term economic reforms strategy will be effective and how much it will have impact on the economic system. Another question in this regard is how long will be the impact and how much it will be sustained if the impacts assumed are significant and positive on the system.
Fourth, within this finance act though it was mentioned that reduction of taxes on MSMEs (Micro, Small and Medium Enterprises) is to encourage growth of this sector which will result in employment generation but on the other hand there is missing link i.e. harmonization within the tax system across the province is missing link. This will therefore hinder the growth of this sector and hence employment generation can come under question.
So, with another reform package around what current federal government should come up with to encourage economic growth, job creation and making system industry friendly? First, there is need to reduce number of taxes. For example, in the current system there are over 60 provisions of withholding taxes which should be reduced. This itself will help in reduction of compliance cost in the form of time and documentation therefore businessman will have more time to do business and less time to face regulators.
Second, there is need to clarify the definition between filer, non-filer and seasonally employed labor force (those just working part-time e.g. students). In the current system non-filers and seasonally employed labor force both are clubbed into non-filers thus affecting the welfare cost.
Third, while going into the medium-term economic reforms strategy there is need to bring in ingredients of long-term program. For this purpose, there is human capital present i.e. there is right man for the right job which need identification and placement accordingly. This will therefore bring in soft-skills to play its pivotal role in the long-term reform agenda.
Fourth, government took into consideration reduction in tax rates but there is need to come up with harmonized and uniform approach across the revenue authorities working in each province. This will help in avoiding the double taxes and making businesses more effective and productive in the long run. For this purpose, there is need to work at policy level with representation from each revenue authority.
The current government, did tried on encouraging the businesses and investment to flow in and take into consideration these offerings which should be the starting point, but for the long run focus should be on reduction of compliance cost, reduction in the tax numbers, clarifying the difference between filers, non-filers and seasonally employed people in the labor force and bringing in harmonized tax policy. This will not only help in reducing the cost of doing business but will also encourage more businesses to come in and have sustained functions resulting in more job creation, more growth and more development.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.