We propose separation of tax policy and administration functions. Ideally, a dedicated national tax policy unit should be maintained at the Ministry of Finance, while tax administration function may be left to FBR and provincial revenue bodies
A survey by Sustainable Development Policy Institute (SDPI) has indicated that Pakistani firms face over 50 levies in the form of taxes, cess, user fees, permit, licenses and surcharges
High levels of investment and export and employment of greater human and financial resources are among key signs of growth in business enterprises in an economy. Unfortunately, the number of new investments in Pakistan has declined from 63 in 2013 to 35 in 2016.
Conventionally, cost of capital, trade openness, tax and regulatory regime, an enabling infrastructure including energy resources, the ability of the state to enforce contracts, availability of financial intermediation, and improved security situation are seen as key determinants of investment activity.
Pakistan seems to have made some progress on improving its security outlook. Perceptions regarding an improved economic growth rate – owing primarily to China Pakistan Economic Corridor (CPEC) – and low levels of interest rates allowing private sector credit to increase have been other positive signs. However, progress on other indicators seems to be slow.
The return of circular debt in the energy sector and persistent power outages is an example in this regard. Besides, even if businesses adjust to infrastructure deficits, high cost of compliance with tax and regulatory regime is still preventing firms to grow. Weak enforcement of rules of competition and higher sunk costs faced by businesses in entering and exiting markets is also not allowing new firms to grow in small- and large-scale manufacturing and value-added agriculture and livestock sectors.
A survey by Sustainable Development Policy Institute (SDPI) has indicated that Pakistani firms face over 50 levies in the form of taxes, cess, user fees, permit, licenses and surcharges. Additionally businesses face several withholding taxes, besides being charged tax liability in a distorted manner. This includes advance taxes, turnover taxes, further taxes, and super taxes. Taxes are paid at federal, provincial and local government levels, each with its different modus operandi for filing, assessing, submitting payments and auditing them. This increases transactions costs of businesses some of which are transferred to consumers, leading to higher price and loss of welfare. The study suggests that complexity in tax regime is a key reason preventing start-up firms from flourishing.
Another impact of higher number of taxes is loss of economic efficiency. A tax on goods, for example, causes changes in demand and supply. This in turn implies increased local prices of a good in shortage and also higher import bill if the same good is imported. Thus society suffers a higher cost as both buyers and sellers adjust with tax-related expense.
So what may be done in the forthcoming budget to move towards a more fair and just tax regime which provides a positive signal to existing and new enterprises?
Firstly, there should be a reduction in number, rate and type of direct taxes.
Secondly, the government should review proposals put forth by its Tax Reform Commission (TRC) and also study recently made changes to India’s Central and Integrated Goods and Services Tax law to reform its indirect taxes’ regime. The TRC proposals seek reduction in cost of compliance with general sales tax, solution to the issue of multiple and double taxation across provinces, phasing out of federal excise duty and a more transparent structure for taxes on trade.
Thirdly, the forthcoming budget should bring some balance in tax contribution by different sectors of the economy. This is needed to alleviate the manufacturing sector from what it claims is an unjustified burden of taxes as income from agriculture and services sector still remain out of the tax net.
A careful review of taxation on inputs is also needed. For example, keeping a large part of agriculture exempt from direct taxes provides little relief to farmers if agriculture inputs remain subjected to GST and customs duty.
In the case of industry, a level playing field for small and medium enterprises gets distorted if wide ranging exemptions and preferences are provided in the tax code to a select few. The exemptions provided to inputs imported for CPEC is a case in point.
In the service sector, GST rates on services in Pakistan are higher than those in peer economies. This affects export of services from Pakistan. While export of goods in several sectors is exempt from taxes, export of services is not. Both categories of exports require a balanced treatment.
Fourth, the administration of revenue authorities also requires an overhaul. Fear of intrusion by tax authorities prevents private sector entities from declaring all of their activity.
Tax administration can be improved if federal and provincial revenue authorities are allowed full autonomy at least along the lines allowed to the State Bank of Pakistan; and if the recruitment process at these authorities is made of influence of any government ministry or department. Furthermore, information technology-enabled processes can help reduce the interface between tax payers and officials, leading to a reduction in incidence of corruption. And, assessments that use scientific tools such as the geographical information systems can help forensic and other forms of audit.
We also propose separation of tax policy and administration functions. Ideally, a dedicated national tax policy unit should be maintained at the Ministry of Finance, while tax administration function may be left to Federal Board of Revenue (FBR) and provincial revenue bodies. The administrative reforms can be expedited through strengthening of federal and provincial tax Ombudsman offices.
Fifth, a recent pre-budget proposal submitted to the provincial governments by Centre for International Private Enterprise (CIPE) and the SDPI had highlighted the importance of harmonisation of provincial tax rules and regulations. Currently all provinces have different tax rates and tax bases on which rules are applicable. This eventually leads to higher compliance costs and misuse of lower rates in some cases.
Finally, this year saw an unfortunate precedence where none of the Chambers of Commerce and Industries came forward and formally submitted their pre-budget proposals to the Ministry of Finance. A key reason cited was the lack of acknowledgment and evaluation of previous proposals. Such instances can be avoided if the government whole heartedly works towards a more effective and structured public-private dialogue mechanism. The tax committee of Federation of Pakistan Chambers of Commerce and Industries should be part of the Economic Advisory Council (EAC) at the Ministry of Finance and of other steering committees and advisory bodies at Ministries of Commerce, Textile, Industries and Production and the FBR. We also propose the establishment an EAC to advise the provincial finance ministers.
As the federal budget for the next fiscal year is forthcoming, right now is a most appropriate time to consider the reforms mentioned above. These reforms can lower the cost of doing business, increase competitiveness of Pakistani exports and help the growth of private enterprise in Pakistan.
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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.