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Will budget 2020-21 promote investment and help local business?
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During the fiscal periods of 2018-20, outward investment declined from 36.1 per cent to 17 per cent. This declining percentage can be looked into while taking into account the investment from China, Switzerland and the Netherlands. In the fiscal year 2019-20, it was noted that in this period, Chinese investment increased from $ 130.8 million to $ 877.8 million, Swiss investment to $ 45.9 million and investment from the Netherlands increased from $ 69 million to $ 108.5 million.

Sectors in which net investment was seen primarily visible include oil and gas, financial business, textiles, trade, construction, power, chemicals, transport and communication (IT and Telecom).

With the controls from the government and investment management, foreign direct investment (FDI) in the fiscal year 2019-20 doubled from $900 million to $2150 million. To ensure this much appreciation in the investment, the government took steps to improve the ease of doing business; one of the indicators to facilitate businesses and investment.

Therefore, it can be said that the government succeeded in the investment front by providing different concessions and exemptions available. In this budget, the Government of Pakistan has also proposed important measures to promote investment with a key focus on indicators of ease of doing business. First and foremost, the thing proposed in this budget is the simplification of the withholding tax regime where the proposal is to omit nine withholding taxes and merge five taxes. Similarly, another important thing to promote investment in the country, as proposed by the government, is the rationalisation of certain taxes; increasing the threshold level to reduce compliance cost for taxpayers and strengthening of other mechanisms through different means, including non-tax measures such as dispute resolution framework.

These measures will help achieve success while dealing with investment and business to a certain level and may help in stabilising the system. But there are still areas left in the business, which may hinder the promotion of investment and the local business from developing over time.

First and foremost, no further clarity is being made on the point of withholding tax i.e. amalgamation of withholding taxes. Primarily question, which can be posed here, is the type of taxes with which amalgamation will be made and what will be the new rate of taxes? This will thus, be a major uncertainty for the business community bringing in investment be it foreign or domestic.

Second, this budget remained silent on the role of the board of investment and its mechanism. This was never discussed at any level of budget-making. Thus, clarity in investment policy framework is another challenge to be faced by investors in the long run. Confusion in the investment framework is primarily because of multiple tiers of decision-making. Thus, there is a challenge for investors to decide upon investment.

Third, though this budget claimed to have given tax refunds in the past, this policy didn’t get translated because of which business community felt discouragement while investors also seemed hesitant. This fiscal year (2021), the government has again signalled tax refunds yet no clarity in policy matters related to refunds has been mentioned. It can, therefore, be said that delays in refunds are because of banks’ hesitance to pay money to businesspersons. It has, therefore, resulted in challenges associated with the growth of the business.

Fourth, while there were packages announced for different sectors in the time of COVID-19 to facilitate and support businesses and bring in investment, it has been noted that these packages are yet to be translated. Being the primary bank dealing with money circulation in the economy, the State Bank of Pakistan announced that there will be no deduction on transactions for which banks are to facilitate the business community and investors. Banks in this regard are hesitant to keep money in circulation as there is no profit or return for banks. The budget remained silent on addressing this challenge.

Confusion in the investment framework is primarily because of multiple tiers of decision-making

Fifth, the budget didn’t answer anything related to the domestic economy. As is the current scenario of COVID-19, there can’t be global trade between countries. The need of the time was to talk about the domestic economy; to keep the system active and engaged and to keep money in circulation. The opportunity missed through this budget would have helped in strengthening local businesses, which, in the long run, with a sustained approach, could have been a reason for investment.

While looking at these challenges and looking towards the government’s actions, which, in the end, will result in stabilisation only, the government needs to look into several things. First, there is a need for the simplification of the tax regime across the board with less dependence on indirect taxes. For this purpose, the need is to further reduce withholding taxes, harmonise the tax system with less dependence on tax bodies i.e. reduction should be in the number of tax bodies.

There is also a need to harmonise the government system for which budget revisions should reflect an integrated approach. This harmonised government system can be achieved through the involvement of stakeholders from both public and private sector. The involvement of different stakeholders will help in identifying and analysing the demands. This will further help in smoothening of the process, reduction of the compliance and simplification of the system.

Besides this, follow-up sessions on the budget should look into the institutional and structural changes within the system to bring in space to breath for business and investment.

Though the government did significantly well to stabilise the investment and business, the promotion of investment and business, in the long run, resulting in growth has not been a part of the talk. Government’s efforts will help stabilise the system but investment and business, in the long run, will require not just fiscal allocations but also a simplification of procedures and a revision of governance frameworks, including the integrated approach of governance.

This article was originally published at: https://dailytimes.com.pk/627610/will-budget-2020-21-promote-investment-and-help-local-business/

The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.