Foreign Investors Warn Pakistan of Negative Impact on Formal Sector with New Taxes

Foreign Investors Warn Pakistan of Negative Impact on Formal Sector with New Taxes

Islamabad: Foreign investors have advised Pakistan to refrain from introducing new taxes in the forthcoming budget for 2023-24, expressing concerns over the potential negative impact on the country’s formal business sector.

In a meeting held on June 3, 2023, the Overseas Investors Chamber of Commerce and Industry (OICCI), representing foreign investors, presented its key taxation proposals to Finance Minister Muhammad Ishaq Dar. The meeting was attended by high-ranking officials from the Ministry of Finance and Revenue, Federal Board of Revenue (FBR), and the Governor of the State Bank.

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Amir Paracha, the President of OICCI, acknowledged the government’s engagement with leading tax contributors and highlighted the current economic stress faced by the country. Paracha expressed apprehension about the negative to marginally positive GDP growth forecast, high inflation, interest rates, and a weakening currency. These factors have the potential to significantly impact the profitability of tax-paying sectors in the coming year.

OICCI recommended the removal of the Super tax and urged against the introduction of new taxes or surprises in the upcoming budget, emphasizing that such measures would further dampen the formal business sector. The Finance Minister showed great interest in OICCI’s proposals, which aimed to boost economic activity in the future.

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One of the key recommendations put forth by OICCI was the urgent need to broaden the tax base and collect revenue proportionately from each sector of the economy, including trade, services, real estate, and agriculture. OICCI emphasized the availability of sufficient data within the system to significantly expand the tax base and address revenue leakage. The Ministry of Finance appreciated OICCI’s offer of assistance and requested the FBR team to collaborate with technology companies, who are also members of OICCI, to leverage the latest technology tools, including Artificial Intelligence, for identifying potential taxable entities.

OICCI estimated that with dedicated efforts to collect revenue from all segments of the economy, the Tax-to-GDP ratio could be increased to 16% within a few years, compared to the current level of less than 10%. Furthermore, OICCI recommended allocating at least 30% of the current FBR resources to a dedicated Broadening of Tax (BTB) unit.

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The abolition of the Super Tax for all sectors, capping the Corporate Tax rate at 29%, and avoiding any further increase in the effective tax rate were among OICCI’s recommendations. The organization also suggested reducing the minimum tax rate, particularly for listed companies and those in regulated sectors, to 0.25% and allowing a carry forward of minimum tax credit for at least 5 years.

OICCI highlighted the need for simplification of the withholding tax regime, which currently consists of 200 different tax rates across 24 sections, to enhance convenience and improve the business environment.

Addressing tax revenue challenges, OICCI drew attention to massive excise duty evasion in the tobacco industry, estimated at Rs. 80 billion, as well as the issue of duty-not-paid goods and under-invoicing. The organization recommended making import data publicly available and using the latest methods of valuation, including online search and international and regional pricing comparisons, while involving local legal brand owners in custom valuation processes.

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In consideration of the high inflation impact on low-income groups, OICCI proposed that annual incomes up to Rs. 1.2 million be made tax-free, compared to the current threshold of Rs. 0.6 million.

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