Premature reversal of tax exemption hurt investors’ sentiment: PBC

Premature reversal of tax exemption hurt investors’ sentiment: PBC

KARACHI: Pakistan Business Council (PBC) has said that the premature reversal of tax exemption hurt the investor sentiments.

In a letter sent to Finance Minister Shaukat Tarin, the PBC said that the recent reversal of tax exemptions, some which had just a few years to run, and others which were conceptually aimed at promoting scale and consolidation through formation of groups, wider shareholding through listing, and resultant improved governance and formalization of the economy have hurt the investor sentiment.

“We urge you to restore the incentive to list companies, exempt inter-corporate dividends from tax (and from withholding tax), allow corporate players in agriculture to avail the same tax benefits as the unincorporated and restore the tax benefits on income arising from use of intellectual property abroad. The earlier termination of tax credits on investment in plant and machinery also needs to e reversed,” the PBC said.

The business council about the fiscal targets said that a 27 percent increase in the tax target for fiscal year 2021/2022, in an economy forecast to grow at a nominal rate of under 14 percent, with little evidence of improvement in FBR’s capability to broaden the tax base, bodes ill for existing tax-payers.

“Successive governments have lacked the political will to pursue non-taxpayers. Relying on existing taxpayers for additional revenue accelerates the informalization of the economy,” it said.

The PBC has long advocated for the separation of fiscal policy from collection of taxes and for addressing the talent and technology gaps that prevent the FBR from broadening the tax base.

“Unrealistic tax targets is putting the cart before the horse. Taxing the already taxed is akin to killing the goose that lays the golden eggs,” the PBC said.

Fundamental fiscal reforms will take time to deliver, and the benefits will be sustainable. We must not be distracted by short-term targets.

Regarding energy costs, the PBC said that the mooted 27 percent increase in power tariff, on top of the already uncompetitive energy cost, the burden of which will fall entirely on the shoulders of honest customers, is not a growth driver.

The narrative on denying the five main export sectors of energy at a regionally competitive cost and forcing the captive power producers to switch to the grid, reliability of which is yet unproven, does not portend well for exports.

Efforts should instead be focused on fixing the inefficiency and losses of transmission and distribution. Ominously, the delay in settlement of the agreed dues of the IPP’s threatens the gains made on renegotiating capacity charges. Industry, both export oriented and domestic is the engine of employment.

Burdening it with the cost of systemic inefficiencies and cross subsidies to residential users impedes its competitiveness and restricts its capability to create jobs.

Subsidies are best addressed through the Ehsaas Programme. Allow industry to create livelihoods and generate taxable revenues. Facilitate the major export sector through the much-awaited Textiles Policy.

The PBC is encouraged by the State Bank of Pakistan’s differentiated treatment of demand-pull and supply/utility cost-push inflation. However, if the latter causes remain unchecked, there is a high risk of a multiplier effect on core inflation. Higher borrowing costs on this account will also sap growth.

The business council said that the Temporary Economic Refinance Facility (TERF) which lapsed in March led directly to over Rs400 billion investment in plant and machinery and indirectly to an approx. Rs300 billion investment in land and industrial buildings.

This will add jobs, enhance exports, and strengthen “Make-in-Pakistan.” The cost of the interest subsidy will more than be covered by additional tax revenues. At least retaining a version of TERF should be considered for medium sized businesses. Beyond the immediate timeframe, SME and longer-term lending can be taken over by properly configured and resourced development finance institutions which need to be established.

It said that the current fiscal policy discourages incorporation of businesses by levying tax on dividends and subjecting gains on sale of shares to CGT, irrespective of the holding period. Unincorporated businesses escape both these taxes. Manufacturers suffer from taxation at each stage of the value-chain whilst commercial importers benefit from presumptive tax at the import stage. Minimum tax based on turnover, besides being inequitable, also acts as a barrier to entry of new players by increasing the capital investment required to fund the tax liability until their businesses become profitable. Incentives hitherto available to motivate business with the formal sector have been removed.

The PBC urged a comparative study of the fiscal policy affecting corporatization and the manufacturing sector.

The rate at which import tariffs on raw and intermediate industrial inputs is being reduced could be accelerated to promote domestic manufacturing.

Food shortages and inflation risk hunger, unrest and law and order stability. Higher cost of food also reduces discretionary spending, lowering demand, a critical driver of growth. The government should walk the talk on “agriculture emergency,” especially on wheat and cotton. These have the greatest impact on hunger, jobs, and exports.

Impeding investment, cost, and ease of doing business are colonial-era, complex, time consuming, paper-based, and personal interaction-reliant bureaucratic processes. Fragmentation between the federal and provincial authorities has further made doing business more complex – taxation and unharmonized food standards are just two examples. We are encouraged by the government’s resolve under the Pakistan Regulatory Modernization Initiative (PRMI) and Civil Service Reforms to address the regulatory environment. The recent move to unify reporting of federal and provincial GST on a common portal and the Single Window initiative to speed up clearance of consignments portend well for the economy. The Raast and Roshan digital initiatives undertaken by the SBP also hold potential to promote financial inclusivity, visibility, speed, and cost of transactions. The lessons on digital “Know-Your-Customer” can be emulated in the wider economy – in opening of bank and broker accounts, for instance. Supplemented by fiscal incentives, digital transactions would also help broaden the tax base.

The continued bleeding of revenue by State-Owned Enterprises (SOEs) remains a lingering concern. This depletes the amount that the government can invest in socio-economic development. Several attempts to restructure and dispose SOEs have failed. Impeding this process are: PPRA regulations, public sector recruitment rules and fear of action by the National Accountability Bureau (NAB). These and other factors that thwarted the success of Sarmaya-e-Pakistan need to be addressed to arrest the bleeding of SOEs.

Reform of the NAB law is necessary to address the near paralysis of decision making by the bureaucracy. Two examples, from just the critical energy sector are delay in settlement of amounts due to IPPs and decisions affecting K-Electric.