Negotiators also apprised the global lender about plans to separate tax policy from the Federal Board of Revenue (FBR) functions, a move that had been initiated under the Special Investment Facilitation Council (SIFC)…. The interim finance minister informed the IMF about plans to restructure the FBR—Pakistan vows to stop wasteful expenses, The Express Tribune, May 9, 2023
The International Monetary Fund (IMF) has sought a briefing from the Finance ministry on the Special Investment Facility Council (SIFC)….the IMF is concerned about the impact of SIFC’s actions on tax collection and subsidies—IMF seeks briefing on SIFC’s role, Profit, November 8, 2023
This survey shows that international and national evidence points out that taxation and growth are negatively correlated. It is time Pakistan took this seriously and changed the adjustment and growth model.—Taxation and Economic Growth: A Review of Evidence from the Taxation Research by Sarah Nizamani, Research Associate, Pakistan Institute of Development Economics (PIDE)
According to a press report, the caretaker finance minister, Dr. Shamshad Akhtar, during recent talks with a team from the International Monetary Fund (IMF), told them that she constituted a task force that was working to bring structural changes to the taxation system and there was a proposal under review to separate tax policy from Federal Board of Revenue (FBR).
The report further revealed that “there was no convergence between the task force and the FBR on many issues.” Till today, no restructuring plan of FBR or blueprint for tax policy reform has been presented to the caretaker prime minster or for the endorsement of the Special Investment Facility Council (SIFC). It may be recalled that the federal cabinet during the government of Pakistan Tehreek-e-Insaf in November 2018 approved a separate tax policy board from revenue administration, but failed to implement this decision.
According to another press report, “the IMF is concerned about the role of the SIFC.” Their worry is related to tax exemptions vis-à-vis foreign direct investment to lure the rulers of Saudi Arabia, United Arab Emirates, Qatar and Kuwait etc. An independent think tank from Islamabad has also raised some fundamental concerns about the SIFC in a report, and aptly observed: “The mandate of SIFC neither include institutional reforms nor simplification of procedures despite the acknowledgement that complexity of business regulations and bureaucratic hurdles are the reasons behind dismal state of economy.”
The report from the think tank further suggests: “Reforms should start from the government departments to create ease for the Pakistani entrepreneurs and improve provision of public services instead of creating new councils and adding more complexities. Creation of a parallel body to expedite the decision-making process and requisite approvals may not be a sustainable solution until the concerned government departments are reformed.”
The daunting challenge, persistently faced by Pakistan, for the last many decades is aptly highlighted in a Policy Paper prepared by the Pakistan Institute of Development Economic (PIDE), suggesting that “Not only is the tax system complex, the cost of compliance is high. Taxpayers are also discriminated on the basis of being filer and non-filer. Higher taxes, narrow base, differential treatments, and exemptions become hurdles in achieving growth and employment and block flow of revenue.”
All governments, civil or military, through decades of their unthinking fidelity to this faulty approach – of unduly burdening the poor and the middle class with the brunt of taxes - have created a fiscal mess that has virtually crippled the economic sovereignty of Pakistan.
The Ministry of Finance and the FBR have never bothered (seriously) to start a meaningful dialogue with experts and stakeholders on vital issues related to tax policy flaws and operational difficulties affecting investment that could have led to accelerated and sustainable economic growth and creation of much-needed employment. The myopic approach and obsession of fixing and meeting higher revenue targets have been the main impediment in devising a rational tax policy for encouraging investment, saving and industralization through the corporatization of business (we have now one of the highest corporate taxes in the world), ensuring export-led growth, knowledge-based economy, innovations and documentation of economy.
It is worthwhile to mention that a number of recommendations for achieving the above goals were presented in a seminar on ‘Tax Policy for Overseas Investors/Non-residents’, held in the apex training institute of Inland Revenue Service in 2018. The seminar highlighted that the sole stress on irrationally-fixed revenue targets—with principal incidence on the weaker sections of society—has been the main malady. All governments, civil or military, through decades of their unthinking fidelity to this faulty approach – of unduly burdening the poor and the middle class with the brunt of taxes - have created a fiscal mess that has virtually crippled the economic sovereignty of Pakistan.
The persistent failure of successive governments to lower taxes, broaden the tax base, crack down on untaxed assets and ill-gotten wealth, spend public money prudently and remove socioeconomic imbalances has pushed Pakistan into a ‘debt prison.’ We cannot come out of debt enslavement unless men in mufti and khaki show an unshakeable determination to pursue a pragmatic reform agenda to transform Pakistan into a true social democracy, with justice for all. Foreign investors will never come to Pakistan unless our own investors first repose confidence in the system and enter into joint ventures with foreign investors.
The disincentives and irritants in tax system dissuading both local and the foreign investors, repeatedly pointed out by experts and stakeholders, remain unattended. Taxation policy and its implementation are focused on the organized sector only, and consequently, unregistered businesses are flourishing at a rapid pace relative to registered ones, accentuating the monstrous size of the undocumented economy. There is a lack of predictable, transparent, and consistent policies e.g. super tax, regulatory duty and group taxation etc.
Apart from the imposition of higher duties, the long delays in the release of tax refunds is a major issue afflicting industry. Many businessmen prefer to sell their finished goods in Pakistan as the government has not clearing tax refunds of different exporters.
Pakistan still struggles with a needlessly complex withholding tax regime. There are over 50 withholding taxes, with very high tax rates. This results in a high tax burden for compliant taxpayers and the multiplicity of taxes, dealing with multiple tax agencies. Normal Tax Regime (NTR), Presumptive Tax Regime (PTR), Minimum Tax Regime (MTR), Alternate Minimum Tax (AMT), Super Tax (ST) etc are just some examples of this.
Taxation policy and its implementation are focused on the organized sector only, and consequently, unregistered businesses are flourishing at a rapid pace relative to registered ones, accentuating the monstrous size of the undocumented economy.
The sheer number of provincial and local taxes, and no clarity about Workers Welfare Fund (WWF), Workers Profit Participation Fund (WPPF) in the case of companies having trans-provincial operations further complicates the system. There is a lack of harmonization, and widespread confusion about jurisdiction between FBR and provincial tax agencies, as well as among Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA).
The manufacturing sector is burdened with a high cost of doing business. For example, many industries are contributing nearly 80 percent in different types of taxes and duties on the import of raw material, whereas the government has imposed only a 5% duty on Chinese goods under the free trade agreement.
Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on retrogressive taxation and incompetence of our economic wizards, Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations—modern economies are knowledge-based and future is for those who can develop them as quickly as possible.
One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector for enhancing investment resources for economic development. In Pakistan, we have failed to achieve this goal. Inconsistent tax policies have forced the business community to search for safer havens abroad, depriving the country of invaluable capital.
Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding and training. For technological transfers, rapid industrial growth and employment generation, FDI is desirable. In Pakistan, when local investment is dying, expecting FDI is like living in a Fool’s Paradise.
Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Unfortunately, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.
The economic challenges faced by Pakistan are multiple and grim—we are ensnared in a deadly debt trap, but there is no plan or strategy on the part of the rulers to come out of it by exploiting untapped assets, revolutionizing agriculture to produce food security and exportable surplus, value-added agro-based industries, stopping wasteful and unproductive expenses.
One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector for enhancing investment resources for economic development. In Pakistan, we have failed to achieve this goal.
Pakistan faces the herculean task of providing jobs to nearly three million young people alone every year. For achieving this task alone, we will have to ensure that economy grows at the rate of over 6 percent annually over a long period of time, and investment reaches over 25 percent of GDP. This challenge is also our greatest opportunity for economic progress. The majority of job seekers are young people, who are our greatest asset—imparting requisite skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation—our real engine of growth.
The prevalent pessimism is due to the attitude of financial managers, who cannot think beyond what they are “commanded” or “trained” to think at the behest of foreign lenders and donors. They keep on telling us about the symptoms of an ailing economy, but never try to cure the real causes of the illness. The work done by local experts is ignored by all the governments—civil and military alike.
Pakistan has been facing an ever-worsening fiscal, debt and unemployment crisis and a perpetual challenge of rapid and sustainable inclusive growth but no government has ever thought of ‘earmarking of revenue’ for ‘employment zones.’ Such employment zones can cater for the creation of employment, technological renovations, export promotions, town renovations, or experimentation with new economic management systems.
Pakistan is in dire need of establishing a number of “Employment Zones’, which should be low-tax for corporate income and for companies creating new jobs. It will be an effective tool to reduce the mounting unemployment burden and to help boost industrial and business growth. The government should identify areas where structural employment is particularly high and then earmark revenue for establishing employment zones in those areas. Out of total collection of taxes, at least 25 percent should be transferred directly to an independent fund for establishment of ‘employment zones’ jointly by federal and provincial governments.
Devising an efficient tax model for encouraging investment, productivity, research and economic growth in Pakistan requires an analytical study of all the irritants prevailing in the tax codes, procedures and implementation processes. This is beyond the capacity of the FBR, SIFC and the hand-picked task force constituted by the caretaker finance minister.
The main irritants are an outdated system, inconsistent policies, incompetence, lack of coordination, highhandedness, corruption and a truly unprecedented high level of maladministration and inefficiencies in the tax apparatuses—both at federal and provincial levels.
We need research and public debate for suggesting solutions to remedy the situation and promote business growth attracting domestic and foreign investment aimed at promoting exports and ensuring much-needed employment generation.