Dr. Ikramul Haq
On the one hand, our Finance Minister keeps on emphasising the need for attracting foreign direct investment (FDI), corporatisation and documentation of economy for rapid growth and on the other his actions reflect the diametrically opposite. During all the three Nawaz Sharif’s tenures, traders got generous amnesties and corporate sector suffered heavy taxation. In the budget 2017-18, the high tax paying companies have been further targeted. It is strongly resented by, especially Overseas Investors Chamber of Commerce and Industry (OICCI), established in 1860 to promote FDI, growth of commerce and industry in Pakistan.
In a letter sent to Mr. Ishaq Dar, OICCI has objected on anti-corporate tax measures and urged him to review and reverse them for encouraging FDI in the country. In Investor-friendly tax policy, Daily Times, April 30, 2017, apprehensions were expressed that Dar et al in the coming budget would introduce further anti-investment tax provisions. May tax proposals were suggested for promoting investment, but as expected, all fell on deaf ears of Dar. Now, OICCI followed the suit asking for a predictable, consistent and transparent tax policy—a prerequisite for attracting investment, creating jobs and boosting economic growth.
After making representation, chief executive of OICCI observed: “… we are confident that our concerns (on tax proposals) will be considered seriously and duly addressed before the Finance Act 2017-18 is approved”. This appears to be overoptimistic. Our Finance Minister is bent upon squeezing the good taxpayers at the cost of rich-non-filers, who are more than happy to pay some extra withholding tax for securing complete immunity! These non-compliant rich individuals, having colossal incomes, are the darlings of Dar. His hostility towards large companies that pay hefty amounts is evident from the fact that these are further burdened with: (i) super tax for another year though promised to be a one-time levy (ii) abolition of tax credit (iii) enhancement of tax from 5% to 10% for non-distribution of profits up to 50% of paid-up capital and increase of turnover tax from 1% to 1.25%. Besides, higher taxation on dividends and capital gains on disposal of shares/stocks—it will discourage corporate investment in stock/money markets.
The above anti-corporate tax measures once again confirm that the present government is not interested in taking action against non-filers and untaxed incomes/wealth. Super tax was levied for rehabilitation of internally displaced persons but is being utilised to bridge fiscal deficit. The plight of those uprooted in North and South Waziristan and elsewhere as a result of military operations speaks volume. Money collected in their name is funding luxuries of the rulers. The letter of OICCI aptly observes: “A fair chunk of super tax, we understand, is collected from OICCI members whose headquarters management takes a negative view of such ad- hoc measures…”
Over the period of time, Securities & Exchange Commission of Pakistan (SECP) has successfully conducted reforms for ensuring easy registration of companies. The total number of registered companies has now reached 80,000. Increase in number of companies of over 20,000 in few years is result of steps like reduction in fee, swift incorporation, elimination of purchase of third-party digital signatures and introduction of simple, hassle-free CNIC-based user ID and PIN system for incorporation and post incorporation activities.
The most laudable achievement of SECP is replacement of 33-year-old Companies Ordinance, 1984 with Companies Act, 2017 (comprising 515 sections and eight schedules). It is one of the most exhaustive laws ever approved by our parliament—a good omen for democracy. On the contrary, FBR has yet not moved any draft for replacing the existing complicated tax codes, subjected to mindless and excessive amendments every year.
For facilitating businesses and accelerating growth, we need simplified procedures for starting and doing businesses, protection of investors’ rights and quick settlement of disputes. Outdating and anti-business tax codes, working as a stumbling block, need to be realigned with the new Companied Act, 2017. For reaping real benefits of China-Pakistan Economic Corridor (CPEC), all anti-corporate tax laws and onerous procedures must be removed. On urgent basis, the government should introduce in Parliament a simplified tax regime, aimed at encouraging industralisation and promotion of small and medium-sized business enterprises (SMEs). The biggest challenge is how to end FBR’s hostile attitude towards existing taxpayers. It is high-time that Finance Minister should take note of it and revamp FBR. They must get returns from non-filers (who are eligible to pay) rather than just be happy having some extra withholding tax from them.
There exist a number of anti-corporate provisions in the tax codes e.g. withholding tax on almost everything. The companies are victims of forced labour—acting as withholding tax agents without any compensation. And on the top of that they are penalised for lapses that are neither intentional nor willful. Thus, people are hesitant to conduct business as a company, especially when audited accounts by independent auditors are rejected merely on whimsical grounds and without bringing any material evidence on record. Litigation is imposed on companies and they have to hire costly professionals. These malpractices are blocking corporatisation of businesses for better growth and creating new jobs.
In any development strategy, it is essential to increase elasticity and buoyancy of tax system. An elastic system automatically raises revenue at the same or at a faster rate than the growth of national income and facilitates a sustained increase in necessary government outlays. It also reduces the economic uncertainties associated with frequent discretionary changes in taxes.
Frequent ad-hoc changes in tax policies create uncertainties among taxpayers and affect investment and production adversely. Dr. Faiz Bilquees in her study, Elasticity and buoyancy of tax system in Pakistan, found that both the elasticity and buoyancy coefficients are below unity, hence the tax system in Pakistan is inelastic to reflect changes in GDP or national income.
Tax policy should reduce or check undue private consumption expenditure by taxation of excess incomes. So, there should be lower rate of tax for companies, not more than 20% and on dividend income not more than 5%. It will induce new investment resulting in more jobs that we badly need. Once higher level of growth is achieved, tax, which is its byproduct, will increase automatically.
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The writer is Advocate Supreme Court and Adjunct Faculty at Lahore University of Management Sciences (LUMS). Email: ikram@huzaimaikram.com; Twitter: @drikramulhaq