PBC warns against additional taxes on formal sector

KARACHI: The Pakistan Business Council (PBC), a policy advocacy group, has urged the caretaker government to focus on cutting its own expenditure and supporting exports rather than imposing additional taxes on the formal sector.

“There is much talk of broadening the tax base… However, if the past is anything to go by, the tax paying formal sector should brace for additional burden, including through wealth tax on accumulated, declared and already taxed earnings,” the PBC said on the social media platform X, formerly Twitter.

“This will create further incentive for those in the informal sector to remain under the radar.”

The council said the interim administration, which took over in August ahead of general elections, must focus on cutting its own expenditure so that “unnecessary burden” is not passed on to businesses.

“It is appreciated that the caretaker government can’t undertake deep rooted structural reforms in the limited time it has. But revenue-seeking measures (or suggesting new export models) will hurt the formal sector,” the PBC said.

“This cannot be a recipe for economic revival. The government’s effort should be focused on cutting its own expenditure so that unnecessary burden is not passed on to business.”

The group also criticised the finance minister Shamshad Akhtar’s remarks before a Senate committee, where she reportedly suggested new export models and ruled out duty drawback, a refund of customs duties paid on imported goods.

“The FM pointed out the headwind on the external account from rising global fuel cost. … we were surprised that she urged exporters to step up without competitive energy or other terms to match those of Bangladesh and India,” the council said.

"She must surely have been misquoted as saying that the government will not give duty drawback, a practice that prevails across the world, not just in countries with high FX reserves, as the media reports suggest her mentioning. Amongst other factors, FX reserves, are built from competitive exports exceeding imports."

The council said that duty drawback is not a subsidy, but a compensation for the cost of inefficiencies in the energy and other sectors which make Pakistani exports less competitive than those of neighboring countries like Bangladesh and India.

“Surely, exports need encouragement and what is often misconstrued as subsidy is really the cost of inefficiencies in our energy and other sectors that are forced upon those who pay their bills,” it added. “We can’t expect overseas customers to pay for unrecovered taxes, duties, cross-subsidies, line losses, theft, etc. in our input costs.”

The council said that it supports the caretaker government for managing a “challenged economy” and hopes that it will take steps to revive economic growth.

“The caretaker government deserves full support for managing a challenged economy and the FM (finance minister) did well to highlight the stress points as well as some early achievements from administrative and other controls.”