SAI calls for tax policy reforms, lower sales tax to spur growth

KARACHI: The SITE Association of Industry (SAI) has called for a clear institutional separation between tax policy formulation and tax administration to prevent conflicts of interest and align with international best practices.

Drawing comparisons with models in the UK and neighbouring countries, SAI proposed a structure where tax policy is handled by the Ministry of Finance, revenue distribution managed by an independent finance commission, and consumption taxes regulated by a dedicated council.

In its budget proposals, SAI President Ahmed Azeem Alvi and former president Riaz Uddin, who chairs the association’s taxation committee, stressed the need to transform the budget-making process into a strategic economic tool, rather than continuing it as a routine fiscal exercise.

Addressing systemic weaknesses in the taxation framework, SAI noted that Pakistan’s income tax base remains narrow -- just 9-10 per cent of GDP -- while the formal industrial sector bears a disproportionate tax burden. The association urged widening the tax net to include untaxed and under-taxed sectors, and recommended capping the maximum income tax rate on business income at 25 percent over the next three years. It also called for the abolition of the super tax, describing it as outdated and inequitable, and sought relief on inter-corporate and individual dividend taxation.

Alvi and Riaz expressed serious concern over amendments introduced through the Income Tax Ordinance IV of 2025, particularly to Sections 138(3A), 140(6A) and 175C. According to SAI, these changes confer excessive powers on tax authorities and violate Articles 4, 18 and 77 of the constitution. The association demanded their immediate withdrawal, warning that such measures could deter compliance, foster informality and erode investor confidence.

On sales tax reform, SAI highlighted longstanding issues stemming from overlapping federal and provincial jurisdictions. It proposed a harmonised General Sales Tax (GST) regime supported by a single compliance portal, allowing seamless cross-jurisdictional input tax adjustments. The association also called for expedited refund mechanisms, with refund payment orders (RPOs) to be issued within five working days and payments processed shortly thereafter.

SAI raised concerns over the current combined sales and further tax rate of 22 per cent, saying that it promotes tax evasion and hampers formalisation of the economy. A review of the rate structure was recommended to reduce distortions and incentivise registration.

The association urged the government to implement a gradual reduction in the sales tax rate, targeting 15 per cent over the next three years. It argued that this would reduce the cost of doing business for the formal sector and stimulate economic growth.

SAI also called for the abolition of the additional sales tax, which it claimed enables businesses to remain in the informal sector by avoiding registration and tax obligations. This, the association said, perpetuates a cycle of non-compliance that impedes formal economic development.

It further recommended maintaining sales tax exemptions on essential items such as basic foodstuffs, pharmaceuticals, and education-related goods, noting their importance in shielding vulnerable populations from inflationary pressures.

The association requested the restoration of zero-rating for export facilitation schemes and educational stationery, in line with assurances made by the finance minister during his June 2024 budget speech. It believes reinstating these exemptions will support the export sector and ease financial burdens on educational institutions. SAI proposed a reduced sales tax rate of 5.0 per cent on other essential and deserving items to further alleviate consumer hardship.

SAI also called for the removal of area-specific sales tax exemptions in the former tribal areas (Fata/Pata), arguing that such exemptions should end in pursuit of nationwide tax uniformity and broader fiscal reform.

Alvi and Riaz highlighted the need for comprehensive reforms in Pakistan Customs, citing outdated laws, tariff fragmentation, under-invoicing and weak enforcement. The association recommended revising the Customs Act to align with WTO and WCO standards, simplifying duty structures and introducing a unified valuation and appraisal system. It also proposed designating the port of entry as the sole point for revenue collection to prevent leakage and facilitate smoother inland goods movement.

On social welfare schemes, SAI criticised the management of employee welfare funds such as EOBI, PESSI/SESSI, WWF, and WPPF as inefficient and outdated. Largely funded by employers, these schemes offer little influence to contributors. SAI advocated for integration under a unified authority, governed centrally and supported by digital platforms, with tripartite representation from employers, employees, and regulators. It proposed that disbursements be made via mobile payment systems, and that healthcare and related services be outsourced to third-party providers.