‘Aggregate corporate tax rate in Pakistan reaches Asia’s highest’

KARACHI: Aggregate taxes on companies in Pakistan have reached 40 percent – highest in Asia – with super tax entering third year, a business advocacy platform said on Saturday. 

“Regretfully, super tax now enters its third year, resulting in an aggregate tax rate of 40 percent (with WWF – workers welfare fund and WPPF – workers profit participation fund) - twice the average tax rate in Asia,” the Pakistan Business Council (PBC) said in its post-budget analysis. “Super tax, tax on bonus shares and retained reserves act as penalties for success rather than as an encouragement for investment.”

PBC, a business policy advocacy platform representing private sector businesses, said retained reserves will continue to be taxed albeit on a different basis, impeding capital accumulation and thus investment. 

It said domestic industry has been undermined in the past decade by a combination of poorly negotiated free trade agreements, liberal import policy, shortage and cost of energy, misuse of the Afghan transit treaty, smuggling, under-invoicing and tax evasion. 

“The net result is that jobs have been off-shored, mainly to China, whilst we focus primarily on export of commodities instead of adding value (and jobs) locally,” it added. “Domestic industry in a country of 200 million should gain scale and become competitive, both in exports as well as import substitution.” 

The council’s analysis noted that share of manufacturing in GDP has sharply declined to 13 percent. But, the sector carries 52 percent of the tax burden. “Unemployment is up, Pakistan’s share in world exports down, external account under pressure and the tax/GDP ratio well short of what is required to invest adequately in social development. Poor health, including stunting and education is thus impeding the quality of human capital.”

It advised that government should encourage capital formation, accumulation and consolidation to promote scale and competiveness as well as public participation in listed companies. 

The PBC said the move to lower the taxes on smartphone instruments and cellular usage, though symbolic, is in the right direction and one which needs to be augmented to close the digital divide. “A three-year tax holiday for start-ups will also nurture this sector.”

The cornerstone of PBC’s 8-point agenda is to promote jobs, value-added exports and import substitution and increase tax revenue by strengthening domestic manufacturing and developing ICT sector. 

The council further asked for restoration of the Finance Act 2007 regime for taxation of groups, including withdrawal of cascading taxes on inter-company dividends. 

“These are essential to promote emergence of strong Pakistani groups on the global markets,” it said. “Unfortunately, the budget failed to address this.” 

The extension of tax relief for newly listed companies is a welcome move. “However, the so called “simplification” of capital gains tax on listed company shares is another way of burdening shareholders with higher tax,” it added. “By removing the link between the tax rate and the period of holding, the move reduces the incentive to hold shares for a longer term, thus adding to stock market volatility.” 

Investors in Asia’s best performing stock exchange will now be subject to 50 percent higher tax on dividends than two years ago.

Instead of indexing the tax on dividends with progressive economies such as Singapore where tax is 0 percent, the rationale cited to increase it to 15 percent is to bring it in line with those countries that have a similar level. Dividends are paid from taxed income of companies. Many jurisdictions abroad therefore do not levy additional tax on dividends.

The PBC said the final budget was an important opportunity to signal fundamental reforms to inspire greater investor confidence.

“This is a budget that suggests “business as usual” when jobs, exports and tax revenues are anything but that,” it added.

“There therefore remains substantial room in PBC’s scorecard for tax reforms.”