‘Fiscal policies impede growth of domestic industry’

KARACHI: Fiscal policies are compelling formal sector to work as unpaid tax collector of 75 different types of withholding taxes, impeding the growth of domestic industry and discouraging capital formulation, consolidation and investment, a business advocacy group said.

“The narrow formal sector is increasingly burdened with higher taxes,” the Pakistan Business Council (PBC), representing leading private sector businesses, said in a study. “Manufacturing, which represents 13.5 percent of GDP, carries 58 percent of the tax burden. Agriculture and retail/wholesale, which together represent 40 percent of the economy, contribute less than two percent.”

The council said fiscal and other policies should facilitate rather than encumber the formal sector to enable domestic industry to thrive. The advocacy group said presumptive tax regime should be withdrawn, while all operating a taxable activity must file returns, to “create a more level-playing field for manufacturing”.

PBC said government should ensure reliable energy at competitive cost through indigenisation of fuel mix, reducing transmission and distribution losses to 10 percent from the existing 19 percent and equalising energy costs between domestic and industrial customers. “Energy cost in Pakistan is presently twice that of the region.”

The council emphasised five-yea broad-based export policy to promote investment in capacity and capability building, “to replace kneejerk, short-term packages”. It also sought withdrawal of super tax, cascading tax on inter-company dividends and tax on less than 40 percent profit distribution.

The business advocacy group said the information, communications and technology sector is “under-supported and over-taxed”. Government should promote venture capital funds, while banks should be allowed to take up to five percent exposure of their assets to fund private equity and venture capital investments. Private sector credit as percent of GDP in Pakistan is amongst the lowest in the world. Small and medium enterprise credit is negligible because banks prefer to lend risk-free to the government.

“Banks should be encouraged to think of out-of-the-box solutions to manage exposure,” PBC said. “The banking system needs to build appetite and resources for long-term project finance.”