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Friday March 29, 2024

Plight of an entrepreneur

By Mahmood Ul Hassan
September 11, 2022

I moved from Canada to Pakistan exactly three years ago, leaving a lucrative career and a comfortable life. Riding the optimistic wave of Naya Pakistan, I moved back with the intention to serve my native country and make a difference.

Taking a huge risk, I brought hundreds of thousands of dollars to Pakistan and invested my hard-earned savings from Canada. I worked day and night to build a world-class healthcare facility. I provided employment to professionals such as doctors, nurses, paramedics, and administrators, employing and contracting over 30 individuals. I built a legitimate business and did everything by the book.

It has been almost two years since we opened the business. Through persistence and hard work, we have grown the business substantially. But we are still in the red. As expected, it takes any legitimate business a few years to turn a profit. However, I was shocked when I got a call from my accountant last week notifying me that I owed hundreds of thousands of rupees in taxes. Not only that, he also informed me that I should expect to pay over one million in taxes for the coming year. How could that be? Our business is still losing money and each month I must dip into my savings to cover the payroll, rent and utility bills that are mounting on us.

Having done financial planning in Canada for individuals and businesses I understand personal and corporate taxes at an expert level. In Canada, the highest combined federal and provincial (Ontario) marginal tax rate for an employed individual is 53.53 per cent. It is one of the highest personal income tax rates in the world. In comparison, the combined income tax for a Canadian Owned Private Cooperation (CCPC) starts at only 12.2 per cent and increases progressively to the highest rate of 26.6 per cent as active business income grows. Most importantly this tax is calculated on net earnings (profit), not revenue or turnover. Moreover, the Canadian government allows a capital gain tax exemption of over 900,000 dollars when the business is ultimately sold. This exemption can be multiplied by structuring the ownership of the cooperation with family members, essentially allowing the entrepreneur to save a significant amount in capital gains taxes when it is time to sell the business and reap the reward of their labor.

Why are income tax rates for salaried individuals so much higher than tax on private corporations in Canada? Surely, it’s not because the Canadian government hates salaried individuals! It is because the Canadian government understands that an individual takes a huge amount of risk when they venture on their own, investing their financial capital and time, therefore, entrepreneurs should be encouraged and rewarded to take the initiative. These Canadian-owned businesses ultimately form the backbone of their economy. In aggregate, small- and medium-sized businesses employ about 90 per cent of Canadian workforce and ultimately are the biggest drivers of economic growth. As a result of this progressive tax system and nurturing business environment, each year the Canadian economy produces world-class companies which earn billions of dollars of income and drive their economy forward.

Pakistan ranks 108th out of 190 countries on the list of ‘Ease of Doing Business’. It is a monumental task to set up a legitimate business in Pakistan, let alone make it successful. An entrepreneur must contend with financial, political, security, legal, property and ever-changing legislative risks. The economy is volatile and the cost of doing business is increasing each day due to exorbitant electricity and fuel prices. It feels like running on a treadmill. Doesn’t matter how much effort you expend; the externalities don’t allow you to move forward. Yet, the government instead of supporting and encouraging new businesses find ways to further extort them by levying unreasonable taxes.

I am running a legitimate business; therefore, we record our sales and revenue. Since our business is growing, our revenue has also grown at a healthy rate. However, the business is still at an infancy stage and our earnings have not grown to a level that would cover our variable and fixed cost. Which means we are still in loss and paying for company expenses from our personal savings. However, I have been handed an income tax liability of over a million rupees by the FBR. This is the Minimum Tax regime which is calculated not on net profit but the revenue or turnover of a company.

When I questioned the logic of this from my accountant, he gave me the assurance that once my business starts earning a profit this amount will be deducted from my future tax liability. How does this make any sense? Instead of supporting our business at this crucial stage where we are struggling to stay afloat, the government is levying more burden on it. With the odds already stacked against us, we might not even make it to the next stage where we can take advantage of this ill-conceived tax law.

So, what are my options? One, close the business, cut my losses and return back to my lucrative career abroad. Two, evade taxes.

To be clear, I will not choose either. But the fact that I am forced to contemplate these two options is unfortunate.

Then, the only option left is to challenge and protest the regressive and absurd tax regime in this country, in the hope that positive action will be taken before it’s too late.

I appeal to the finance minister and the FBR to not penalize legitimate entrepreneurs that have taken immense risk and sacrifice to establish businesses. Given the hostile economic environment in Pakistan, the odds are already stacked against them. If these businesses survive, they will form the backbone of our economy. If nurtured, they will grow and innovate and, in the process, produce goods and services that will provide employment, foreign exchange and tax revenue. These businesses are the only hope of this country to be financially independent one day. Don’t make them pay for your inability to collect taxes and broaden the tax base. These irrational and short-sighted tax laws, that are politically motivated and designed to appease a minority at the expense of legitimate businesses, are suffocating our economy. Wake up before it’s too late!

The writer was a finance professional in Canada before returning to Pakistan to start his own business. He can be reached at: ulhassa@gmail.com