Revenue shortfall attributed to tax imbalances

KARACHI: The corporate sector in Pakistan is paying the highest rate of income tax in comparison to its counterparts in the region. Corporations in Pakistan are paying income tax at the rate of 35 percent while the corporate sectors in regional countries are taxed by between 20 to 33.99 percent in the category.
Despite the imposition of such a relatively high corporate tax rate in Pakistan, the country’s tax-to-GDP ratio is one of the lowest in the world and is one of the reasons that the government’s revenue generation remains weak. The Pakistan Business Council (PBC) has revealed this anomaly in the rate of corporate tax in the country, in its report, titled “Pakistan National Business Agenda 2010”.
Detailed analysis indicates that Turkish companies are paying income tax at the rate of 20 percent. Corporations operating in China, Malaysia, Indonesia and Vietnam face income tax rates at 25 percent while corporate entities in Thailand and India are paying 30 percent and 33.99 percent tax, respectively. The current tax-to-GDP ratio in Pakistan is less than nine percent which is deemed unsustainable for economic growth with low tax collection forcing the government to face a permanent revenue shortfall which severely hampers any efforts to improve the living conditions of the poorer segments of society.
It was indicated that the root cause of this revenue shortfall is the exclusion of major segments of the economy from the tax base (agriculture, most services and real estate). To increase tax collection without increasing the burden of taxation on existing taxpayers, it is imperative that the tax base be broadened, the report reasoned.
The need for drastic and innovative steps to bring sectors of the economy into the tax-net which are currently not being taxed was emphasised. The PBC agenda suggests that the government should reduce the rate of sales tax by 1.5 percent per annum and bring it to 10 percent by 2013.
The report went on to state that the existing sales tax regime should be replaced with an across the board Value Added Tax (VAT) on goods and services. It was also noted that section 107-A of the Income Tax Ordinance 1979 should be restored to provide 15 percent corporate investment tax credit.
Another vital step is that real estate developers be taxed on a per square foot basis for built up property and per square yard basis on land developed for sale. It was also underlined that the filing of tax returns should be made mandatory for persons who are members of a private club, professional body, have credit cards, taken personal loans and traveled outside Pakistan in the last financial year.
Also on the agenda was the imperative for the consolidation in the industrial sector. Pakistan’s industry by and large is fragmented with no group or individual player in any industry in a position to successfully compete with regional or global competitors. A consequence of this has been that Pakistani companies have not only lost share in the international markets in the past decade due to cheaper and better quality imports in their domestic markets.
The PBC acknowledged that the government realised the need for scaling domestic companies in 2007, drafting the Holding Company legislation with a view to providing an environment for consolidation and growth of the group companies. However, since the inception of this law, not a single group has been able to benefit from its provisions, primarily due to the shortcomings in the law.
PBC also advocated the need to foster human resource growth. Each year the government collects billions of rupees under the heads of the Workers Profit Participation Fund (WPPF) and the Workers Welfare Fund (WWF). This is in addition to the funds collected as part of the employees’ old age benefits and social security contributions. The funds that are collected for the improvement of the human capital of the country have failed to deliver.
The council has proposed that listed companies should be allowed to spend up to 50 percent of their contribution on technical training programmes and alternatively the rates of the WPPF and WWF should be reduced by 50 percent. With industry driven technical training programmes, the PBC reasoned, a human resource pool would be developed which is in line with industrial requirements and the needs of the country.