The long awaited budget for the fiscal year 2017-18 was presented by Finance Minister Ishaq Dar on May 26th, 2017. Reviewing the budget for the current fiscal year, Pakistan Business Council (PBC) said commented that the federal budget should have includes steps to generate more jobs, measures to promote value-added exports, and encourage import substitution.
However, the current budget seems to have failed to provide these measures as the tax burden continues to pin down businesses in Pakistan. Investors have also shown reluctance in injecting money in Pakistan due to similar tax burdens. While the industrial sector was looking to get some tax subsidies, with super tax entering third year, the aggregate taxes on companies in Pakistan have reached 40 percent.
“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
According to Finance Bill for the current fiscal year, Super Tax is levied at the rate of 4% on the income of Banking Companies, while 3% of tax is applicable on other persons. This is the third year ever since super tax was first levied in 2015, which was then carried on in 2016 as well. Apart from super tax, a tax on share bonuses and on retained reserves is also levied that makes up about 40% of the aggregate tax income, and has majorly discourage investment in the country.
The super tax was imposed by the government so that rehabilitation work of temporary displaced persons (TDP) that were affected by operation Zarb-e-Azab could take place. Now almost 90% of the TDP’s have returned to their homes, giving the government ample time and reason to boost its investment sector by cutting off taxes.
Pakistan is in dire need to promote investments which can only be done by providing tax incentives. If the government fails to provide tax incentives, investments in the country will continue to decrease and investors’ confidence will continue to drop. In addition to that, the government should have also focused more on the creation of jobs for locals when the unemployment rate of the country is continually increasing.
Subsidies to companies who are willing to invest in Pakistan means new gates of job opportunities for the locals will open and minimize the current rate of employment in the country. Setting up new industries and companies would also have resulted in import substitution, as the goods that we are currently importing, we might have been able to produce them locally with the help of new industries.
The manufacturing sector’s contribution in the GDP of the country has gone down by 13%. Rather than giving tax incentives to the manufacturing sector, it is being burdened with taxes alone. Slowdown in exports, inadequate social development, and poor health infrastructure are also a major hurdle in providing quality human capital.
The government should encourage scale and competitiveness by capital formation, consolidation, and accumulation. Participation of public in listed companies is also necessary for quality human capital. PBC also said that the government should also develop the information and communications technology sector as it is the future in which we need to invest now.
Ishaq Dar also announced that the government would be making tech startups tax free for the first three years since their establishment, in order to promote tech startup culture in the country. Another major reform that the government brought in was the reduction in tax prices of smartphones and cellular usage.