Overseas Investors Chamber of Commerce and Industry (OICCI) has asked the budget makers to draft tax policy for 2017-18 in a way to increase Foreign Direct Investment (FDI) and improve perception of foreign investors' regarding the business environment of Pakistan.
The budget proposals of the OICCI for 2017-18 revealed that the significant drop of Foreign Direct Investment (FDI) into the country in recent years has been alarming. Therefore, a review should be made of all policies, specially relating to taxation system, which impact FDI, in order to improve the perception of foreign investors' regarding the business environment of Pakistan.
OICCI proposed that as regularly propagated by all investors, there is a need for long term stability and consistency in the existing policies and duty structure. In the annual budgets, changes are announced in long-term policy matters that directly impact the industry stakeholders. An example from last year includes the sudden deletion of sub-clause (d) from section 2(14) of the amended Sales Tax Act 1990 through the Finance Act 2016, disallowing input offset of provincial sales tax on services, which was later reversed after great agitation by all business houses, including OICCI. Similarly, the withdrawal of group dividend facility was surprising and worked against the GO P's desire to grow large investment in the country. These changes are brought about on an ad-hoc basis with no rationale provided to the industry stakeholders and such inconsistent policies pose a serious threat to investors for business continuity.
OICCI recommended that the feedback of the Largest Tax Contributors, as represented by OICCI should be taken before finalisation of the Annual Finance Bill, so as to avoid any unintended negative impact of the proposed policy changes on investment climate, including FDI. The implementation of amendments in the annual Finance Act should be done after providing appropriate time for incorporation in electronic systems and adjustment of price labels on existing stocks. This will give confidence to the investor and promote long-term business stability and more investors are likely to set up businesses in the country.
Afghan Transit Agreement - negative impact on local industry: The in-equitable tax system has encouraged organised businesses to go into trading rather than manufacturing, leading to reduction in employment. Non-duty/tax paid goods are brought into the country in the garb of Afghanistan Pakistan Transit Trade Agreement, hurting the country's economy.
It is recommended to harmonise duty and tax rates (to what level and basis which will satisfy OICCI) to remove the incentive for evasion. Fix quantitative limits for imports based on genuine Afghan needs and the size of its population.
Establish a basis of collecting duty/taxes at the point of entry into Pakistan for the account of the Afghanistan Government and it is recommended to fix import value in consultation with the brand owner in Pakistan, it recommended. Delay and procedural hassles In Processing of Outstanding Refunds: Protracted delays in settlement of tax refunds is one of the biggest contributor in distorting the commercial image of Pakistan in all the Perception and Ease of Doing Business Surveys and, possibly one of the factors negatively impacting inflow of FDI in the country. This has been regularly pointed out at the relevant forums, including to the Prime Minister and Minister of Finance.
It is recommended that all tax refund claims for the period up to June 30, 2016 should be released against bank guarantee before March 31, 2017, followed by an audit of those refunds by company auditors. This process should be completed by September 30, 2017. The part of refund claim not certified by the auditors should be adjusted against the bank guarantee and the audit reports should be construed as an appealable order. Going forward, tax refund cheques should be issued within one month after the issuance of Refund Payment Order (RPO). Inter adjustment of Income tax and Sales tax refunds should be made part of the law, OICCI recommended.
It may be noted that foreign investors have identified long delays in refund processing amongst the major irritants in aspects of doing business in Pakistan in the last three consecutive Perception surveys of OICCI done in 2011, 2013 and 2015. This matter has also contributed to the very poor ranking of Pakistan in the World Bank Survey Report on "Ease of Doing Business". If Pakistan has to attract the FDI in Pakistan, then ease of doing business should be its priority and undue holding of refunds is a major contributor to the negative perception.
Tax Broadening and Documentation Measures: Additional taxes should not be raised from those who are already paying taxes honestly and diligently but the increase in tax collections should be made from those entities and individuals who have so far successfully evaded paying their due share of taxes to the national exchequer.
In order to increase revenue collection, there should be a strong political will and transparency to ensure that all income generating activities in every business and service sector are included in tax net.
It is recommended that the broadening of tax base through appropriate legislation to ensure that all income earners pay taxes equitably, including on income from agriculture related activities and all kinds of government and banks saving schemes. All income earners, without exception of any sector, including from agriculture activities, should get themselves registered and obtain proper NTN. Tax authorities should ensure that all NTN holders file annual income tax/ wealth returns and wealth reconciliation statements, OICCI recommended.
The culture of Amnesty Schemes should be completely eliminated as it discourages the honest tax payers. Severe, and visible, penalties should be enacted in the law to punish tax evaders. Regular coordination should be done with relevant authorities of countries, considered as tax heavens for stashing away illegal wealth, for information sharing. Appropriate laws should be made to enable the government to seize local assets, in equivalent value, or levy appropriate taxes, if any person holds any kind of assets outside the country for which source of income could not be established.
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