Parliamentary Secretary of Ministry of Finance, Rana Muhammad Afzal Tuesday emphasised the need for tax reforms to raise abysmally low increase in the tax ratio of Pakistan in the region.
Speaking at a workshop on tax policy and enterprise development in South Asia organized by Governance Institute Network International (GINI) in collaboration with International Development Research Center (IDRC) here, he said there is huge evasion in the property tax and measures are requited to be taken to fill the loopholes. Chairman National Assembly's Standing Committee on Finance, Omer Ayub Khan also underlined the need for making tax system facilitators to businesses instead of creating hindrance.
Country study report presented to the workshop states that an analysis of the impact of current policy and its implementation on all three themes, tax concessions and exemptions, RGST and Property tax, on the SMEs shows that Pakistan needs to do a lot more to promote the sector. The informal sector lacks willingness to join the formal sector and sees no benefit in changing its status. At the same time public policy is also not conducive. In this environment, it is important that some effort is made by the public sector to strengthen the SMEs, particularly given their role in employment generation, export promotion and contributing to inclusive growth.
It further reveals that the government has adopted some policy measures that were included in the initial theoretical and recommended policy framework, however, many remain. We suggest that the government may consider the following; (i) rationalising tax expenditures and enhancing greater public investment, especially in power generation and distribution, gas supply, roads, etc for small enterprises. As compared to tax expenditures it will improve the competitive position of the SMEs relative to the large scale sector and enhance their growth and profitability;(ii) provide fiscal incentives for conversion from Association of Persons (AOP) to small company according to the Companies Ordinance. This will improve their competitive position and growth and profitability prospects. Besides, the government may consider reducing competitive advantage from tax expenditures to large companies by the following policy measures.
The study concluded that the development of SMEs in Pakistan remains an under-researched area reflective of the policy neglect. GINI/IDRC must be appreciated for initiating research on small enterprises, which can play an important role in achieving 'inclusive growth' in Asian economies.
The primary conclusions are, first, that constraints to enterprise development relate more to the business environment and lack of access to credit, services (especially electricity and gas), markets, technology and skills.
Second, the taxation system does play a role, albeit a somewhat negative one. Recent changes, particularly in the granting of exemptions and concessions, reveal an anti-small enterprise bias and a visible orientation towards big business. This will aggravate further the competitive disadvantage of small enterprises.
The research undertaken demonstrates that to the extent that small enterprises fall in the net of taxes like income tax, GST (VAT) or property tax they do not enjoy any significant preferential treatment, except for the presence of exemption limits. In addition, the compliance costs are high, including bribes to tax officials.
The report recommends a reduction in the multiplicity of taxes and other charges, simplification of returns and reduction in documentation requirements. Also, compliance levels of small enterprises could increase if there is a stronger link with services provided. Overall, the Report has demonstrated the need for development of a comprehensive set of policies to promote SMEs. Such a framework should recognise the difference in constraints faced by small enterprises in different sectors.
At the minimum, tax policy should not discriminate in favour of big business. This is essential if the growth process has to be made more inclusive and employment provided for the burgeoning youth population. The recently announced Prime Minister's Youth Program is very much a step in the right direction.
Comments
Comments are closed.