Budget and corporate sector

On the one hand, our governments keep on emphasising the need for corporatization of business to attract foreign direct investment (FDI) and documentation of economy for rapid growth and on the other, their actions reflect the diametrically opposite. Since 2013, the government of PML-N extended unprecedented amnesties and concessions to traders but meted out rough treatment to the corporate sector by heavy taxation. In the last budget, the high tax paying companies were saddled with more liabilities. It was strongly resented by corporate sector, especially Overseas Investors Chamber of Commerce and Industry (OICCI), established in 1860 to promote FDI, growth of commerce and industry in Pakistan.
In its proposals for budget 2018-19, to be announced on April 27, 2018, OICCI has indicated that super tax should be deleted-it was imposed through the Finance Act, 2015-16 for one year but was later extended for another year. The OICCI has demanded that the corporate income tax rate should be 25 per cent from the fiscal year 2018-19, considering the average tax rate of less than 22 per cent throughout Asia. It further emphasised that tax rates of the banking sector should be aligned with the corporate sector. Expressing concern over different sales tax rates on services by provinces, it has recommended uniform rate of 13%. It has also asked for withdrawal of tax on undistributed profits and on bonus shares.
The OICCI further suggested review of turnover tax and abolishment of Alternative Corporate Tax. Maximum turnover tax is proposed 0.5 per cent, and 0.2 per cent for oil marketing, refineries, LNG terminal operators and large chemical companies with high turnover and low margins. It is also recommended that regulatory duty levied through SRO 1035(I)/2017 should be withdrawn on import of raw materials which are not being produced locally.
The OICCI has recommended that the incentive for investment be made attractive. For instance tax credit under section 65B of the Income Tax Ordinance, 2001 should be enhanced from existing rate of 10% to 15% of the investment and the date for benefit be extended from existing 2019 to 2022 and factory building associated with the plant and machinery purchased for extension, expansion, balancing, modernisation and replacement purposes, should also be included. It has also recommended that industrial undertakings be allowed to import raw material in the first year of production, without payment of advance tax under section 148 and for subsequent years, be allowed exemption against advance tax on import of raw material, as per actual requirement, instead of 125 per cent quantity of previous year. Tax credit for employment generation under section 64B, currently restricted to manufacturers, should also be extended to the service sector which contributes about half of the GDP of the country.
The OICCI also recommended the following:
-- Group taxation as per law that existed prior to the Finance Act 2016-17 be restored
-- Coordination between federal and provincial legislation should be streamlined, including synchronization and harmonization of sales tax rates and policies across all jurisdiction and sectors and should be closely aligned with the regional benchmark of 12% sales tax rate.
-- The Federal WWF and WPPF law should be updated based on the recent provincial enactments and current minimum wage levels
-- Outstanding tax refund should be cleared within next six months in an orderly and prearranged manner. All subsequent tax refunds are cleared within 45 days. Furthermore, inter adjustment of income tax and sales tax refunds be made part of the law.
-- Federal Tax Ombudsman should be entrusted to settle all the disputed claims of taxpayers.
-- To boost FDI and rapid economic growth, tax compliance should be made easy.
The anti-corporate tax measures of the absconding Ishaq Dar, presently facing trial in the Accountability Court, were not understandable. He levied super tax for rehabilitation of internally displaced persons but the same was utilized to bridge fiscal deficit. The plight of those uprooted in North and South Waziristan and elsewhere as a result of military operations speaks volumes. Money collected in their name has been used to fund luxuries of the rulers.
Over the period of time, Securities & Exchange Commission of Pakistan (SECP) has successfully conducted reforms for ensuring easy registration of companies. The total number of registered companies by the end of December 2017 reached 84,500, but Federal Board of Revenue (FBR) received about 34,000 returns. The most laudable achievement of SECP in 2017 was replacement of 33-year-old Companies Ordinance, 1984 with Companies Act, 2017. FBR has yet not moved any draft for replacing the existing complicated tax codes, subjected to mindless and excessive amendments every year.
For facilitating businesses and accelerating growth, we need simplified procedures for starting and doing businesses, protection of investors' rights and quick settlement of disputes. Outdating and anti-business tax codes, working as a stumbling block, need to be realigned with the new Companies Act, 2017. For reaping real benefits of China-Pakistan Economic Corridor (CPEC), all anti-corporate tax laws and onerous procedures must be removed. While individuals have been given generous relief in tax rates from July 1, 2018, the issue of hostile taxation of corporate sector remains unattended. It is high time that Prime Minster addresses this matter in the forthcoming budget.
There exist a number of anti-corporate provisions in the tax codes, eg, withholding tax on almost everything. The companies are victims of forced labour-acting as withholding tax agents without any compensation. And on the top of that they are penalised for lapses that are neither intentional nor willful. Thus, people are hesitant to conduct business as a company, especially when tax rates are high and audited accounts by independent auditors are rejected merely on whimsical grounds and without bringing any material evidence on record. Litigation is imposed on companies that have to hire costly professionals. These malpractices are blocking corporatisation of businesses for better growth and creating new jobs. Tax policy should reduce or check undue private consumption expenditure by taxation of excess incomes. So, there should be lower rate of tax for companies, not more than 20% and on dividend income not more than 5%. It will induce new investment resulting in more jobs that we badly need. Once higher level of growth is achieved, tax, which is its byproduct, is bound to increase automatically.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)