FBR chief explains what discourages SMEs to come into tax net

Chairman Federal Board of Revenue (FBR) Shabbar Zaidi stated on Tuesday that difficult tax system and trust deficit discourage small and medium enterprises (SMEs) to come into the tax net and consequently they are unable to have access to formal finances.

Speaking at the Pakistan innovative Forum on Tuesday, Shabbar Zaidi said that the country's taxation system is one of the reasons that things have not developed in the manner they should have been. Pakistan is going into tax reform program of the World Bank (WB) with the primary thrust of simplification of the tax laws, he said and added that unless tax laws are simplified, the government would be unable to bring real people into the tax system.

He said that size of SMEs in the economy is much larger than 30 percent and finances raised by the sector are around 07 percent largely because of not being properly documented and consequently it is not eligible to have access to finance in banks. Zaidi added that documentation of the SMEs is not there because of the impediments, which are created perceivably or in reality by the Federal Board of Revenue (FBR) taxation system.

He explained that in Pakistan there are 3.1 million industrial and commercial electricity consumers and technically all of them should have been under the tax system. However, he stated that only 43,000 of the total power consumers are in the sales tax system. This shows the relationship between the documentation on the FBR side and reality of the SMEs in Pakistan.

The FBR chairman said one of the fundamental reasons for the SME sector to remain in the informal regime is trust gap because the SMEs believe they would be subject to harassment soon after coming into the tax system. He said that documentation, financing and taxation system of the SMEs are related subjects.

Zaidi further stated that first reason for being out of the tax system is to avoid certain amount of taxes because in the past taxation system in the country was tilted more towards trading side of the economy instead of manufacturing side. The SMEs in the manufacturing side were burdened to come into tax net due to higher rate of taxation and more compliance requirements, which were consequently making them less competitive compared to those dealing with imported goods. The SMEs in the world of manufacturing are the backbone of the employment and they are for the growth of the economy but in Pakistan SMEs were discouraged to come into the system and indirectly trading sector was given preference and promotion.

He said that all taxation laws had common taxation with the same provision for large units and SMEs. He said that laws, regulations, procedures and by large nature of filing documentation are the same and the tax authorities are not creating taxation friendly environment for SMEs, so they want to avoid taxation. "We have never tried to make SMEs laws and things simpler for SMEs sector," he added. Regulatory environment is not conducive for small business to come into the system.

He said that once the SMEs achieve certain level, there is always a gap between business and balance sheet. So when SMEs want to switch from non-documented sector to documented sector, there is no basis to bridge the gap. The amnesties are given to bridge the gap and allow bigger SMEs to come under the system, he said.

The chairman FBR said that the way forward may be a simpler taxation system for SMEs or taxation schedule for SMEs with minimum compliance requirements.