The first positive step Dar took in his maiden budget speech (FY14) was to reduce the corporate tax rate from 35 percent to 30 percent for non-banking companies in a staged manner with reduction of one percentage point every year. The step was applauded as higher income tax rate is considered an impediment for companies to become big.

The effective tax rate was north of 35 percent as there are deductions of WWF/WPPF of 7 percent on pre-tax income; and the rest is liable to income tax. For instance, if a company's pre-tax/WWF earnings were 100, after deducting WWF/WPPF, the income came down to 93 and then, 32.5 was deducted as corporate tax (35%). The net income used to be at 60.45, and there was taxation on dividend at 10 percent. If a company used to pay 100 percent cash dividend, another 6.05 is taxed to make the effective tax rate of a whopping 45.6. In case of 50 percent payout ratio, the effective tax was 42.6.

Dar did it right in the beginning by reducing corporate income tax to lower the effective rate, but the goodies were not there for long enough as after two years when the corporate tax rate came down to 33 percent, the government imposed a super tax at 3 percent for non-banking companies (for income of more than Rs500mn) and 4 percent for banking companies. Virtually all of the PSX100 companies make north of Rs500 million. Super tax was supposedly for the rehabilitation of temporary displaced people in the war of terror.

Thus, the effective tax rate for big companies become higher than the income tax rates in the previous regime as super tax is added. In FY16, keeping everything constant, income tax for companies making over Rs500 million stays at 35 percent, which was the same in the previous tenure. And for banking companies, it became 39 percent (since no reduction of income tax for banks) versus 35 percent earlier.

In FY17, government enhanced the tax on dividend payouts from 10 percent to 12.5 percent while there was a tax of 5 percent on issuing bonus shares earlier in the regime. Since most companies in Pakistan pay dividends heavily, the toll had its impact. At 50 percent payout ratio, the effective tax came at 42.5 percent (31% corporate tax) versus 42.6 percent (35% corporate tax) in FY13. In case of 100 percent payout, the tax incidence in FY17 was higher at 46.3 percent versus 45.6 percent in FY13.

Now, in FY18, the dividend tax is increased further to 15 percent with minimum payout ratio of 40 percent is imposed which would adversely impact the expansion plans of companies who choose not to pay dividends such as cement companies. In FY18, with corporate income tax of 30 percent, super tax of 3 percent and dividend tax of 15 percent (assuming 50% payout ratio), the effective tax rate is 42.4 percent versus 42.6 percent in the pre -PMLN era. And for companies who pay higher dividend, the effective tax rate is even higher. If a company pays out 100 percent cash dividend, its tax rate reaches 47 percent in FY18 versus 45.6 percent in FY13.

In case of banks, the ratio is even worse as addition of the super tax of 4 percent and 5 percent increment on dividend income (15% from 10% in FY13) with no change in corporate tax of 35 percent, the tax liability simply increases over 45.6 percent at 60 percent payout ratio, versus 40.1 percent in FY13.

The effective tax rate so far is higher for many companies, since the payout ratio is normally higher than 50 percent, in all the years of PML-N regime. The formalization of economy needs companies to become big and for that, the need is to lower the tax rates without any jugglery.

Now it is for the new governments to decide if they want to continue super-tax or not. It has been passed on to the next government to work on dividend tax rationalization. The bottom-line is that companies today are paying more taxes and that partially explains higher growth in direct taxes in the PMLN government time.