New Delhi, March 3 – Pakistan’s high tax regime is stifling the formal economy, particularly industrial businesses, yet there seems to be no realization within the Federal Board of Revenue (FBR), which continues to extract heavily from the top 1 per cent of the population, according to an article.
The core issue is that capital formation is disincentivized, as the effective tax rate, including corporate taxes, is over 50 per cent for large manufacturing facilities, according to the article in the Karachi-based Business Recorder.
The main shareholder tax is even higher if the business house has a corporate structure, as there is a 15 per cent tax on inter-corporate dividends. The net return after all taxes is reduced to one-third of profits, it stated.
Financial capital is constantly flowing out of the country, and human capital too, as salaried taxes are the highest in the region. This is evident from the growing Pakistani investment in the Middle East, especially in the UAE.
The article points out that high-net-worth Pakistani residents are subject to income tax of up to 45 per cent, an additional super tax of up to 10 per cent, and a 1 per cent capital value tax on certain assets held outside Pakistan. As a result, some individuals, including business tycoons, choose to relocate to Dubai or other destinations and become non-residents for tax purposes. For many, the potential tax savings outweigh the higher cost of living abroad. Consequently, a noticeable number of Pakistanis have moved overseas in recent years.
Pakistan’s apex business chambers flagged the issue of the crushing tax burden in their meeting with the IMF team, which is currently on a visit to the country. Last week, the IMF officials were in Karachi and had engagements with both the Overseas Investors Chamber of Commerce and Industry (OICCI) and the Pakistan Business Council (PBC), with both chambers echoing the need to rationalize taxation. It is time for Islamabad to manage the fiscal balance through broadening taxation, curbing losses of state-owned enterprises, especially in energy, and reducing the footprint of the government, the article stated.
Indirect taxes are also quite high. Adding both direct and indirect taxes increases the incentive to evade taxes. The cost of compliance becomes high. Informal businesses become more competitive and thrive, but they have limitations to scale. The economy does not grow to desired levels, the article lamented.
This largely explains the exodus of MNCs from Pakistan. A few diplomats, especially Europeans, cite unfair taxation as a main complaint. Domestic groups are increasingly venturing into real estate and retail businesses, where part of the income can be hidden in cash and eventually moved out of the country, the article added.
The government needs to reduce rates and expand the base. Provinces must take responsibility for collecting a fair share from land, agriculture, and services sales tax. The federal government must broaden the net beyond manufacturing. Otherwise, manufacturing will keep shrinking. Foreign investors will continue to leave. The exodus of financial and human capital will not stop, the article observed.