‘Overtaxing leaves little for reinvestment’

High corporate tax and low tax to GDP ratio is due to a very small section of the economy being excessively taxed.

Saad Amanullah June 02, 2011


While Pakistan has one of the lowest tax to GDP ratios in the world at less that 9 per cent, corporate taxes in the country at 42 per cent are far ahead of the global average of 25.5 per cent and Asean average of 27.5 per cent.

High corporate tax and low tax to GDP ratio is due to a very small section of the economy being excessively taxed.

Surprisingly, about 220 companies from the American Business Council (ABC), the largest group of single country overseas investors in Pakistan that includes 67 members from various sectors of the economy, and the Overseas Investors Chamber of Commerce and Industry account for 25 per cent of all the tax collected in Pakistan today.

Several sectors of the economy like most  services-oriented industries, real estate, stock market and agriculture don’t pay tax proportional to their earnings.

The government, unable to expand the tax net, ends up disproportionally taxing the already taxed companies.

In addition, whenever there is a shortfall in revenue collection, new taxes such as one per cent special excise duty, flood relief tax, IDP tax on individuals, etc are added.

On top of these taxes, all these companies are spending a disproportionate amount on creating their own infrastructure to supply energy, water and law and order, all of which should be covered by the taxes that are levied on them. This leaves very little or no money left for re-investment.

The government must focus on expanding the tax net in this budget as further burdening the existing tax payers will severely impact their ability to grow. The ABC strongly believes that true growth in Pakistan will come through a vibrant private sector, where everyone shares the tax burden and the government fixes the infrastructure so instead of spending on it, these companies can expand their operations and help grow employment as well as the economy.

ABC companies do not mind paying taxes as long as everyone pays and they are not singled out as a group that is captive and hence disproportionally taxed.

Every earning member of the society should pay taxes, the taxation structure should be simple and tax rates should be competitive vis-à-vis other countries.

The ABC proposes to expand the tax net by including all sectors into its ambit and incentivising companies and individuals who pay taxes.

A key reason for low foreign direct investment in Pakistan vis-à-vis other countries is our non- competitiveness in terms taxation and infrastructure.

The government must work to stimulate investment and offer a business friendly atmosphere by eliminating inconsistencies in its policies, protecting intellectual property rights, significantly improving rule of law create a level playing field where no one sector feels discriminated or disproportionally taxed.

Only then we will be able to see a prosperous and economically strong Pakistan.

Saad Amanullah Khan is Vice President of the American Business Council.

Published in The Express Tribune, June 2nd, 2011.


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