Big businesses oppose super tax

Air concern over 7.5% tax on retained profits; warn of default risks

ISLAMABAD:

Pakistan’s 100 largest businesses have opposed the continuation of the super tax and voiced their concerns about the imposition of up to 7.5% income tax on their retained profits. They issued a stark warning to the government about the increasing default risks and its impact on the business environment.

Representatives from the country’s business chambers and the Pakistan Business Council (PBC), on Tuesday, shared their taxation proposals and expressed apprehensions about the current economic situation during a meeting with the Senate Standing Committee on Finance.

The committee proceedings reaffirmed the widespread belief that the deteriorating economic conditions have severely affected businesses, leading to factory closures.

Ehsan Malik, CEO of the PBC, representing the country’s 100 largest manufacturers, stated that there is a significant default risk, and the government should not expect new investments.

Pakistan’s industrial sector is already burdened, paying approximately 56% of total taxes despite its 20% share in the economy.

Malik added that fiscal policies were already skewed against the manufacturers and the sector cannot bear the additional tax burden in the upcoming fiscal year.

The PBC strongly opposed the government’s decision to continue the up to 10% super tax, which was initially intended to be levied for only one year. Earlier, the Express Tribune had reported that there was no proposal to withdraw the 1% to 10% tax imposed on affluent individuals and companies. However, according to Section 4C of the Income Tax Ordinance, the super tax will continue beyond the tax year 2022.

Malik urged the government to focus on tracking non-filers of income tax returns by restricting their use of credit cards and reinstating the requirement to present Computerised National Identity Cards (CNICs) for purchases.

Senator Saleem Mandviwalla, chairman of the standing committee, expressed reservations about barring credit card holders who do not file income tax returns, pointing out that Pakistan has only 1.7 million credit card holders.

Businessmen complained about the adverse impact of import restrictions, which have disrupted the supply chain.

The PBC proposed bringing the real estate and trade sectors into the tax net, which, according to Malik, could generate an annual revenue of Rs747 billion for the Federal Board of Revenue (FBR).

Additionally, the PBC opposed any proposal to tax company reserves, arguing that companies should retain reserves to meet working capital requirements and future investment needs.

The Reform and Revenue Mobilisation Commission (RRMC), led by Ashfaq Tola, proposed imposing an income tax of 5% to 7.5% on the accumulated profits (distributable reserves) of listed and non-listed companies. The RRMC estimates that this measure could generate Rs338 billion in taxes in one year. The Commission recommended imposing income tax rates of 5% for listed companies and 7.5% for non-listed companies on their distributable reserves. This tax on reserves would serve as an advance tax on dividends that companies will pay to shareholders in the future. It would be adjustable against the tax levied on the actual distribution of dividends. The concept of advance tax on dividends already exists in the Ordinance for Controlled Foreign Companies.

According to the Tola Commission’s estimation, this proposal would result in an annual revenue impact of Rs338 billion, based on the total value of companies’ reserves amounting to Rs5.44 trillion.

The PBC also expressed concerns about the proposed shift from a final tax regime to a Minimum Tax Regime (MTR) scheme for exporters, stating that it could negatively impact exporters who are already facing difficulties.

With a target of Rs9.2 trillion for tax collection by the FBR, which is 24% higher than the previous year’s target, concerns were raised about the burden falling on manufacturers due to the lack of political will to expand the tax base.

“Without any political will to expand the base and increase the capacity of the FBR, the burden of the additional taxation will again be thrown on the manufacturers,” lamented Malik.

Senator Sherry Rehman, the Federal Minister for Climate Change, highlighted the lenders’ requests for Pakistan to change its borrowing-based economic model. Rehman emphasised that Pakistan must not assume it is “too big to fail” and should actively seek alternative models and arrange funds for climate financing.

Coca-Cola, Director Public Affairs, Aisha Sarwari demanded a reduction in withholding taxes on aerated water from 20% to 16%, citing a significant sales decline for the company since the government increased the rates in February.

The President of the Lahore Chamber of Commerce and Industry advocated for a tax amnesty scheme to disclose foreign exchange hidden by Pakistanis. Additionally, he proposed excluding one-shop owners from Tier-I retailers. However, these proposals were criticised for potentially promoting the black economy and encouraging tax evasion.

Published in The Express Tribune, May 24^th, 2023.

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