National growth has almost stagnated to a point where the economic managers are extremely worried about warding off the financial default on account of domestic and international debt obligations.
In order to pass through this critical financial crunch, the economic managers must turn their focus to framing policies which could enhance tax revenues of the state. For the purposes of enhancing domestic resource mobilisation in terms of increased revenue, we need to identify areas of economy which have been growing consistently over the last at least one decade.
In addition, the sectors which are receiving windfall profits in the wake of devaluation of currency and enhanced policy rates and getting enriched by the increased prices of petroleum products, utilities and real estate should be focused for getting appropriate revenue contributions out of the profits and gains earned by them not by their own policy initiatives but by default the public policy measures taken in the wake of IMF financial package. Recent World Bank report has also reviewed the economic situation of Pakistan and has suggested some solutions and identified certain areas of economy which require immediate attention of the economic managers for resource mobilisation.
The bank has, inter alia, suggested that tax exemptions should be done away with and that valuation tables of immoveable property should be revised upwards to bring values at par with the market rate. They further suggested that rates of income tax on salaried income be enhanced and pensions income be subjected to tax to enhance revenue in short term. In addition, the agricultural income should be taxed at par with income from other sources. Deeper analysis of economy reveals that there are certain specific areas which are earning enormous profits and gains consistently but are either exempt or not contributing their due share to tax revenues. These areas relate to profits and gains earned by the exporters, income earned by IPPs, telcos and banks.
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These businesses are earning huge profits and gains but their contribution to national revenue is far less proportionate to the profits and gains earned. Taxing this potential area will be far less controversial than taxing the salaried or pensioners class and enhancing valuation of property tables which may face severe resistance from provincial governments.
In the neighbouring countries as elsewhere, income earned through exports is taxed like a regular income earned from any other business and is subjected to tax at the same rate as is applicable to income earned from any other business enterprise. No distinction is drawn between export income and income earned from other sources.
However, in some countries, export goods made at the export promotion zones are subjected to concessionary rates which are about half of the rates applicable to normal income. But nowhere is complete exemption granted to such a regular source of income.
However, export income in our tax system is charged at foreign exchange proceeds at nominal rates which makes revenue contribution of this sector disproportionate to the advantages and concessions they avail for manufacturing exportable goods.
As is evident, proceeds worth trillions of rupees are being received annually from this sector but no reasonable tax contribution is forthcoming due to application of the concessionary rate of tax. Therefore, this potential revenue area needs immediate attention of the policymakers sitting in Q-block and FBR.
Income earned by independent power plants (IPPs) also enjoys total exemption from taxes including income from capacity charges. The exemption regime is so overwhelming that income earned by these enterprises is exempt not only from normal taxes but the same is also exempt from minimum taxes which are applicable to other exempt and loss-making enterprises.
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Therefore, at present blanket exemption has been granted to this source of income which looks odd in the prevailing economic circumstances. On top of that, no sunset clause has been laid down for capping such exemption period.
Such concessions from taxes were granted to the earlier plants conceived and installed when Pakistan was facing acute power shortages and the FDI was not easily accessible. The consequence of the blanket exemption is that presently all power plants enjoy exemption on their incomes and are not liable to contribute to the national exchequer despite earning burgeoning income and gains.
Exemption from income tax is not a practical and workable idea in a developing country where there is already an acute shortage of resources and where poverty is rampant and human development index is far below the desired level. However, concessions may be granted for setting up new industries and rebate may be offered for import of raw materials.
However, once income is earned, the due share should be passed on to the national exchequer. In simple terms, no tax concession on income earned post- start of commercial production.
Insight into tax contribution of telcos would reveal that their contribution to personal taxes on profits and gains is disproportionate to profits and gains earned. The business income earned from these entities is being taxed at the rate applicable to a manufacturing business whose processes are much more complex and involve multiple stages of production before getting to the final product.
In contrast, the business of telcos does not involve any cumbersome processes rather they are more akin to services than the manufacturing sector. Such enterprises where production stages are few and processes and sales of product are easier in terms of sale and collection are generally assessed to tax through a separate regime in the form of a schedule containing rules for computation of profits and gains and tax payable thereon.
The prevailing taxation regime has already had examples of taxation by schedules for the petroleum production and exploration industry and the banking sector. In the former case, gains and profits are taxed at 40% to 55% rates.
The assessment and computation of profits and gains of telcos by a separate schedule is all the more essential as it would add more clarity to multiple disputed heads of accounts, deduction claims and expenditure claims made in income statements which have opened floodgates of tax litigation and in consequence tax revenue of billions of rupees has been stuck in appeals process.
In addition, due to prolonged litigation, the government has not been able to recover the taxes assessed and both the litigants have to bear additional cost on such litigation. What holds true for the telcos also holds true for the banking companies. Customers’ deposits are leveraged by banks for investment and earning profits and gains.
In view of the increase in policy rate, the profits of the baking companies have substantially increased whereas the ratio of disbursement of profits to the customers has not increased as such. So, richness and prosperity by using customers’ funds defeats the purpose of equity and fair distribution of resources.
These banking companies have the capacity to pay taxes to the national exchequer, commensurate with their exorbitant earnings which is caused not by their indigenous initiative or creative policies but by the jacking up of interest rates and high inflation.
The repealed Income Tax Ordinance, 1979 subjected the profits and gains from the banking companies to the rate of over 60% which unfortunately was brought down gradually to sit at par with that of manufacturing companies with sheer disregard to the nature of income generated by these two sectors.
Tax revenues are the byproduct of economic growth and should be ideally collected from the high earning sectors, particularly such sectors which are earning exuberant profits and gains as a result of public policy measures. Treasure troves should invariably be shoveled instead of digging dry troves.
The enterprises mentioned above have the capacity and potential to pay the fair share of tax revenues which is all the more essential to create fiscal space to enable the executive to work for equity and social justice and prosperity in society.
The writer, an officer of Inland Revenue Service, retired as Member FBR
Published in The Express Tribune, October 30th, 2023.
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