High corporate tax rates – a barrier to MNCs

Burdening tax-compliant sector more may lead to disinvestment as has already been witnessed

KARACHI:

Approximately 210 multinational companies (MNCs) in Pakistan operating in sectors like tobacco, oil, auto, pharmaceuticals, banking and others contribute a third of the total tax collection and make a major contribution to the national exchequer.

They also reinvest in their respective units or inject capital into some new ones. Moreover, they make investments of around Rs13 billion annually in Corporate Social Responsibility (CSR) projects to ensure the provision of facilities to around 30 to 40 million people in healthcare, education, infrastructure and community development.

In line with Prime Minister Shehbaz Sharif’s goal to scale up foreign investment, the MNCs have recommended the government to enhance the ease of doing business, including the simplification and digitisation of tax framework.

This is part of the Overseas Investors Chamber of Commerce and Industry (OICCI)’s comprehensive tax proposal package.

Pakistan has a complex tax structure with a multitude of taxes and tax regulators, which needs to be simplified. Also, corporate tax rates in the country are one of the highest in the region and the world with the effective tax rate ranging from 39% to 52%. It sometimes acts as a barrier to new entrants and causes a drag on the MNCs operating in the country.

Pakistan’s tax-to-GDP ratio is low and it should be addressed by broadening the tax base. Currently, only 3% of the population pays income tax, which is unsustainable for Pakistan’s economic growth. Burdening the compliant sector more may lead to disinvestments as the country has already witnessed it recently.

Lastly, the OICCI recommends that the government should devise a transparent and consistent policy framework without surprises, aimed at achieving annual foreign direct investment (FDI) of 3% of gross domestic product (GDP).

Smuggling and illegal trade hurts the economy in terms of reducing revenues, distorting markets and impacting investments due to the informal sector’s expansion. To stem smuggling and illegal trade, Pakistan should modernise its customs system by using advanced IT and digitisation techniques in addition to strengthening border controls.

The country needs to implement sophisticated valuation methods, increase transparency by making import/export data public and enhance international cooperation to combat counterfeiting.

There is also a need to enforce brand registration, impose strict penalties and deploy task forces to eliminate illegal stockpiles. The introduction of a track and trace system for fast moving consumer goods (FMCGs) such as tobacco, sugar, cement and other production lines is likely to help.

Lastly, the Afghan Transit Trade Agreement should be revised to harmonise duties, set import limits and utilise vehicle trackers and scanners. The large-scale unpaid duty on petroleum products from a neighbouring country has already been highlighted as a key challenge by the petroleum industry, which ought to be addressed effectively.

This has been a key consideration for many years given a huge opportunity for ramping up revenues and bringing the informal sector to the tax net.

The incidence of taxation should be equitable across sectors (industry, agriculture and services). The industry’s current share in tax revenue is more than its share in GDP while reverse is the case for agriculture and services.

Widening the tax net will need a broad buy-in from all key stakeholders including the under-taxed and untaxed sectors that is likely to be quite challenging.

Furthermore, there is a need for a wide-ranging public information campaign to clarify misconceptions regarding tax burden, incidence and contribution compared to the regional and peer economies.

Pakistani authorities are keen to see progress on the Federal Board of Revenue (FBR)’s digitisation that will help meet revenue mobilisation goals.

Speaking about the current state of affairs and future outlook, OICCI President and eminent banker Rehan Shaikh said it was also reflected in the most recent OICCI surveys.

However, after the challenging last few years, the economic outlook has started improving since the start of 2024 as evident from the recent positive shift in market sentiment.

Looking ahead, in order to entrench the recent optimism with the expected pick-up in economic growth, consistent decline in inflation and expected increase in domestic and foreign investment, the country needs to progress on the well-known structural reform agenda.

The upcoming budget and the expected longer International Monetary Fund (IMF) programme will kick-start the process. The broad consensus among key stakeholders on the need for medium-term economic stability and structural reforms with an innovative and inclusive approach, led by public-private partnership, will drive a positive outlook.

While there has been some good progress on this front, there are also several challenges in effectively disseminating awareness as well as further embedding intellectual property rights (IPRs) within Pakistan.

Some of the key reasons for this include limited financial and human resources to ensure enforcement and create awareness, lack of prioritisation compared to other economic or social challenges and inadequate coordination between the Intellectual Property Organisation (IPO) Pakistan and other relevant stakeholders, including the relevant law enforcement agencies.

“For the OICCI, this is a matter of critical importance as the OICCI IPR Survey 2023 has revealed that Pakistan is losing up to Rs800 billion annually owing to IPR infringements. As a chamber, we have been actively advocating institutionalisation and enforcement of IP rights as it is a major factor for multinational companies eager to launch new products or bring innovation to a market,” he said.

“More importantly, I also believe that this requires an ‘all hands on deck approach’, which is to get all stakeholders including IPO-Pakistan and other governmental and non-governmental organisations to create a unified and coordinated approach to IP awareness. The OICCI has pioneered IPR knowledge sharing by launching once again in April 2024 the second edition of ‘Evolution of Intellectual Property Rights in Pakistan’ manual in partnership with a leading IP law firm.”

The writer is a staff correspondent

Published in The Express Tribune, June 10^th, 2024.

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