A conflict of interest: Foreign investors resist drive to increase tax rates

Metro-Habib reels from the increase in advance income tax.

ISLAMABAD:

As the country struggles to step up revenues by closing loopholes in tax laws, foreign investors have started resisting the drive as it leads to withdrawal of lower tax rates and exemptions that they have been enjoying until recently.

In the first such instance, Metro-Habib Cash & Carry Pakistan – a subsidiary of German Metro Group associated with wholesale business – has asked the government to take back the notification that has multiplied its tax burden, according to officials of the Federal Board of Revenue.

The resistance put up by foreign investors comes at a time when international trade partners as well as donors and lenders are prodding Pakistan into increasing tax revenues as the era of aids and grants has come to an end because of recession in Europe and economic slowdown in the United States.

Tino-Zeiske, the Metro Group’s Vice President for International Affairs, Germany’s commercial counsellor in Pakistan and other officials held on Tuesday a meeting with Adviser to Prime Minister on Finance Dr Shahid Amjad and asked him to withdraw the statutory regulatory order (SRO) 140, issued in February. FBR Chairman Ansar Javed was also present in the meeting.

Through the notification, the FBR has standardised withholding tax at import stage by imposing a uniform rate of 5% advance income tax on commercial and industrial imports. This has closed loopholes in tax laws with the scrapping of zero-rating facility and increase in rates in cases where importers were paying 1% and 3% tax at import stage.

In case of commercial importers, payment of 5% tax will be the final discharge of tax liability under the Final Tax Regime. All reduced rates of withholding tax on import of specified items have now been done away with.

Following the withdrawal of lower tax rates, powers of FBR officials to determine the category of imported goods have also been clipped in a bid to tackle growing corruption in the tax machinery.

Recent assessments of the FBR show that tax revenues can be increased significantly by only controlling leakages with little need for taking some additional revenue-generating measures.

Tax exemptions, most of them allegedly given in return for kickbacks, have been part of the system since long but reached their peak after 2006, FBR officials pointed out in briefings at various forums. This has led to a situation where 84% of tariff lines are governed by SROs while the effective rate of sales tax has come down to just 3.6%.

According to the FBR, in the last five years, Rs651 billion worth of tax exemptions had been given through the SROs.

One of the drawbacks of the SRO culture is that the country has a tax-to-GDP ratio of only around 9%, one of the lowest in the world. In recent months, the FBR has taken certain corrective measures to remove the exemptions as the country prepares for entering a new bailout programme with the International Monetary Fund.

The drive against SROs, unfortunately still through SROs instead of bringing changes through Acts of parliament, has implications for the foreign investors.

“When we started our operations in Pakistan, the government gave us an assurance that the tax exemption will be for 10 years, which has now suddenly been withdrawn without consulting us,” said an official of Metro-Habib Cash & Carry, who spoke on condition of anonymity as he was not authorised by the company to speak to the media.

He said foreign investors needed consistency in policies and any changes midway may affect investor sentiments.

Company’s Director Corporate Affairs Pervez Akhtar confirmed that the group’s vice president met with the finance adviser, but he did not give details and insisted it was a courtesy call and the adviser was briefed about the company’s business in the country.

Officials, however, told The Express Tribune that the adviser asked the FBR chairman to consider the request of the company, but he did not give any firm commitment to the visiting delegation.

Published in The Express Tribune, May 1^st, 2013.

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