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Rising cost of doing business

11 Mar 2010

The news of an increase in Special Federal Excise Duty by one percent, 18 percent power tariff hike and 26 percent increase in gas tariff have jolted the Pakistan business community. In conjunction with the proposed taxation measures in the second half of the current fiscal year-special excise duty (SED) from one percent to two percent and withholding tax on cash withdrawal from banks from 0.3% to 0.5%- the changes in taxation will probably influence the economy of Pakistan.

Taxand Pakistan discusses how this is impacting their economy and investors.

The government is, instead of reducing wasteful expenses and bringing more people in to tax, levying indirect taxes/duties on inputs (raw materials, utilities etc) so the cost of doing business is impacting consumers making it difficult for the business houses to recover their capital reducing profits without realising its impact on everyday life. Businessmen can no longer recover the cost of various inputs from the end users-the purchasing power of the masses is fast diminishing due to inflation and decrease in earning in real terms. The untapped avenues of resource mobilisation-introduction of progressive taxes and increase in production-do not have the attention of the government. The result may affect the economy of Pakistan.

The business community have stressed upon the government to explore new avenues for broadening tax base instead of putting more pressure on the existing taxpayers. The proposed taxation measures in the second half of current fiscal year-special excise duty (SED) from one percent to 2 percent and withholding tax on cash withdrawal from banks from 0.3% to 0.5%- may further deteriorate the economic situation in the country. The enforcement strategy of the Federal Board of Revenue (FBR) has already created concern in the business community. The Finance (Amendment) Ordinance, 2009 section 177 of the Income Tax Ordinance, has been amended giving extensive powers to the newly designated Officers of Inland Revenue.

The government is increasing electricity and gas tariffs. The extra costs will impact the economy and may affect the competitiveness of the export products of Pakistan.

According to official figures, the contribution of income tax-although a major portion of it is now composed of indirect levies or expenditure taxes-as percentage of GDP is continuously declining; it was merely 2.2% in 2008-9, 2.4% in 2007-08, 2.8% in 2006-07, 3.01% in 2005-2006, whereas in 2004-2005 it was 3.15%. The sole reliance on indirect taxes that constitute over 78% of total collection proves beyond any doubt that the tax system is directly contributing to rising cost of doing business and abject poverty.


Taxand's Take

The prevalent economic and tax policies are detrimental for business and industry. From our point of view, the government's priority should be focused on improving productivity and economic growth so that it will ultimately lead to more revenue generation. At present, our economy is faced with a dilemma, where it can neither afford to give any meaningful tax relief package to the common people, trade and industry (due to huge fiscal deficit) nor can it achieve a satisfactory level of economic growth (due to retrogressive tax measures). This is a vicious circle that the government needs to break. It must come out of this tangle to make Pakistan a competitive economy where investors, both domestic and foreign, find satisfactory conditions to live in and invest.

Your Taxand contact for further queries is:
Huzaima Bukhari
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