Industrial sector: Upfront load of WHT leads to increase in energy costs

LAHORE: An upfront load of withholding taxes has led to an increase in energy costs for the industrial sector, making industrial energy most expensive in the region as an industrial input.

The Federal Board of Revenue (FBR) sources said that energy sector alone has contributed a hefty sum of Rs650 billion during the fiscal year 2017 mainly on account of upfront withholding taxes. Likewise, gas as an industrial input is 37 percent cheaper in Europe as compared to Pakistan mainly because of tax-padding at production and distribution stages. Transportation costs are about 25 percent higher in Pakistan vis-à-vis the regional countries, due mainly to upfront withholding taxes, they added.

They have stressed the point that Pakistani tariff levels are above par and serve as a major impediment to integration in global supply chains, hampering the diversification of exports.

According to the sources, the overextended withholding tax regime in Pakistan has resulted in resource-shift from industry to import, real estate and other non-productive sectors. Besides, they added, the resources travel from formal to informal sectors because of price competition between goods and services produced in the formal and informal sectors. Further, they pointed out, if more substitutes exist in the informal sector, the more difficult it would be for firms in the legal, tax-paying, formal corporate sector to pass off the corporate tax in the form of higher output prices. It is believed that Pakistan's black economy, at any given time, may be equal to the size of the formal economy.

The sources said a wide-range withholding tax regime over the last three decades has distorted incentive structures in Pakistan and weakened the desire for self-reliance. They said the withholding tax regime is inimical to policies, transactional process and import tariff structures, which are critical to enabling firms to participate effectively in global value chains based on core competencies, including manufacturing of different components and services like design, logistics, marketing and distribution etc.

Since government is constantly striving for revenues, said sources, it chooses to withhold refunds so desperately needed by the exporters. The exporters then compulsively have to approach banks for working and export finance capital. While mark-up paid by industrialists gets added to product cost, the government successfully propagates loans so taken as industrial credit off-take to score points in media and the parliament and paint halcyon picture of the economy. All said over-deduction further holds back exporters' potential to compete internationally, they added.

To make things worse, sources said, the withholding tax regime comes down hard with its blunt blade of China-cutting of transactions and taxflation completely sapping competitiveness of the industrial sector. It is in this context that Pakistan's sluggish economy, deindustrialisation, sprawling black economy, sickly revenue generation, receding exports, FDI and home remittance may be seen, analysed and framed in for policy refinement.

Copyright Business Recorder, 2020