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KARACHI: With reference to the draft Income Tax (Second Amendment) Act 2021, which is being extensively discussed in the media, Pakistan Business Council (PBC) has come up with a set of comments on the proposed changes.

In a letter to Minister for Finance and Revenue Affairs, Dr. Abdul Hafeez Shaikh, PBC Chief Executive Ehsan A Malik said that withdrawal of existing fiscal concessions will damage investor confidence. He said investment decisions are made keeping in view consistency in tax policy. Frequent changes in the tax policy as is once again being proposed in the Act can only have a negative impact on both existing as well as potential investment. Fiscal incentives which were time-bound need to be allowed to continue for existing businesses till their terminal dates, while the government may add its discretion deciding not to extend these two new entrants.

Withdrawal of incentives for listings: Listed companies due to stringent regulatory requirements are some of the most compliant entities in any tax jurisdictions. The proposal to withdraw fiscal incentives currently available to listings will impact the growth and democratization of the capital markets. Globally, listed companies attract FDI in the form of equity and partnerships. Not encouraging local corporates to list will hamper not only FDI but also opportunities for local corporates to raise capital from global markets.

Discouraging consolidation of local corporates: Governments in emerging markets encourage companies to consolidate and grow in scale to take on global opportunities. The proposed change in the holding company law, ie, clause 103C reduces the incentive for local corporates to consolidate and scale up to face regional and global competitors.

Taxing income of corporate in exempt sector: The decision to tax income of corporates derived from agriculture – a sector which is mostly unorganized and tax exempt creates disincentives for corporatisation of agriculture. The FBR seems to be missing the point that though the corporates in agriculture sector themselves may not be required to pay tax on their income. They are withholding and depositing tax on the payrolls of their employees.

Violation of sovereign obligation: The amendment proposed to move against legally enforceable sovereign commitments to power producers, LNG Terminal Operators, OGDCL Bond holders, etc. This will lead to not only litigation within the country but can also lead to recourse to international courts. A better strategy would be to not provide these fiscal incentives going forward.

Penalizing services rendered outside the country: The proposed decision to tax services provided by Pakistani companies outside the country as well as receipts against intellectual property such as royalties, technical fee, etc, at the normal rate will reduce the incentive for Pakistan-based companies to render services abroad or to market their intellectual properties to foreign clients. The government should be working to promote export of services, not to discourage it.

Copyright Business Recorder, 2021

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