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Some of the budget proposals circulating in the media — especially those recommended by the reforms and revenue mobilization commission (RRMC) –have been termed anti-documentation and anti-corporatization by analysts and businessmen. One businessman described this as nationalization. The government must think through before implementing some of the measures such as tax on company reserves and minimum asset tax (MAT) on domestically held movable and immovable assets.

The government is desperate to enhance tax revenues at a time when debt servicing expense is higher than net federal fiscal revenues by a good margin. However, the government is attempting to tax those who are already in the tax net while not much effort is being put to those who are (or part of their balance sheet is) simply out of the documented system. In the previous PTI regime (or even under Miftah Ismail last year), there was at least a resolve to tax the untaxed. However, now under Ishaq Dar, the concepts are clear – to squeeze the existing taxpayer further.

In terms of direct taxes collection, 15 percent (or less) of the manufacturing sector is paying half of the tax. And Dar is determined to further grind that axe. In addition, recommendations have been made to tax the accumulated reserves. The proposal is to impose an advance tax of 5 percent on listed firms and 7.5 percent on unlisted firms. The tax is adjustable on actual dividend distribution by the company in the future.

The architect of this proposal perhaps think that this tax is levied to lure the companies to pay dividends and it is in the interest of minority shareholders. One may wonder if that is the case why there is a tax (and the rate is higher) for unlisted companies. The objective seems simply to collect as much of taxes today from a pool that is in the tax net. And such measures may shrink pool that further.

The question is if the government is collecting advance tax on future income what would the government collect in the future? The tax shall be adjusted against future dividends to the shareholders; but ownership may change hands at the time the actual dividend is paid. Is it a tax on the shareholders or the company?

One financial market expert termed this as slow poisoning of the economy. “I am not saying give capitalists any tax advantage, but when you tax the same guy, the other untaxed guys become stronger and stronger and your ability to tax them reduces further i.e., slow poisoning of the nation. Not the state, state is a club of men who govern, they get their due share from every Tom and Harry; but the nation that gets even poorer.”

Others have complained how can the government differentiate between those reserves which are to be used for dividends and those that are to be used for working capital and capital expenditure. Such taxes hinder firms’ ability to expand, and they must borrow at prevailing high interest rates to finance working capital. However, the public sector perhaps believes that if the government borrows at 20 percent+ why cannot the private sector? This reflects a complete lack of understanding that the government is passing on the burden to the public and keeps on borrowing without bringing any efficiency in its spending. The private sector is a different animal.

The tax has triggered a panic among big companies. One of the owners of a big textile firm (who is operating from Dubai these days) decided to call a meeting of shareholders to increase the authorized capital of the firm to lower the undistributed reserves through offering bonus shares. Many others may also follow suit. There is a hefty fee of Rs130 million for doing so. Seths are ready to spend this money to avoid the tax.

Then there is another tax- MAT. This is to be an extension of existing capital value tax (CVT) which is currently levied on foreign assets. In this case, any domestic individual would pay a minimum tax on movable and immovable assets where the asset value exceeds Rs100 million. This shall be adjustable against domestic income. This is akin to wealth tax and regressive in nature. And if companies avoid tax on undistributed income, they will come under the ambit of this tax.

The message for the organized tax-paying sector is that they are – for the lack of a better term - suckers for being formal and organized. Message is to move further towards informality. And that has been happening since 2015-16 when the then finance minister Dar (who is at the helm today as well) imposed tax on banking transactions and expanded the withholding tax regime where the formal sector becomes responsible for collecting taxes for suppliers and other informal players in the value chain.

One indicator of informality is cash in circulation. This used to be 30 percent of bank deposits in 2015 and now it is close to 45 percent of bank deposits. This is going to increase further. And now foreign currency cash circulation is increasing as well. There are other measures in parallel which are increasing informality – for example, the imports restrictions from official payment channels while opening a route to pay for imports through informal (hundi/hawala) channel. This has pushed the formal businesses to the back-foot while smaller and informal players are exploiting the opportunity.

In the end these measures intentionally or unintentionally kill the formal documented sector. So much for reform!

Copyright Business Recorder, 2023

Author Image

Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar


Comments are closed.

Builder May 29, 2023 12:58pm
I agree with the author. Dar lives in an outdated box which he can't get out from. The only solution to increase revenues is to tax the untaxed, that's it. This is the only way we will, someday, be able to lower GST and relieve the lower class of this undue burden.
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KU May 29, 2023 01:13pm
There is absolutely no hope for any kind of plausible plan or economic recovery that focuses on key sectors of the country. There also seems to be a criminal ignorance of agriculture's future or 60% of people associated with this sector and is reflected in the consistent rise in the cost of production. Foolish ideas revolving around increasing new hybrid taxes on industry and people who are already paying tax is the level of competence that we are faced with. But when your fate is decided by a corrupt virus and useless propaganda, there is little you can do.
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Wasif May 29, 2023 01:14pm
We are seeing geniuses at work, increasing the Tax net is not such a rocket science as its made out to be. Its a simple function of making life unbearable for undocumented sector, if only those in power were not the ultimate beneficiary of it. (across all parties and power centers)
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Tulukan Mairandi May 29, 2023 02:59pm
They have poisoned minds of the people. The economy is next. Soon we will have no country
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Carl May 29, 2023 06:46pm
"One indicator of informality is cash in circulation. This used to be 30 percent of bank deposits in 2015 and now it is close to 45 percent of bank deposits...In the end these measures intentionally or unintentionally kill the formal documented sector. So much for reform!" The major dilemma is that no lessons have been learnt from debacles of 1971...economic stability comes from political stability for which will of people is a must! Holding a free and fair elections is the only viable solution for the survival of the nation! men in uniform cannot continue to run country like past 75 years! People cannot take it any more! Wake up! Let people decide their future! or else a bloody civil war awaits around the corner!
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John May 29, 2023 11:47pm
Clueless remain clueless about the economy!
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TM May 30, 2023 08:12am
Taxes are not the solution of anything. Actually the true thing is right and 100% recovery. Second most important thing is to impose death penalty law immediately is the demand of current time. Now we are getting deposit from Saudi areb, and kSA currency already stronger 300 times then two years before. It’s also coming worthable like USD, it will also cause same now we are facing for USD.., and will be very very difficult for a common person to perform Umra.., already Hajj expenses people already have seen gone where. So it’s very importnat to stop new taxes, but 100% recovery and death penalty on corruption is very importnat.
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TimeToMovveOn May 30, 2023 07:38pm
@Carl, "The major dilemma is that no lessons have been learnt from debacles of 1971" "only viable solution for the survival of the nation! men in uniform" "cannot continue to run country like past 75 years! People cannot take it any more! Wake up! Let people decide their future! or else a bloody civil war awaits around the corner!" With these statements, reality, and clarity, there is hope for Pakistan. And then there are others in this forum who are delusional about what is happening in Pakistan. I hope they are in the minority, and you are in the majority.
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Syed Zain Hussain Shah May 30, 2023 08:48pm
With a wild dog by the fanciful name of Imran Niazi on the loose and ready to bite and murder any nearby citizen with a modicum of morality present in him, it is not a wonder that the likes of analytical Ishaq Dar and compassionate Shehbaz Sharif had no choice but to assuage the desires of the rotten international establishment by agreeing to a variety of murderous policy measures such as currency devaluation. However, the worst tragedy that could ever hit Pakistan (privatization of our world-honoured state industries/companies) may yet arrive. To avert that tragedy, Imran Niazi must be hanged at the earliest opportunity and that too in the enlightened city of Shikarpur. It is my city and I have powerful connections to many people here, I would certainly invite all of my tenants and mulazims to throw stones at Niazi at such a wonderful occasion.
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MaiKolachi May 31, 2023 03:27pm
The crooks & corrupt specialize in slow poisoning!
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