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EDITORIAL: World Bank report titled “South Asia Development Update Jobs for Resilience” highlights the existing policy flaws impeding investment – foreign and domestic requiring remedial measures, including withholding tax in the sales tax mode that requires multiple registrations with the Federal Board of Revenue (FBR) and with provincial tax authorities, an exercise focused on raising revenue rather than facilitating investors, which raises tax compliance cost and the cost of doing business. To lure investors, foreign or domestic, would require a massive reform in the existing tax system.

The World Bank report was uploaded on the Bank’s website the same day that Prime Minister Shehbaz Sharif, while presiding over a meeting to review progress on foreign investment, stated that the promotion of foreign investment is his government’s top priority dedicated to turning challenges into opportunities while assuring investors that they would be provided all possible facilities.

It is relevant to note that Pakistan Bureau of Statistics, Ministry of Finance and Fiscal Policy Statement itemized agriculture’s share in GDP at 19.2 percent and its share in taxes a mere 0.6 percent, industry had a share in GDP of 20.9 percent but was contributing a disproportionate 69.6 percent to tax collections and services with a 59.9 percent share in GDP contributed 29.8 percent to tax collection.

Additionally, domestic investors are being crowded out of the domestic credit market because of a massive rise in government borrowing and the rise in energy tariffs due to the fact that lender conditions are impeding the capacity of the export sector to compete regionally.

The Shehbaz Sharif-led government approved Investment Policy on 7 July 2023, the outcome of the Special Investment Facilitation Council’s (SIFC’s) deliberations, that introduced the following measures: (i) abolishing the minimum equity requirement for foreign investment, and allowing investment in all sectors except casinos, alcohol manufacturing, arms and ammunition, atomic energy, high explosives, currency and mining; (ii) freedom to repatriate profits in their own currency and receive special protection; (iii) no restrictions on easing land or transferring land; (iv) no restriction on foreign real estate investors; (v) foreign investors allowed to hold 60 percent stake in agricultural projects and 100 percent equity in corporate agriculture farming; (vi) incentives based on performance and location; and (vii) simplifying business regulations and providing guidelines for establishing an investment grievance mechanism to address disputes.

There are three overarching risks to investment that persist to this day; notably, the available foreign exchange reserves that would guarantee prompt repatriation of profits (especially as many Chinese Independent Power Producers are currently seeking government intervention to ensure release of foreign exchange to import fuel and/or to repatriate profits), terrorist attacks that target Chinese workers and political violence due to uncertainty. The latter is associated with high inflation, low growth (World Bank projects a rate of 1.8 percent at best for the current year) with obvious negative repercussions on available job opportunities and the need to borrow from multilaterals to avert the threat of default with associated conditions of raising tax collections that if past precedence is anything to go by has implied raising taxes on existing payers.

There is no doubt that friendly countries have pledged considerable foreign investment, 24 to 25 billion dollars, as per members of the executive; however, unless investors find a fertile ground for their investment this pledge may remain unmet as it did in the past. It is therefore critical for the government to formulate and implement tax reforms with a view to streamlining the tax registration system, reducing compliance costs and abandoning the focus on revenue and instead focusing on reforms. The initial year or so when revenue may decline due to ongoing reforms the government must tackle its resource constraints by reducing current expenditure through voluntary sacrifices of major recipients, reforms in pensions, in state-owned entities and in targeting subsidies.

Copyright Business Recorder, 2024

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KU Apr 08, 2024 12:35pm
The truth is that Pakistan is in trouble and we are in denial, but fast approaching point of no return. Its critical now, despite WB/IMF advice on public sector waste/theft/tax, we are not heading.
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KU Apr 08, 2024 12:38pm
To attract FDI we need political stability, infrastructure, skilled manpower, law and undue interference/exploitation by public sector. We don't have it, our policy makers consistently ignore this.
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KhanRA Apr 08, 2024 01:54pm
No country with such a poor image attracts investment. 4th worst passport in the world. What is wrong with the view of Pakistan? Maybe they see what we ignore - rampant religious extremism and bigotry
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Tariq Qurashi Apr 09, 2024 02:07pm
FDI that takes profits in foreign exchange out of the country should not be given preference. Preference should be given to FDI that has an export component and can earn foreign exchange.
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