Tax burden on industrial sector

EDITORIAL: A report in this paper, explaining how 19-20 different federal and provincial taxes presently levied on industrial/manufacturing units disproportionately raise their cost of doing business, ought to ignite a serious discussion on the subject. These are very sensitive times, after all, and the government is desperate for the economy to grow faster and generate additional jobs as it goes into another, no doubt very tough, bailout programme with the IMF (International Monetary Fund).

That is why the manufacturing sector, which is one of the largest national employers and contributes no less than 20 percent to the country’s GDP, must not be burdened with unfair taxes – on top of already historically high input costs – because it only factors into the end price and distorts the economy even more. The sector complains that it is forced to contribute 60 percent to tax revenue, and the report goes on to show that except corporate income tax, all federal/provincial taxes are in fact indirect taxes “in the sales tax mode” – taxes that are readily passed on to consumers and then contribute to inflation.

It’s pretty clear that the cost of compliance is already very high for the industrial sector. And, as we know only too well in these parts, such things are the very opposite of the government’s stated objective of improving ease of doing business and attracting foreign investment. So, as the new finance minister and his team go about rationalising the tax regime, they at least know what not to do – rather what to undo first.

Yet if cost of compliance is painful for industry, it is downright impossible for SMEs (Small and Medium Enterprises) – those whose business turnover per tax year does not exceed Rs250 million. This sector is also a very large employer because it is much less automated and more labour-intensive than industry. And difficult compliance rules for this sector, especially in a protracted downturn accompanied by historic inflation, means more unemployment, poverty and crime in what is, after all, one of the most densely populated countries in the whole world.

And since the last thing anybody needs right now is more social unrest, it’s about time someone in charge did something about this sector beyond mere lip service. Besides, addressing this cost of compliance issue will not only bolster the SME sector and increase employment, a streamlined tax structure will also help with documentation of the economy – another item that has been right at the top of the finance ministry’s to-do list since forever.

There is, therefore, an urgent need to revise tax laws for the industrial sector as well as SMEs. This major exercise is going to be necessary if chunks of the informal sector are to be sanitised and brought into the formal economy anytime soon. So far, many governments have complained about these issues, and also highlighted the urgent need to address them. Yet nobody’s done anything about them so far.

Now, though, with the economy truly on the edge, perhaps the lack of more time and/or other options will force the finance ministry to do the right thing and finally rationalise industry taxes.

Copyright Business Recorder, 2024