Pakistan's business community demands government to share roadmap to alleviate taxation burden

Pakistan's business community demands government to share roadmap to alleviate taxation burden

By: Communicators - Business Team (July 15, 2024)

With Pakistan reaching an agreement for $7 billion extended fund facility with International Monetary Fund (IMF), the Pakistan Business Council (PBC) has demanded that government should now take the business community into confidence by offering a roadmap on how and when their taxation burden will be alleviated. The government should provide relief by cutting back on public expenditure and broadening the tax net. The government should also share the progress on digitalizing and restructuring the FBR.

The trust deficit between formal businesses and government is at its highest due to the lack of communication by the government in the lead-up to and following the budget announcement. PBC has expressed that the country’s economic managers should come to Karachi, listen to businessmen and consider their concerns, including a level playing field with the informal sector.

The government must also acknowledge the role that the formal sector plays as unpaid tax collectors on behalf of an ineffective FBR. Pakistan's weak negotiation position with the IMF may do little to shape the 24th programme in a more reform-centric and less front-loaded way, but it is worth trying. Otherwise, the result will not be different from the past

The FBR, in its current form, is incapable of broadening the tax base and its chairman has openly admitted the fact. The IMF also realized that the only way to help balance the fiscal account is to put further burden on the already taxed sectors.

The global lender has recognized the inability of the government to walk the talk on cutting the government’s size and reigning in public expenditure. The IMF is also aware of this government’s inclination toward infrastructure projects, and surprisingly, it appears to tolerate that. 

IMF is primarily focused on the immediate challenge of dealing with Pakistan’s debt vulnerability. There are some good measures that the IMF has successfully imposed on the federal and provincial governments. New tax on agriculture income has been identified as “the most important development”. 

What remains to be seen is whether IMF can prevail in revising the National Finance Award, as simply producing a provincial budget surplus is hardly a motivation for the provinces. The provinces need to take responsibility for the Benazir Income Support Programme (BISP), leakages in energy distribution, and a good share of the Public Sector Development Programme.

IMF also wants the government to resist new regulatory and tax-based incentives and phase out Special Economic Zones incentives. This would discourage investment in a country with a low investment-to-GDP ratio and now one of the highest tax rates in the world.

Refraining from the expansion of generation capacity and guaranteed return projects is a welcoming condition. IMF’s insistence on timely adjustment in energy tariffs detracts from fundamental reforms of the energy sector. On a positive note, replacing cross-subsidies with targeted BISP support augurs well for an industry burdened with regionally uncompetitive energy costs.