Complex tax system keeps businesses from documenting setups: SBP

Postfiling index invokes for massive scale of reforms in tax audit, compliance structure. It takes around an average of 45 days to dispose a complaint against revenue division /FBR

M Jahangir Hayat

LAHORE: The complex nature of tax system, cumbersome documentation processes perception and incidence of corruption put enough fear and intimidation among a number of existing and emerging businesses to keep them from documenting their setups altogether, this was stated by State Bank of Pakistan (SBP), in its recent findings.
The SBP said that the overall tax regime that encompasses tax structure, rates and payment technology influences investment climate in the country.
“To promote investment, the underlying aim of a tax policy regime is to set two distinct goals: first, incentivizing potential investors, and second, increasing revenues to finance essential infrastructure for a business-enabling environment,” the central bank explained.
The pro-investment environment entails a tax system that meets some necessary conditions including fairness, adequacy, simplicity, transparency, and administrative ease.
The tax authorities in Pakistan have largely struggled to create an environment that is conducive to increase the tax-base, lower the distortions, and promote equitable and efficient tax system in the country, the SBP report added.
“Instead, the complex nature of tax system, perception and incidence of corruption, and cumbersome documentation processes put enough fear and intimidation among a number of existing and emerging businesses to keep them from documenting their setups altogether – certainly, some businesses stay off the radar by their own choice to evade taxes.
The SBP highlighted that this has led to a steep surge in the country’s informal economy over the years.
In this context, a challenging task for policy makers in the country has been to keep the principal trade-off in providing tax relief to investors while maximizing revenue mobilization, the SBP underscored adding that currently, the tax authorities are struggling to improve the tax-to-GDP ratio, which stagnates around 12 percent in last 5 years, among the lowest in the world.
“The registered income taxpayers documented in the country were 4.8 million in FY17-18, representing mere 2.2 percent share of current population,” the central bank shared.
In case of sales tax, only 0.2 million business concerns are registered with tax regulatory authorities; 68 percent of overall domestic sales tax revenue comes from nine major sectors including POL, electrical energy, cement, aerated water/beverages, cigarettes, fertilizer, natural gas, sugar, and other food products, the central bank report explained adding that the share of other major industries and sectors including auto, textile, chemicals and services sector etc. remained insignificant regardless of the size of their activity in the domestic market.

The SBP indicated that the severity of impediments a business faces in dealing with tax-related procedures is reflected in a very low ranking of 173 out of 190 countries in doing business indicator of ‘Paying Taxes’. In the South Asian economies Hong Kong enjoys the best-scored country.
The absolute score average of paying taxes of Pakistan remained lowest in the South Asian region, the SBP said.
Qouting an instance the SBP report explained that according to the latest report of Ease of Doing Business 2019, a medium-sized manufacturing firm is required to pay 47 payments in a single year to different regulatory authorities in the country.
“Of these, 17 belong to Federal Board of Revenue (FBR), 12 to Employees Old-Age Benefits Institution (EOBI), and 18 relate to different provincial departments and social security institutions,” the report explained.
“The worst performance in the paying taxes was recorded in post-filing index that measures the compliance with and efficiency of completing VAT cash refund and tax audit, the report pointed out
“More specifically, a medium-sized firm requires more than 10 days complying with requisites of VAT refunds and 79 weeks obtaining VAT refunds; this is the worst performance in the region after Afghanistan,” it was said.
For businesses, the inordinate delays in tax refunds create liquidity crunch and increase the risks attached to the viability of upcoming ventures”. The report shedding light on accumulated refunds of businessmen with FBR, said that the latest available statistics suggest that as on June 2018, claims of Rs 372.1 billion were pending with FBR against income tax, sales tax and federal excise duties, FBR had issued Rs 83.1 billion of refunds during July 2018 till March 2019.
The SBP report further highlighted that the ranking of the country also remained lowest among the peers for other indicators, such as time to comply with corporate income tax correction and time to complete a corporate income tax correction.
“In addition, it takes around an average of 45 days to dispose a complaint against revenue division /FBR.
“The substantially low score of postfiling index reflects the hurdles a business must overcome to continue its operations in the country; it also invokes for massive scale of reforms in tax audit and compliance structure,” the SBP report concluded.

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