Pakistan overhauls tax laws in hopes of extending economic gains

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Pakistan overhauls tax laws in hopes of extending economic gains

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Pakistan’s economic growth experienced a significant spurt during the past two quarters of the fiscal year 2017-18. This happened on the back of investments under the China-Pakistan Economic Corridor programme, a liberal credit regime for the private sector, and growing domestic demand. Additional capacities have also been added to large-scale manufacturing industries, including the steel, iron, cement and automobile sectors.

During the past seven months of this fiscal year there has also been an increase in the value of Pakistan’s exports to the US, China, the UK, Germany and Afghanistan. Key export items proving increasingly popular include textiles, cereals, processed food, leather and mineral products. Pakistan currently also enjoys preferential market access under the European Union’s Generalised Scheme of Preferences, which has helped promote Pakistan’s garment sector in several European countries.

This newfound wave of economic growth is not without risks and challenges. The increase in imports has caused a sharp decline foreign-exchange reserves held by the central bank. As Pakistani exports include a significant amount of imported components, economic managers therefore have found it hard to reduce the expanding import bill.

In addition, in an attempt to remain popular during an election year and provide uninterrupted power and gas supplies to industry, the government has been subsidizing the losses of energy-distribution companies. This, along with a few other loss-making public-sector enterprises, has forced the government to resort to higher domestic debt. The rising public debt will remain a concern as Pakistan is also increasingly resorting to short-term external debt to lessen pressures on dwindling foreign-exchange reserves.

The government seems confident for the time being that the growth rate of exports will exceed that of imports, which could bring some respite in the short term. However, if the foreign-exchange reserves fall below the level of covering two months of imports, the government will have to approach lenders of last resort. In the past this has usually been the International Monetary Fund (IMF). However, this time citizens are being told the Chinese government is keen to bail out Pakistan from balance-of-payments difficulties, so the IMF might not be needed.

Furthermore, the recently announced amnesty scheme and federal budget 2018-19 featured several changes through which the government expects to attract foreign currency-denominated savings that might have been invested abroad by affluent Pakistanis, and tap into the wealth stored in informal and undocumented sectors within Pakistan. This includes undeclared real estate, local bank accounts and bearer securities and bonds.

The rising public debt will remain a concern as Pakistan is also increasingly resorting to short-term external debt to lessen pressures on dwindling foreign -exchange reserves.

Dr. Vaqar Ahmed

A presidential ordinance in April 2018 offered an amnesty for Pakistanis who legitimize their illegal and undocumented incomes and assets, at a rate of 2 percent and 5 percent. Citing examples of similar schemes in Indonesia and Argentina, the federal finance minister hopes such a measure will encourage Pakistanis — at home and abroad — to declare and transfer to Pakistan their foreign wealth which, in turn, could boost foreign-exchange reserves and alleviate the balance of payment woes.

To target Pakistani nationals conducting business in the informal segment of the economy, several amendments have been made to the tax code with the expectation that they will force people outside of the tax system to register with the authorities. It is hoped this will provide a boost to government revenues, which are quickly depleted every year due to rising debt-servicing costs and spending on improvements to security and law and order.

There are some unconventional new measures that might force many to start filing tax returns. Any citizen who fails to register for tax by June 2018 will not be able to attain the status of a tax filer until the following year. This could result in the imposition of higher, non-adjustable withholding charges on certain transactions.

Those who do not file taxes shall be prohibited from purchasing property worth PKR 4 million ($35,000) or more. In addition, they will not be permitted to buy new motor vehicles. A 3 percent general sales tax will also be levied on any business or individual selling goods to unregistered suppliers.

To track the flow of money into and out of Pakistan, citizens will be required to explain the source if remittance from overseas in a year exceeds PKR 10 million. When money is sent out of Pakistan a withholding tax will be applied, which is higher for those not registered for income tax.

Sustaining growth will also require continued public and private investment in critical infrastructure needs. A quarter of Pakistan’s population still lacks access to basic services, such as electricity, water and waste disposal. At least 9 percent of gross domestic product must be spent on closing the infrastructure gap over the next decade.

All this has to be accomplished if Pakistan’s economic growth rate for the next year is to grow by more than 6 percent. The federal budget and the government’s own development spending can make this possible if increased production can be maintained in the construction sector (particularly low-cost housing), agroprocessing industries, and five export-oriented sectors: textile, leather, carpets, surgical and sports.

— Dr. Vaqar Ahmed is joint executive director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by Oxford University Press. Twitter: @vaqarahmed

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