KARACHI: Pre-budget steps taken by the government to withdraw tax exemptions through presidential ordinances will hit trade and industry while hurting ease of doing business in the country, Pakistani businessmen have said.
The withdrawal of exemptions has been made in line with negotiations with the International Monetary Fund (IMF), which asks for the withdrawal of income tax exemptions worth Rs140 billion. The ordinance was a condition requisite for the $6 billion IMF program.
Subsequently, dated March 22, Pakistani president, Dr. Arif Alvi, issued ‘Tax Laws (Second Amendment) Act, 2021’ through which 36 tax exemptions have been withdrawn-- some amended and others replaced with tax credit.
Pakistani businessmen say the move will seriously hurt business in the country.
“Pre-budget withdrawal of a number of exemptions will affect trade and industry negatively,” Mian Nasser Hyatt Maggo, President of Federation of Pakistan Chambers of Commerce and industry (FPCCI), told Arab News on Saturday.
“We are already at the lower side of the ease of doing business ranking, and this will further aggravate the situation,” he said.
The tax exemptions withdrawal and transposed into tax credit regime will impact corporate sector companies, the listings of new companies at the stock exchange and IT export industries.
“The exemptions will affect modarabas and new companies to be listed (on Pakistan Stock Exchange),” Muhammad Sohail, CEO of the brokerage ‘Topline Securities,’ told Arab News.
“No major impact on the masses is expected,” he added.
Through the ordinance, the government has withdrawn the reduction in tax rate facilities including the income of a modaraba taxed at 25% and corporate tax rate by 2% for newly listed companies.
“This will impact the investors of modaraba companies because the companies which earlier were giving dividends to their shareholders probably, they will not be doing so in the future,” Adil Ghaffar, CEO of First Equity Modaraba, told Arab News.
“This will impact the income of investors and their purchasing power will be hurt,” Ghaffar said.
The analysts say the tax exemptions will impact the profitability of the corporate giants.
“Our estimates show that removal of relief on inter-corporate dividends will have 5-7% impact on profitability of holding companies”, Sohail said.
Under the ordinance, 100% tax credit will be allowed to IT services or IT-enabled services after fulfilment of certain conditions including the filing of returns and withholding tax statements.
This mainly affects the IT export industry and start-ups whose tax exemption was already subject to bringing 80% of export revenue to Pakistan. Now in addition to the said condition, the industry will have to file its sales tax returns and ensure withholding of taxes on every payment, according to accountancy firm, KPMG.
“Pakistan’s IT sector and IT exports are growing at historic levels at present,” Syed Ahmad, founder and CEO of DPL, a software company based in Islamabad, told Arab News, and added that the trend of record growth would be negatively hit.
“I think for continuity of the growth trend, it is important that the continuity of policy is ensured.”
“Moving away from a system of automatic tax credit and going to claim that tax credit now, will not only increase cost of doing business, but also impact ease of doing business,” he said.
Apart from IT, the exemption has also been withdrawn from the coal mining industry and tax credit will be available on the compliance of conditions.
The impact of these tax exemptions, Pakistani businessmen said, will ultimately be passed on to end consumers and hurt their incomes and purchasing parity.
