According to financial experts, the ratio of aggregate corporate taxes in Pakistan has reached 40 percent with imposition of super tax entering its third year. The rate is the twice the average tax in Asia as bonus shares as well as retained reserves are taxed as penalty rather than success. It appears the imposition of super tax on bonus shares and reserves are taken as preemptive measure to discourage investment schemes in the country. The Federal Board of Revenue issued draft rules two years ago to implement super tax for rehabilitation of temporary displaced persons. The banking companies are liable to pay tax at the rate of four percent of income and all other taxpayers at 3 percent of income if their income exceeds Rs500 million. According to experts, the imposition of super tax has weighed down banking sector profit by 23 percent or to Rs 40 billion during the fiscal year 2015-16.
Despite carrying 52 percent of the tax burden, the GDP ratio of the manufacturing sector in has declined to 13 percent which resulted in increase in unemployment, decrease in exports and the country faced shortage of funds to invest in social sector development programmes. The local industry has been under pressure for the last one decade due to various imprudent policies, including wholesale singing of free trade agreements with various countries, unrealistic tax regime on import of common goods, energy crisis, under-invoicing and tax evasion. Inconsistent import policies have spurred smuggling activities in border areas with Iran and through Afghan Transit Trade. If the government wants to improve trade and industrial activities, it will have to curtail ratio and number of taxes and will have to enhance tax net. The local industrial entrepreneurs should be encourage to modernize their industrial units and diversify their products. It will, therefore, be plausible if the government encourages capital formation, creates an environment of competiveness in the industrial sector and pushes for public participation in listed companies.
The government should set up free trade zones, export processing zones and industrial areas to attract foreign investment not only from China, but also European countries. Instead of putting burden of taxes on the local investors, they should be encouraged to participate in the industrialization process of the country. Otherwise, it will be difficult to stop brain drain and capital flight.