Unfortunately, no serious effort has ever been made in Pakistan to devise a rational tax policy for encouraging corporatisation of business leading to economic growth. The sole stress on irrationally-fixed revenue targets -- with main incidence on the weaker sections of society -- has created an ugly fiscal mess.

The persistent failure of successive governments -- military and civil alike -- to broaden the tax net, confiscate untaxed assets and ill-gotten wealth, spend public money prudently and remove socio-economic imbalances has pushed Pakistan into a dark ‘debt prison’. We can get out of it provided there is leadership having substantial competence and unshakeable determination to pursue a pragmatic reform agenda to transform Pakistan into an egalitarian State -- true social democracy with justice for all.

One of the main tools of tax policy is to increase the level of savings and capital formation in the private sector partly for borrowing by the government and partly for enhancing investment resources within the private sector for economic development. In Pakistan, we have failed to achieve this goal. Recent years have experienced closure of large industries and stagnation in growth. Besides corruption and incompetence, inconsistent tax policies of Federal Board of Revenue (FBR) have forced the business community to search for safer havens abroad, depriving the country of invaluable capital. Similarly, foreign investors are reluctant to avail the tremendous Pakistani talent that goes to waste for lack of proper funding.

Pakistan is one of those very fortunate countries of the world that has an abundance of resources and a climate that is fit for simply any activity throughout the year. But thanks to donors’ agenda of overemphasis on retrogressive taxation and incompetence of our economic wizards (sic), Pakistan’s dependence on imported products has increased manifold, whereas value-added exports have not been given any attention, let alone promoting high-tech industries capable of technological innovations -- modern economies are knowledge-based and future is for those who can develop them as quickly as possible.

For technological transfers, rapid industrial growth and employment generation, foreign direct investment (FDI) is desirable. In Pakistan, when local investment is dying, expecting substantial FDI is like living in a fool’s paradise. Tax incentives play an important role in attracting FDI -- which has nose-dived in Pakistan during the last decade. Tax policy constitutes an important, if not a determinant factor, for favourable investment behaviour. Regrettably, our budget makers have always been preoccupied with revenue targets and have never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, investments and employment generation, without which sustainable growth is not possible.

Foreign investors will not come to Pakistan as long as unsatisfactory law and order situation and energy shortages exist. Due to these and other negative factors even the existing industrial units are closing down or working at low capacity. Nobody is willing to invest in special economic zones, where tax incentives are available, the main reason being lack of proper infrastructure. The result is about 80 per cent decline in foreign direct investments during the last ten years.

Pakistani industrialists -- fearing loss of life and property, threats from extortionists, acute power shortages, rising costs of doing business and hostile tax policies -- are shifting their capital abroad. Investors, both domestic and foreign, prefer a place that characterises stability, consistency and requisite infrastructure facilities -- we lack all these. Tax incentives do matter but not as first priority -- any feasible growth-oriented project can be profitable even after paying reasonable taxes. In Pakistan, corporate taxation is still as high as 44 per cent (company tax rate plus tax on dividends).

Economic challenges faced by Pakistan are multiple and grim -- we are ensnared in a deadly debt trap, but there is no will on the part of the rulers to come out of it by tapping the real tax potential and putting an end to wasteful and unproductive expenditures. Our total debt has now reached about 68 per cent of GDP. The last government during its tenure added Rs6.3 trillion to the debt burden -- an increase of 103 per cent. Consequently, the present government was forced to borrow more to pay earlier debts and bridge the ever-increasing fiscal gap -- pushing debt servicing alone to Rs1.5 trillion in 2014-15, nearly 68 per cent of total revenue collection. This reckless borrowing will continue to bridge burgeoning fiscal deficit, which is estimated to cross Rs2 trillion this year. Many countries have larger debt burden than Pakistan but have capacity to repay. The alarming situation for us is dwindling ability to pay back as revenues are almost stagnant and growth in exports is diminishing.

Pakistan also faces the herculean task of providing jobs to millions -- on an average we need to create 20 million jobs annually for the youth alone. For achieving this task we would have to ensure that economy grows at the rate of 8 per cent to 10 per cent per annum over a long period of time--for this we need investment of 20 per cent of GDP. It is, thus, imperative to raise tax-to-GDP ratio to 30 per cent. This challenge is also our great opportunity for economic progress. Majority of job seekers are young people, which are our greatest asset -- imparting education and skills to them and creating matching jobs is the real challenge. This can be met successfully by assignment of taxes for productive investment and employment generation -- our real engine of growth.

The prevalent pessimism is due to the insensitive attitude of the rulers and financial managers, who cannot think beyond what they are "commanded" or "trained" to think. They keep on telling us about the symptoms of an ailing economy but never try to cure the real causes of illness. They avoid fundamental structural reforms, thus, crises persist.

We need to incentivise corporatisation of business for rapid industrialisation. At present there are about 68,000 companies registered with SECP out of which 24,000 are active and file tax returns. There are numerous anti-corporate provisions in tax codes discouraging investors to establish companies and seek public funding. The companies are maltreated by FBR -- after collecting billions as ‘collection agents’ of State without any compensation they are penalised even for minor lapses that are neither intentional nor willful.

Taxation of notional benefits e.g. concessional loans in the hands of employees, high corporate tax rate and double taxation of dividends and reserves out of already taxed profits are some examples of anti-corporate provisions. In these circumstances, no one would like to conduct business through a company, especially when audited accounts by independent and credible auditors are rejected merely on whims and without bringing any material on record by taxation officers. Litigation is imposed on the companies and they have to hire costly professionals to get justice -- Defence Housing Society v Commissioner Inland Revenue etc (2015) 112 Tax 287 (H.C. Lah). It is thus no surprise that in World Bank’s ‘Doing Business 2016’ data for Pakistan that our ranking has gone down to 138 from 136!

The corporate sector is the worst sufferer of the FBR’s arid policies and widespread corruption -- top management of the FBR has a myopic outlook as evident from over-emphasis on withholding taxes. With low tax rates we could have promoted corporate growth. On the contrary, in 2015 the FBR imposed ‘Tax on undistributed reserves’ [section 5A of Income Tax Ordinance, 2001] ignoring the fact that reserves are created from already taxed income. Minimum taxation on service sector companies was another wrong move. In 2014, the FBR imposed ‘Alternative Corporate Tax’ [section 113C of Income Tax Ordinance, 2001]. Such erratic, arbitrary and expropriatory taxation will only further retard the corporate sector and discourage economic growth.

Devising an efficient tax model for corporate growth in Pakistan requires an analytical study of all the irritants prevailing in tax codes, procedures and implementation processes. The main irritant is highhandedness, corruption and unprecedented high level of maladministration in tax apparatuses -- both at federal and provincial levels. A joint SECP-FBR committee should be constituted to analyse the existing negative statutory, regulatory and administrative framework relating to corporate entities and then suggest solutions to remedy the situation and promote corporatisation of business as a plausible growth engine of investment and creating much-needed jobs.