By Kazim Alam, The Express Tribune
KARACHI: A lot is said about apprehending tax evaders and broadening the tax net in Pakistan. In stark contrast, it seems that nobody is actually concerned about improving the country’s tax machinery to facilitate those who pay their fair share of taxes regularly.
Perhaps this is one of the major reasons why Pakistan trails behind most other economies in this crucial aspect. According to PricewaterhouseCoopers (PwC), a global professional services firm that works through A F Ferguson and Co in Pakistan, Pakistan ranks 162 out of 185 economies of the world in terms of ease of paying taxes.
The Paying Taxes 2013 report, compiled by PwC in collaboration with the World Bank and the International Finance Corporation, reveals that compared to the worldwide average, it takes twice the number of hours in Pakistan to comply with tax procedures. While the “case-study company” of PwC say that globally takes 267 hours on average to comply with tax regulations, it takes 560 hours in Pakistan’s case to do the same. This is significantly higher than the average number of hours put in by companies in India (243), Bangladesh (302), Sri Lanka (254) and China (338).
The number of hours spent in complying with consumption taxes alone is 480 in Pakistan, compared with 162 hours in Bangladesh, reveals the PwC report.
Pakistan also ranks among countries where the number of tax payments made annually is considerably higher than the global average. While the global average is 27.2 payments a year, it is 47 in Pakistan, as opposed to seven in China , 33 in India and 20 in Bangladesh. 25 out of the 47 tax payments that a PwC case-study company makes every year in Pakistan are labour-related, which is higher than China, India and Bangladesh.
The only indicator in which Pakistan fares better than the global average, as well as most regional economies, according to the PwC report, is the total tax rate – which is calculated as a percentage of the case-study company’s commercial profit. The total tax rate in Pakistan is 35.3%. Total tax rates in China, India and Sri Lanka are 63.7%, 61.8% and 50.1%, respectively. However, Bangladesh fares slightly better than Pakistan with a total tax rate of 34.9%.
“An economy that shows growth in the tax-to-GDP ratio should have a decreasing scale of rates of taxes. In contrast, an economy with a stagnant or declining tax-to-GDP ratio, such as Pakistan’s, will always show resistance in reducing the rates of taxes,” explained tax consultant Komail Abbas Badami, who serves as partner in Badami Law Associates, while speaking to The Express Tribune.
He also says the finding of the report that the total tax rate as a percentage of commercial profit of the so-called case-study company is 35.3% is contentious. “Income tax alone is 35%, in case the profit is higher than the turnover tax,” he said. Workers’ Welfare Fund contributions that come to about 2% of the net profit, and other liabilities like professional tax, Sindh Employees Social Security Institution tax and Employees’ Old-Age Benefits Institution tax also increase the total tax rate.
According to the report, comparing the total tax rate indicator with GDP and foreign direct investment suggests that higher rates for businesses are associated with reduced ability for an economy to grow and attract inward investment.
“Although I don’t fully agree with the statement that higher taxes invariably result in stunted economic growth, I do believe a future indication – for example, three to five years’ slab – of a reduction in rates of taxes should be advertised to attract new domestic and foreign investments,” Badami added.
Published in The Express Tribune, January 4, 2013.
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