For years we’ve heard the rhetoric of “broadening the tax base” which seems to have been falling on deaf ears. This could be either because the concept’s implementation methodology is not fully understood, or it is felt that tough measures required to bring taxable economic activity into the net would be difficult in a country driven by social and political pressures.
The classic example is that of corporatization of businesses. Sixteenth-century Europe cashed in on this centuries ago. Register businesses by introducing a fair system of taxation which motivates businesses to file tax returns, and in the process document the economy.
Till date, we have been making ad hoc amendments to the existing company law. The proposed law is to be developed on specified principles, including the simplification of processes of registration, development of audit standards, giving investors a wider array of corporate structures, and moving towards a regime of proportionate regulation and enforcement without hassling the investors.
Austerity measures should never compromise the quality of HR and foreign regulators need to be invited to Pakistan to impart skills, knowledge and training. This, coupled with market-based compensation packages and a performance-based work environment, will minimize the potential for misuse of power by the regulators. It would also expose the regulators to their role in developing the economy of Pakistan, as opposed to merely policing it.
The classic example is that of Far Eastern and Middle Eastern countries, which have kept the tax rate low but enforced it strictly, and their businesses are willing to pay the taxes as they are perceived to be fair. If we were to reduce our tax rate further and ensure that all businesses in Pakistan, irrespective of their form and size, are registered and subject to taxes, will we be better off or worse off?
We also need to rethink whether tax rate should be a function of the form of business or its profitability. The latter would be a more plausible answer — a business earning a lower level of absolute profit should be subject to a lower tax rate irrespective of its form, especially when its accounts and operations are more transparent, subject to greater regulatory scrutiny and it is therefore less likely to evade taxes.
Article by: Muhammad Ali