BUDGET 2003-2004

BUDGET 2003-2004 <!--[if gte mso 10]> BUDGET 2003-2004 TAX INCENTIVES FOR GROWTH AND PRODUCTIVITY By Dr. Ikramul Haq, Advocate, Lahore Tax investment incentives have in recent times become a favourite tool in development strategy both for domestic investors and for attracting foreign direct investment (FDI). The rationale for their use is that they constitute an important, if not a major element in determining investment behaviour. Unfortunately, the Pakistani budget makers have always been pre-occupied with the revenue targets and never bothered to provide some long-term investment-oriented tax incentives for infrastructure development, without which economic development cannot be achieved. The foreign investors always prefer a place which not only offers tax incentives, but also ensures stability, consistency and excellent infrastructure facilities. The choice of UAE for major investors in recent years is due to these factors. Mere announcement of policies on paper, as has been done by our policymakers, cannot persuade foreign investors to take huge risk of investment in any foreign land. It is a matter of record that tax incentives announced in the 1994 Power Policy, Investment Policy of 1997 and many others were never accepted or implemented by the Central Board of Revenue (CBR). The tax officials under on pretext or the other tried to tax the foreign investors who were promised zero corporate tax in Pakistan. It is a bizarre situation that first the zero-tax policy was announced and investment was attracted and then negative tactics and highhandedness were used to extort taxes from foreign investors. This attitude has destroyed our image in the international community. The Pakistani tax administration has only one focal point i.e. meeting of TARGETS. The CBR high-ups are the real culprits. They are forcing the taxation officers to meet irrational budgetary targets fixed year after year. The taxation officers have neither means nor willingness to bring tax evaders into tax nets so they subject the existing taxpayers and foreign investors to huge tax demands by abusing their vast discretionary powers. Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on the industrial and business growth. Our financial and tax managers should keep in mind that we need to boost our economic growth and productivity which will automatically lead to marked increase in tax revenue. They must realise that investment-related tax incentives increase the net of tax rate of return and thereby reduce the need for large initial capital investment and also reduce risk. The availability of such incentives tends to make otherwise unpromising and risky ventures more profitable. They are also valuable as an indirect stimulus to investment because they publicize and enhance the country's investment climate. The priority of our rulers, military and civil alike, on achieving revenue targets, fixed ambitiously every year in utter disregard of how economy will behave, is the main problem. By fixing revenue targets in isolation and without making necessary efforts to improve productivity and economic growth, has forced Pakistan into a dilemma, where neither it can afford to give any tax relief package to the trade and industry [due to growing fiscal deficit] nor can it achieve a satisfactory level of economic growth [due to retrogressive tax measures]. This is a vicious circle in which our policymakers are now trapped. They will have to find ways and means to come out of this tangle to make Pakistan a competitive place where investors find satisfactory conditions to live and invest. In a country where there is no security of life or property, notwithstanding the availability of host of tax benefits and other incentives, investors will never cone forward. The Central Board of Revenue (CBR), apex administrative revenue authority, has been single-handedly destroying Pakistan's trade and industry by withholding undisputed refunds payable to the taxpayers, making excessive tax demands, flouting Court judgments, harassing the foreign investors through tax procedures and resorting to all kinds of negative tactics and highhandedness to meet its budgetary targets. The actions of the tax machinery are detrimental for business and industry and resultantly the CBR always fails to meet revenue targets [revised downwards many a time not to talk of originally fixed] besides there being no visible improvement in our economic lot. This is exactly what the foreign donors want, with us, acting upon their agenda without realizing the increasing plight of our people and worsening quality of life. There cannot be two opinions about the complete shifting of our economic priorities. We as a nation must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is existence of inefficient, corrupt, repressive and criminal governments/institutions, which do not give a damn for the welfare of the common people. The successive governments' onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan's undeniable geo-strategic and business competitive position in the region. There is an urgent need to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest. The civilian Government must concentrate on balancing its first budget for fiscal year 2003-2004, providing relief to the poor, reduce heavy reliance on internal and external loans and make some meaningful structural change in tax system. The IMF is forcing the Government not to give any new exemptions; this is a conspiracy against Pakistani people and is detrimental to our national and economic interest. They want us not to develop as an industrial country and remain dependent on them as well as serve as large consumer market for multi-national companies. We are in the stage of economic development and still need to develop infrastructure for industrialisation. These objectives cannot be achieved unless we give long-term tax incentives to investors. Our Government should not succumb to the World Bank, IMF or other donors' pressure and must insist for investment-related tax incentives. This is necessary if we want to break the debt shackles of foreign masters. The following tax incentives can go a long way to ensure revival of the economy and rapid industrial growth in the country: Tax holiday for infrastructure facilities A ten-year tax holiday for enterprises engaged in developing or operating and maintaining infrastructure facilities should be announced. The infrastructure facilities which will enjoy this benefit should include roads, toll roads, bridges, rail systems, housing projects for poor people, highway projects, water supply projects, sanitation, sewage and solid waste management, airports, inland ports and inland waterways. Exemption of withholding tax for software payment To encourage the best use of technology and to lower the cost of doing business in Pakistan, payments for the following categories of software made to non-residents should be exempted from withholding tax. They are: site licences, software downloaded from the Internet by end-users, and software bundled with hardware. Writing down allowances for intellectual property Intellectual properties and their exploitation will be a significant source of competitive and advantage in the knowledge economy, in the coining days. To enhance Pakistan's competitiveness in this respect, writing down allowances over a three-year period should be granted for capital expenditure incurred on the following categories of intellectual properties acquired on or after 30 June 2003: -- Patents; -- Copyrights -- Trademarks -- Registered designs; -- Geographical indications; -- Layout designs of integrated circuits; and -- Protection of confidential information. Raising productivity - Company Stock Option Scheme Employee stock option schemes have a significant impact on corporate performance. The schemes have been powerful tools to motivate employees towards greater innovation and enterprise. This kind of scheme has already been introduced in the new Income Tax Ordinance, 2001 but no exemption has been granted which should be given for up to Rs. one million worth of stock option gains arising from the exercise of the employees' option over a ten-year period. Tax holiday for broadband networks and Internet service providers Enterprises providing telecommunication services and broadband networks, and Internet service providers which provide these services between 30th June, 2003 to 30th June, 2005, both days inclusive, should be allowed a tax holiday for five years and a deduction of 25% of profits for a further period of 5 years. Pakistan must concentrate on the development of IT-based projects, which alone can make us competitive in the world markets in the coming days. Tax break for developers of special economic zones and industrial parks Ten-year tax holiday should be given for developers of special economic zones and industrial parks for developing such facilities before 30 June, 2006. The ten-year tax holiday may be availed in ten consecutive years during a block of fifteen years. Rollover benefit for capital gains on sales of securities A new provision should be introduced to exempt capital gains and in case of loss set off against other income, if any, on the transfer of listed securities or units of mutual funds, which have been held for a period of one year or more. Concessional rate of tax for income from Central Depository receipts A provision offering a concessional rate of tax of 5% on income received by a non-resident from bonds and Central Depository Receipts (CDRs) purchased in foreign currency from an "approved intermediary" should be given. Introduction of transfer pricing regulation Provisions to curb tax avoidance through the manipulation of transfer pricing should be strengthened. Income arising from an international transaction may be computed with reference to the arm's length price. Similarly cost and expenses incurred, shared or allocated between associated enterprises in international transactions be computed with reference to the arm's length price. The term "international transaction" should cover transactions between associate enterprises in the nature of the purchase of tangible or intangible assets, lending or borrowing of money, rendering of services and cost contribution arrangements. The definition of "associated enterprise" should be based on the definition of the term included in the OECD Guidelines and defines the concept in general as well as specific terms. A number of penalty provisions should be introduced prescribing penalties for income concealed through transfer pricing, and for defaults in maintaining documentation and failure to provide information or documents during scrutiny by the tax authorities. Definition of "books of account" and "document" The term "books of account" should be defined in section 2 of the Income Tax Ordinance, 2001 and must include a reference to electronic records stored on a floppy disk, tape or any other form of - electromagnetic data storage device. Most of the industrial houses now maintain accounts electronically but the tax department insists that there should be physical books of accounts. This shows backwardness of thinking and non-willingness to recognize the importance of IT in industry, although the CBR keeps on boasting that it is going high-tech. Time limit to issue refunds Time limit for the issuance of refunds of excess tax deducted or paid by a taxpayer should be fixed to one month. In case a return showing refund is filed under section 114, the refund should be issued immediately in terms of section 120 and where refunds arises as a result of any appellate order it should be issued within one month of receiving of such an order. This system will ensure liquidity of cash in the trade market and will not hamper the pace of business. The economic managers while making the budget for financial year 2003-2004 must consider the fact that taxation affects the amount of capital available by encouraging or discouraging savings and foreign investment. It may also divert investment and labour from one sector to another. It affects the level and productivity of employment by influencing individual choices between work and leisure, the intensity of effort on the job and employers' decisions on technology. "Taxes affect a firm's ability to diversify and expand through their import or input costs and managerial behaviour. They may also have a bearing on less