According to Overseas Investors Chamber of Commerce and Industry, the government has failed to take bold steps to attract foreign direct investment in the manufacturing sector of the country. The tax proposals in the federal budget are contrary to the policy predictability, consistency and transparency, which will discourage multi-national companies to continue investment in the country.The tax proposals include omission of provincial sales tax on services from the definition of input tax, extension in super tax for another year, exclusion of banking sector from reduction in corporate tax rates,withdrawal of zero-rating regime for processed milk and changes are also made in the group taxation scheme introduced around a decade ago. The government has also taken many tough measures to increase tax revenue, which could discourage new investments in plant and machinery in the country while customs duties have been increased on hundreds of items to make the situation more complicated.
The overseas investors seek lower rates of withholding tax on fast moving consumer goods and several other concessions for large scale investments. The government wants to generate additional taxes of over Rs 4 billion, but is under pressure from stakeholders to withdraw the proposed restrictions on the relief of group taxation. The foreign investors fear that many companies can be delisted of the stock market if the National Assembly passes the proposed amendments. The new federal budget extends few concessions to the new investors and puts a limits on the tax relief already extended to the multinational companies. Economists fear the tough government rules will damage the corporate sector as well as the flow of foreign direct investment into the country. The overseas chamber has already requested the finance minister to review the decision as the government move will encourage fragmentation in big firms. According to experts, the idea of group taxation was floated in the Finance Act 2007 after through study by a task force.
The government is taking a desperate move to enhance tax revenue without giving a road map to give a clear shape to the economy. The government had taken the initiative of group taxation to streamline the group ownership structure and centralise the cross-company ownership structure to consolidate the corporate sector. However, it is feared that the new restrictions will discourage the government’s own move to corporatize the national economy. The policymakers should understand that the foreign investors will only put their money in the basket of the Pakistani economy when they will be ensured that their money will make profit in the country.