Some fiscal measures taken a decade back to encourage the consolidation of business groups and promote corporate culture, have been reversed in this year’s budget.

Amendments in the Finance Act 2016 were introduced in the provision of ‘Group Relief relating to: (a) surrender of loss by a subsidiary under Group Relief; (b) withdrawal of exemption of tax on inter-corporate dividend; and (c) withdrawal of exemption from withholding tax on inter-corporate profit-on-debt and dividend. Tax collectors hope the specified steps would yield two billion rupees for the public exchequer.

Experts and businesses consider the move ill advised and regressive. They say if not reversed swiftly it will hurt business sentiments and lead to fragmentation of businesses while compromising the country’s potential of industrial growth.

A senior tax consultant who advises the government on policy issues told Dawn that when the issue was brought to his notice soon after the budget announcement, Finance Minister Ishaq Dar verbally assured parties that it would soon be taken back

The finance minister himself told Dawn on the phone from Islamabad that he never directly or indirectly said anything to this effect. “Amendments are introduced or withdrawn through a process and no one, not even I, can change them on a whim. People in the FBR who initiated the said amendments are in a better position to explain the current status or its future”, he was loud and clear.

Shabbar Zaidi, senior partner, AF Ferguson, who headed the task force that recommended the introduction of the Group Taxation concept in 2007, believed that the amendments were unintentional missteps of overzealous tax men.

“In an interaction after the budget speech Mr Ishaq Dar referred to them as an anomaly in the Finance Bill 2016 that he signalled would be rectified before the Finance Bill 2016 becomes an Act. Why was it not done I do not know but believe it will soon be reversed, as it should be. Yes, the delay has complicated the process as now the reversal has to be made through an ordinance”, he said.

Explaining the logic behind ‘Group Relief’ he said, “They were introduced to address a deeper structural problem. The fragmentation of businesses, owing to the application of the law of inheritance after demise of the proprietor of big business houses, the entity drifted towards a crisis. The dispersal of investible capital among multiple heirs who may or may not be business oriented deprives the company of the benefits of scale”, he argued.

Muhammadali Habib, head of Habib Group of companies, expressed his disappointment over the abrupt policy changes introduced unilaterally that hurt interests of most responsible and tax compliant corporate citizens. Commenting over the phone he spoke of the government attitude that instantly buckled under the pressure of street power (mentioned realtors on revaluation of property pricing) but was not inclined to heed concerns conveyed through proper channels by businessmen.

“Can you blame corporate entities if they feel disenfranchised? The policy is not only unfair but also regressive. The country needs big doses of investment to control joblessness and contain poverty, twin problems that drive youth towards extremism. Sidelining the corporate sector is a disservice to the country and its teeming millions”, he said over the phone.

The Pakistan Business Council, a policy advocacy forum of leading business houses, has been in touch with the FBR over the issue. Earlier in July its CEO Ehsan Malik send a letter to the finance minister expressing concern over the amendments that he pleaded were detrimental to the interest of its members and the economy.

In the letter he said that the amendments “threaten to remove Pakistan from a leadership position in emerging markets in the taxation of groups”.

The letter says, “…the 2007 initiative aimed at streamlining group ownership structures, discourage fragmentation and making the corporate sector transparent and competitive.” It argued that the relief did deliver as a number of business houses created holding companies to bring subsidiary companies under one umbrella.

To support the case the example of Engro is quoted. The company grew four times in net worth, from Rs49bn in 2007 to Rs196bn currently, increasing contribution in taxes to the national exchequer seven times from Rs6bn to Rs41bn in the process.

The letter said the PBC opposed the move as it would increase the tax burden on already tax compliant sectors, discourage consolidation, slow down capital market growth, increase risk for lending banks and compromise the country’s growth potential. It called upon the government to constitute a task force of technocrats to reassess the move and its expected impact objectively.

Malik Amjad Zubair Tiwana, chief income and tax policy, FBR, contacted Dawn, on direction of the FBR Chairman Nisar Muhammad Khan, to confirm the government’s stance. He said the amendments were incorporated in the Finance Act 2016 after due diligence. “No we are not rethinking the policy and the said amendments”.

Khalid Siraj Subhani, CEO Engro responded thus to a Dawn query on the subject: “The ‘Group Relief’ scheme involved significant thought, research, much debate and took several years to bring it in its current form. Hence any changes to it should have been done through a thorough consultative process”.

Published in Dawn, Business & Finance weekly, August 1st, 2016