The surprise government move to retrospectively impose an additional tax on the corporate earnings will significantly impact companies’ profits from 2021-22.
The government last Friday announced a 10 per cent additional super tax on companies earning profits of over Rs300 million a year to boost its tax revenues.
The higher tax rate will cover firms from 13 industries and sectors, including banking, steel, aviation, automobile, cement, chemical, fertiliser, oil and gas, textile, fertiliser, beverage, sugar and tobacco companies, and LNG terminal operators.
The rest of the corporate sector will be subject to 4pc super tax and also cover export-oriented companies under the turnover tax regime.
It is a short-term measure that does not address the needed fundamental reforms
The measure drew immediate reaction from the corporate sector, with Overseas Investors Chamber of Commerce & Industry Chairman, and Engro Corp President and CEO Ghias Khan taking to Twitter to vent his dismay over the measure. “Imposing a super tax on industries is regressive and will hamper industrialisation, curb manufacturing and not reduce the current account deficit. Pakistan needs a wider tax base through documentation, taxing unproductive sectors like real estate and long-term policy development.”
The Pakistan Business Council (PBC) said neither government nor the International Monetary Fund (IMF) has committed to fundamental reforms of the Federal Board of Revenue’s (FBR) capacity to tax. “Hence short-term, knee-jerk and front-ended revenue-seeking measures to tax the already taxed will compromise sustainable growth. No innovation. Pure expediency,” the PBC tweeted.
A Topline Securities note on the potential impact of the decision, which sent the stock market crashing downhill on Friday, says the one-time tax on large companies (under 10pc super tax) will have a 14pc impact (on their 2021-22 earnings).
Senior JS Global analyst Amreen Soorani wrote that the move to collect additional revenues to meet the enhanced tax target for the next fiscal year for securing the restoration of the IMF funding package will have a different financial impact on different sectors and companies.
The banks, already subject to a 35pc income tax compared to the rest of the corporate sector, will bear the brunt, with their earnings taking a hit of between 12.6pc and 15.4pc. The fertiliser companies will be affected equally by 9pc and cement manufacturers in the range of 7.6pc to 9pc. The oil and gas sector’s profit is estimated to be hit by 8.2pc to 8.7pc, steelmakers by 3.3pc to above 9pc and chemical firms by 10.4-11.5pc.
No wonder the share market tanked, with the benchmark KSE-100 index dropping by over 2,000 points or 4.8pc in the morning session immediately after the prime minister announced the tax. By then the smaller investors had already taken the hit to their savings as panic gripped them.
In addition to the super tax, all the corporate entities will be required to pay incremental poverty alleviation tax of 1pc to 4pc on earnings above Rs150m.
The size of the tax will be determined by the earning slab in which a company falls. Nonetheless, more clarity is still awaited on this since a report quoted Finance Minister Miftah Ismail as saying the companies outside the 13 specified sectors will be required to pay either a 4pc super tax or a poverty alleviation levy. The report suggests that super tax will yield Rs80 billion and poverty alleviation levy Rs120bn in additional revenues for the government.
The excessive profits made by the 13 specified sectors in the last couple of years are believed to have egged on the authorities to impose an additional 10pc super tax on their profits from the current financial year. Their profit for the present fiscal year is estimated to be nearly Rs900bn.
Besides, most of these industries are said to have prospered over the decades on the back of hefty government handouts and protections.
Also, the action is populist in nature as the government will be seen as taxing the rich for the first time. Hence, the perfect target for extracting additional revenues. Further, the new additional taxation will not produce inflation or affect the pace of economic growth since it is being charged retrospectively on the companies’ incomes already raked in by them.
While the additional corporate tax will help the government overcome its immediate financial problems, the action at best represents another short-term measure that taxes the already taxed.
“Who (has) benefited from the budget? Commercial importers (have been) spared full tax accountability (and) retailers, non-filers holding real estate, big landlords in agriculture levied mild taxes... Whose vote bank are they? Who suffered? Those creating employment and exports,” the PBC asks.
Contrary to claims of alleviating poverty, the PBC rightly argues that super tax on industry is really to support a bloated bureaucracy, high public expenditure, handouts to commercial importers and the trader vote bank, given the FBR’s taxation capacity gaps and a weak political will to broaden the tax base.
“With the IMF deal as good as done and China rolling over its deposits, it is time for the government to improve investor confidence and perception. The heavily documented industry and banks can’t hide their income. Hence, they are an easy target for governments to tax,” one of the top 10 textile exporters says.
“It is the wrong policy to tax the heavily taxed industries. The government should rather tax unproductive areas like real estate and cut its wasteful expenditure such as on state-owned enterprises. It must free the economy. Regressive taxation will force people to leave the country. No one wants that,” he concludes.
Published in Dawn, The Business and Finance Weekly, June 27th, 2022