THE INVESTMENT and business growth in Pakistan is heavily suffering due to a host of factors; the single most factor is certainly the persistent anti-business attitude of bureaucracy, in particular—both at the policy and operational levels.

This has recently been highlighted in the 100-page Country Assistance Strategy (CAS) report that acknowledges that “Pakistan is an inefficient investment location, with the country becoming less attractive relative to other investment locations in the region.” The main obstacles, according to the report, are policy inconsistencies and tax administration. The strategy has been formulated after extensive consultations of various stakeholders and gives insights to various sectors of economy, government’s reforms programmes and opportunities for the World Bank medium-term assistance.

Lack of policy consistency and predictability, uncertainty over the implementation of steps announced, and perpetual highhandedness of tax administrators have destroyed the entire investment climate. The CAS (in discussions with private sector in 2001), identified policy instability as the leading constraint on the operation and growth of private sector activity (91 per cent of firms considered it a moderate or major obstacle to business), followed by difficult access to financing (83 per cent of firms), tax administration and regulation (80 percent of firms), and infrastructure. It noted that the investment climate appears much less attractive in Pakistan than elsewhere.

Three main themes emerge from the CAS consultations with the private sector: Tax administration and the role of the CBR; regulations and weak infrastructure. All three raise the cost of doing business in Pakistan. The weakness in regulatory environment is a consequence of policy reversals but also of weak and non-transparent implementation within the public sector. It is estimated that senior management spends some 10-20 percent of its time dealing with the government. The regulatory burden is particularly serious for small and medium-size enterprises. It impedes their growth, discourages new firms from entering the market, and encourages firms to remain in the informal economy. While tax administration is a critical constraint for the entire private sector, regulation is more of a binding constraint for small and medium-size-enterprises.

This perception is also reinforced by the results of a recent SME survey carried out in which more than 80 per cent of the respondents cited regulations as a major barrier in their smooth functioning. After policy uncertainty and financing, firms rank taxes and regulations as the biggest constraint to business. Across the board-large firms and small, manufacturing firms and services-they cite high taxes as the chief and regulatory constraint, a verdict consistent with the overall regional rankings. Tax administration is the second biggest regulatory constraint, especially for large firms. Smaller firms are more likely to under-report income. Some 80 per cent of firms estimate that “typical” firms avoid some portion of taxes by under-reporting income, with 22 percent reporting less than 50 per cent of their income, the highest portion in the South Asia region.

On the ill advice of the bureaucracy, the civil and military governments alike tried to attract the FDI through incentives such as user-based import tariff concessions or exemptions (on raw material and other inputs), high tariff protection on output, exemptions from income and sales taxes, exclusive licences or franchises, and other special treatment. Implementation of these measures failed to create a transparent and level playing field for investors. Instead, it encouraged rent-seeking at the expense of international competitiveness and productivity growth.

The private sector is highly critical of the CBR, which they consider to be corrupt and inefficient, with too much discretion. The business environment will never improve if this situation continues unabated. The CBR and its field formations suffer from attitude problem. The honest ones in the CBR are even the worst. They create such huge demands against the taxpayers that it is no more possible for them to run the business.

This attitude can be verified from the various decisions of the Income Tax Appellate Tribunal where their arbitrary tax assessments are quashed, but the taxpayers pay a heavy price for it both in monetary terms and mental torture and agony they suffer. It is strange that the CBR takes no action against them even after their orders are held to be unlawful, excessive, arbitrary and unreasonable.

The foreign investors are reluctant to come to a place where tax officials demand their share for not participating in any productive process of the business.

The most neglected area is dispensation of justice to taxpayers. Our tax justice system is the worst in the entire world. There is an urgent need to ensure “justice”, “rule of law”, “fairness”, “equity” and independence of appellate authorities from administration.

In the hierarchy of tax judicial system, first appellate authorities are directly subordinate to the CBR. The judicial system under the tax codes, or for that matter under any statute, should be completely and truly independent of administrative interference or control. It is an essential prerequisite for ensuring proper tax compliance and confidence of taxpayer in the system.

All appellate authorities should be part of judicial service working under the administrative control of the honourable High Court. The present working of Tax Tribunal under the ministry of law is against the principle of “independence of judiciary”.

An independent tax judicial system alone can facilitate the business expansion and investment as well as the proper collection of revenue in Pakistan.