THE country’s economy cannot come out of sluggishness without some out-of-the-box solutions with focus on encouraging investment in value-addition and new technologies.

It is critical for the country’s economic future to stimulate investment in the knowledge-based economy through targeted fiscal measures.

Sectors like information technology, pharmaceuticals and biotechnology are the cornerstone of the new economy and can help diversify Pakistan’s exports and reduce exposure to crop-risk and natural disasters.

A 15-year tax holiday to the infant IT industry in 2003, led to unparalleled growth of the sector and exports of IT and IT services have exceed $1 billion today. The pharmaceutical sector carries similar potential, but has been hampered by an inefficient and repressive regulatory mechanism. An overemphasis on price controls, lax regulations on quality and a public procurement based on price with limited emphasis on quality have discouraged world class manufacturing. A 10-15-year tax holiday may be extended to those units which invest in and obtain international quality certification.

Further, the employees of the IT services industry should be given special tax credits and tax exemptions in their salary income to encourage them to work in domestic industry and not go abroad for jobs.

Forex retention: At present, exporting companies are allowed to retain only 15 per cent of their export earnings in foreign currency accounts. This should be enhanced to 40 per cent to support firms in hedging against their costs for imported inputs, currency devaluation and inflation.

The condition for tax credit allowed to industrial undertaking set up between July 1, 2011 and June 30, 2016 with 100 per cent equity is too strict and should be eliminated/limited/reduced or relaxed. Moreover, such tax credit should also be provided to other sectors of the economy.

Tax on pesticides: The GST rate on pesticides should be reduced to five per cent and levied only at the import stage to increase the overall tax revenue. Tax compliance will improve due to lower tax rates.

Tax returns: Tax returns should be prepared comprehensively and once prepared, should not be changed each year. If any change is necessary, it should be incorporated in a manner that, except for the change, the previous format is retained.

Corporate tax: Pakistan has one of the highest corporate tax rates in the region but a low tax/GDP ratio. In comparison to our tax rate of 35 per cent, the rates in Malaysia, China and Vietnam are 27 per cent, 25 per cent and 28 per cent respectively. To encourage tax compliance, the revenue collection system should reward good behaviour.

To encourage improved levels of investment, economic activity and employment, tax rates should be brought down to 26 per cent. To balance this potential loss in revenue, there should be a corresponding increase in rates of withholding tax while withdrawing the option of treating at source deductions as final liability in a phased manner. This will provide tax-payers incentives to file returns and declare their real incomes.

Although increase in withholding tax may have an inflationary impact in the short-term, this step coupled with withdrawal of final liability option will significantly improve compliance.

GST rates: To help contain inflation and stimulate the economy, the GST rate should be reduced by two per cent per annum to 10 per cent over the next few years. At the same time, exemption from GST in any sector should be removed, as it acts as a barrier to the pursuit of a transparent and documented economy.

For essential commodities like food items, medicines and textbooks, zero-rating should be introduced in its place so that manufacturers in these sectors declare their transactions fully.

Foreign direct investment: To encourage foreign direct investment, tax concessions, not available now, should be provided.

There is also a need to deliberate on how tax cases can be disposed of within a reasonable period. The officers in the department issue notices at their pleasure and to their advantage. They can issue notice of audit at any point of time in respect of a tax year.

The tax authorities must announce a well considered long-term tax policy for next 5-10 years so that people can properly plan their businesses. There is a need to revisit deeming provisions which are used to tax otherwise un-taxable income.

The writer is president of American Business Forum.