KARACHI, April 6: In an era, in which human capital and strategic thinking play a key role in the growth of physical and financial assets, Pakistan has been afflicted by “brain drain.”
High incidence of personal taxation combined with security concerns have resulted in migration of professionals to industrialized countries when they are badly needed here to improve corporate governance.
And if the pre-budget representations made to the government by companies is any indication, the Income Tax Ordinance 2001 (ITO 2001) would further increase tax burden on corporate executives and would be drag in any effort to check migration of professionals to developed states.
A foreign bank with global reach and operating in Pakistan has asked the government to pay special attention to the problem of “brain drain.”
Hongkong Shanghai Banking Corporation (HSBC) has recommended incentives in personal taxation for professional Pakistanis living at home or abroad to work in the country.
Prior to September 11, the US allowed nearly one million legal and illegal immigrants. Recently, the UK and France relaxed laws governing employment of aliens. And for the first time, France has permitted foreigners to be employed in corporates. IT professionals are in demand in Germany and other industrialized economies.
These countries have been able to attract best talents from Pakistan, professionals on whose education money has been spent from the cash-strapped national exchequer.
In India, IT professionals are quite often paid in foreign currency at international rates to prevent brain drain and the exports of Indian software industry is now in the range of $8-10 billion.
In the current environment, the corporate culture cannot improve rapidly without professional management. In the past, the corporate management and ownership were combined in the person of the “Seth.” This has begun to change. The management of companies are now being handed over to the professionals by the majority stakeholders. Corporate restructuring is vital for business growth.
The corporate governance can be modernized faster by providing required incentives to individuals so prevent brain drain. And if large foreign investment is not forthcoming, it is because of security risk perception of foreign employees. It is not the plants that are under threat but the professionals who run it, who are under threat. The greater the risk, the bigger the gains that the investors are looking for. Professionals can be no exception.
The bank’s suggestion is contained in a summary of pre-budget proposals prepared by the Management Association of Pakistan (MAP) on the basis of representations made by local and foreign companies to the government.
Majority of the 15 companies and all top local and foreign corporates have raised the issue of personal and allied taxes in their individual representations.
Under ITO 2001, tax will be levied on companies on such perquisites paid to the employees which are in excess 50 per cent of an employee salary.
The Atlas Group of Companies says that if perquisites and benefits of an employee have now become taxable, this would amount to double taxation, on the company as well as individual, and should therefore be withdrawn.
Similarly, under ITO 2001, all benefits, allowances and perquisites have been made taxable for all categories of employees.
The 1982 IT rules should be revived to give exemption/relief of various allowances for employees with taxable incomes below Rs300,000, recommends Atlas Group.
Perhaps, the most comprehensive package of tax incentives has been recommended by Enrgo Asahi Polymer and Chemicals Limited. Engro, a joint venture partner in the company, is being managed by an employees group.
The points made by the company include: Financial cost of borrowing capital for purchasing or construction of one residential house be allowed as tax credit against individual tax liability.
Loans free from interest or at concessional rates from employer to employee should not be taxable in the hands of the employee.
Reimbursement of medical expenses should not be taxed or be limited to 10 per cent of basic salary.
Tax exemption limit for salaried individuals should be raised from Rs60,000 to Rs100,000. The tax rates for incomes up to Rs100,000 should be reduced to 25 per cent and the maximum rate should be 25 per cent for income above Rs1,000,000.
Normally, it is the multinationals, foreign banks and top local companies who pay their chief executives and senior managers salaries above Rs1 million. These MNCs also give their employees tax free salary, a part of which is sometimes paid abroad as a special incentive.
But in case of tax free salary, problems have arisen as a result of Income Tax Ordinance 2001. When an employee gets a tax free salary from his company, the employee’s income is to be grossed up by the tax payable by the employer (tax on tax).
Under the Income Tax Ordinance 1979, the amount of tax paid by the employer was also a benefit taxable in the hands of the employee. However, under clause 167(C) of Part I of Second Schedule, the said tax payable was not grossed up for tax on tax purposes. This exemption from tax on tax is not available in the Income-Tax Ordinance 2001 and should be restored, say corporate executives.
In its representation, the Hamdard University has said that salaried persons need to be provided relief and as a first step perquisites should be exempted from tax.
Khadim Ali Shah Bukhari and Co Ltd has recommended that number of slabs of income prescribed for the individuals should be reduced and interval between the slabs should be widened.