Economic stability has turned into stagnation as the government has been unable to resolve fundamental challenges faced by businesses and industry.

The reasons are manifold, both long-term and short-term; broadly the country’s inability to move forward boils down to flawed tax policy and institutional failures of the Federal Board of Revenue. Over the past few months, especially, it seems to have been turned into a security institution, taking a policing approach to matters left best to the market.

In fact, increasingly it seems that revenue calculations are based on static models ignoring economic linkages and market forces all together. How else could the tax authority consistently record revenue shortfalls with effective tax rates of 60 percent to 150 percent of income being faced by individuals and firms.

Take income tax on exporters, for example. For decades exporters were subject to a fixed tax regime where 1 percent of export proceeds were their full and final tax liability. In 2023, the IMF required withdrawal of all preferential tax regimes across the board, particularly for exporters, with a view that preferential regimes were distorting both fiscal revenues and productive incentives across the economy. The logic simply was to create a level playing field for all sectors across the economy.

The government of Pakistan, particularly the FBR, saw this as an opportunity to improve their cash flows, but at what cost. Instead of eliminating the fixed tax on exports and subjecting all businesses to the same normal tax regime, the FBR maintained the 1 percent tax on export proceeds, and brought income from exports under the Normal Tax Regime.

Now, exporters pay 1 percent advance tax on export proceeds (plus 0.25 percent export development surcharge) under the fixed tax regime plus 1.25 percent advance minimum turnover tax under the normal tax regime, and both are adjustable against the 29 percent income tax plus up to 10 percent super tax at the end of the year. Selling in the domestic market, on the other hand, attracts only the advance minimum turnover tax, adjustable against the same rates at the end of the financial year.

While at the end of the day both exporting and selling in the domestic market attracts a 29 percent income tax plus 10 percent super tax, exports face an advance income tax rate of nearly twice as much which, depending on profit margins, can go as high as 135 percent of turnover:

In the FBR’s static calculations, increasing the advance tax on exports of let’s say USD 30 billion from 1 percent to 2.25 percent increases revenue collection from USD 300 million to USD 675 million. Never mind that, assuming a profit rate of 1-5 percent, the 29 percent income tax applicable on these exports falls between USD 87 million to USD 435 million, meaning anywhere between USD 240-USD 588 million of the collection is refundable but never actually refunded. Accounting for the economic incentives created by such a........

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