Day: November 9, 2021

The Federal Board of Revenue (FBR) has announced to incentivize submission of timely, quality reports by Inquiry Officers while proclaiming a punitive regime for the Inquiry Officers who fail to file inquires on time.

According to documents available with ProPakistani, the tax department has issued a letter to all officers associated with income tax and Pakistan Customs to inform them of the decision.

The Chairman FBR has approved the incentives and a punitive regime for the Inquiry Officers with a view to encouraging expeditious finalization of inquiries and to preventing delays in the finalization of inquiries.

Two basic salaries will be awarded to an Inquiry Officer who submits quality reports to the satisfaction of the Authorized Officer within up to 60 days from receipt of the letter. Similarly, there will be an award of one basic salary and a half basic salary on submitting reports within up to 75 and 90 days respectively. Moreover, the FBR has announced one basic salary as an incentive if an inquiry report gets disposed of and an order is passed within 30 days from the date of receipt of reply.

With regard to the punitive regime, the documents reveal that the Chairman FBR has directed to discontinue the IJP allowance of Inquiry Officers/ Inquiry Committee Members/Fact-Finding Inquiry Officer/Fact-Finding Inquiry Committee Members who take more than 100 days to complete an inquiry. The same will apply to Authorized Officers who take more than 40 days to decide an inquiry, and to the Authority who takes more than 40 days for doing the needful in case of proceedings against officers of up to BS-16.

Furthermore, this shall not prejudice the option available to the Authority to initiate disciplinary proceedings under the Efficiency & Discipline (E&D) Rules against the officers concerned on charges of “inefficiency” for their failure to complete the inquiries. Any excuse including requests for adjournment, non-availability of record shall not be taken as a valid excuse for lack of adherence to the time set for doing the needful, explain the documents.

These instructions will have a prospective effect, but these instructions shall be applicable to all pending inquiries from the date of issuance of these instructions by the FBR.

As per the documents, the Chairman FBR had observed that most of the Inquiry Officers delayed the finalization of inquiries despite clear provisions in the E&D Rules and standing instructions on the matters.

The delay not only reflects poor performance of an Inquiry Officer, Authorized Officer, and Authority concerned but also puts the career of the accused officer in limbo for long, adds the documents, citing that justice delayed is justice denied.

Source: Pro Pakistani

The Asian Development Bank (ADB) is planning to provide about US$ 10 billion to Pakistan as fresh assistance in various development projects, particularly in the sectors of urban services, disaster risk reduction, and policy-based programs, in the next five years.

The Minister for Economic Affairs appreciated the ADB for its persistent technical and financial support to the Government of Pakistan. He also acknowledged that ADB had provided US$ 500 million for procurement of COVID-19 vaccine. He asserted that the government was committed to ensuring maximum vaccination coverage.

Omar Ayub Khan highlighted that the urban services sector, given the rapid urbanization and population growth, was a high priority of the present government. He stated that the government was committed to improving the urban infrastructure and services including water and sanitation services, public transport, urban flooding and disaster management, and health facilities.

The Minister underlined that through the National Coordination Committee on Foreign Funded Projects, the Economic Affairs Division had not only significantly improved performance of ongoing projects by removing major bottlenecks, including delays in land acquisition, right of way issues, and hiring of project staff, but had also undertaken an internal exercise to weed out non-performing projects to redirect resources toward more sustainable projects.

He also informed the DG ADB that further efforts were being made to improve project management and oversight by creating a dedicated monitoring cell.

Omar Ayab assured the DG ADB that the government was committed to completing structural reforms in multiple areas of the economy, including energy, capital markets, trade competitiveness, domestic resource mobilization, and governance. He suggested new areas for ADB’s assistance including support for the provision of basic amenities, i.e., energy, roads, and urban services to the erstwhile FATA [Federally Administered Tribal Areas].

DG ADB Eugenue Zukhov reiterated ADB’s commitment to support the government’s reform agenda and to speed up the economic recovery process amid the COVID-19 pandemic. He informed the Minister of the ADB plans of providing Pakistan with fresh assistance. He said additional financing of US$ 700 million was available for Pakistan to procure COVID-19 vaccine under ADB’s APVAX [Asia Pacific Vaccine Access] facility.

The DG ADB also appreciated the Government of Pakistan’s support in successfully evacuating ADB personnel working in Afghanistan. He commended the Minister for Economic Affairs for his proactive approach to enhanced partnership and regular portfolio reviews.

The Minister for Economic Affairs and DG ADB agreed to continue discussing ways to further deepen the Pakistan-ADB development partnership and to ensure the effectiveness of the ongoing portfolio.

Country Director ADB Yong Ye, Principal Energy Specialist Asad Aleem, and Senior Project Officer Nasruminallah Mian were also present in the meeting.

Source: Pro Pakistani

The Federal Board of Revenue (FBR) has estimated that approximately 25 percent of the companies in Pakistan are zombie firms involved in tax evasion due to persistently declaring losses.

An FBR report on “Zombie Firms in Pakistan and Tax Revenue Drag” explains the phenomenon of these firms.

In its report, the FBR has highlighted that a zombie firm is characterized as a loss-making firm that has lost the ability to generate enough profits to cover its interest payments. It survives only by repeatedly refinancing its loans. In the competitive market, zombies have to either exit or restructure. The rise of zombie congestion potentially crowds out growth opportunities for more productive firms, because banks have to keep financing them to keep them as active on their loan portfolios.

The report explains that this also has huge implications for the lost tax potential as well from two channels. The first one is direct, where the firms are not earning or doing business at their potential level hence, there is a direct tax loss. The second channel is the tax lost in terms of the opportunity cost, where the more productive firm is denied the right for financing because of financing compulsion towards these zombie firms. Hence, when these companies are unable to produce what they could have based on the availability of adequate financing, it will also create a potential loss of tax resources.

The FBR disclosed,

Rarely discussed, but the concentration of zombies is the real challenge for industrial growth in Pakistan as well. The misallocation of capital to these unprofitable firms indicates that credit reallocation is not always to the healthier, innovative, and more productive firms. Using balance sheets of the listed firms, we estimate the share of these unproductive firms in the marketplace. Our estimates suggest that approximately 25 percent of firms show up as the zombie firms in Pakistan. Furthermore, roughly 47 percent of these nonviable firms exist in textile, 19 percent in chemical, and 10 percent in the cement sector. The concentration of these firms is not limited to any particular sector. They exist both in the private and public sectors. Our estimates suggest, roughly US$3 billion short-term bank credit flows to these firms annually. In a resource scarce country such as Pakistan, it is reasonable to assume that the efficient allocation of this credit could improve performance of the industrial sector.

The FBR has explained that the public sector enterprises appear as zombie firms as well, which again is a big challenge to banks because the public sector enterprises have faced high levels of debt or overcapacity on the back of government guarantees. These firms, reveals the report, have created a debt cycle, as they are often forced to borrow from banks to repay interest payments. The banks lend to them because they come with a government guarantee, and even keep lending with non-performing loans.

It has further been explained that the support to zombie firms to stay alive impairs market competition. In this situation, banks let these otherwise unprofitable firms distort competition in the economy. They depress market prices and increase congestion of less productive firms in the market. The zombie’s distortion also impacts the overall productivity of industry and job creation that more productive firms could generate. The survival of unproductive firms for an extended period may crowd out investment opportunities, employment generation, and overall productivity of the industry that more productive firms could generate.

The FBR said that the identification of the prevalence and role of zombie firms in the Pakistani economy is essential for a variety of reasons, including enhancing productivity, effective utilization of financial resources, and establishing a fair and competitive market environment. Similarly, this identification is also important from a number of angles carrying significant revenue implications. There is a direct loss of potential tax from the zombie firms as these firms prefer to be on the lifeline credit supply and hence, do not actively progress up to their potentials and hence, incur a loss of potential revenues.

Misuse of tax exemptions and tax holidays has remained a festering sore for the Pakistani economy. These exemptions and holidays are directed to achieving certain economic objectives like bringing more investment in particular sectors of the economy, providing relief to a segment of the economy hit by adverse circumstances, providing a fillip to economic activities in less developed areas, etc. Zombie firms eat up these incentives and prevent the intended benefit to reach the targeted segments of the economy.

Effective and meticulous revenue forecasting is essential, both for goal-oriented development planning and robust fiscal policy. Zombie firms, by distorting economic statistics, compromise efforts for accurate revenue forecasting.

The loss of industrial productivity and overall job losses induce an indirect loss of potential taxes. It needs to be determined whether businesses use loss declaration as tax evasion stratagem, or they actually earn negative profits.

If the firms earn negative profits for a longer time but are continued to be financed by the banks, the risk barometer for FBR should start ringing alarm bells to investigate the possibility of the firm’s Ponzi relation with banks for tax evasion. However, this should not distract from the contribution of banks in hard times to support firms.

The role of regulators, therefore, is key to breaking this ongoing debt cycle (Ponzi game by firms facilitated by Banks). Devising effective regulatory measures to capture the non-viable firms in the marketplace, regulators can generate larger space for the more productive and small-medium enterprises (SMEs) to access credit. Priority in credit access to productive firms, as well as small-medium and innovative enterprises, would improve 41 the health of financial markets and may reap higher investment, employment, and revenue generation in the country.

The regulators may also include a crucial parameter for determining creditworthiness in the shape of a firm’s tax contribution, say, in the last five years. Firms with dismal revenue records may be kept on the low priority of credit extension. There is also a need for greater information integration between FBR and financial institutions for sharing credit financing details. This will help in sifting out zombie firms and encourage more productive firms to enhance economic activity, FBR’s report concludes.

Source: Pro Pakistani

The Asian Development Bank (ADB) is likely to approve a $600 million program for Pakistan in the first week of December to carry out social protection projects.

This was revealed by Director-General Central and West Asia Department, ADB, Eugenue Zhukov, in a meeting with Advisor to the Prime Minister on Finance and Revenue, Shaukat Tarin, at the Finance Division on Tuesday.

In his remarks, Shaukat Tarin said the government was committed to introducing reforms in various sectors, in the face of various challenges, to address the long outstanding structural issues and to attain sustainable and inclusive growth. He also gave an overview of the current economic situation of Pakistan.

Eugenue Zhukov told the Advisor that 80 percent of the funds allocated for procurement of vaccines had been provided to Pakistan, while the ADB was ready to provide additional funds if required. He said ADB had also planned a program on domestic resource mobilization and had been providing technical assistance for the purpose.

The Advisor to the Prime Minister appreciated ADB for extending support to Pakistan in the procurement of COVID-19 vaccines.

He said the government had taken steps to improve the revenue collection through the broadening of the tax base, capturing retail sales, single-window operations as well as track and trace system. Efforts are being made to complete the remaining prior actions under the capital markets development program to disburse it within time, he stated. He assured the DG ADB of making the National Disaster & Risk Management Fund fully functional.

Country Director ADB Yong Ye, and senior officers also participated in the meeting.

Source: Pro Pakistani

The Federal Board of Revenue (FBR) has collected Rs. 80.1 billion during 2020-21 from income tax demands raised against the taxpayers compared to Rs. 60.8 billion which was collected in the previous fiscal year, showing a handsome growth of 31 percent.

The FBR has conducted a detailed analysis of Collection on Demand (CoD) during 2020-21. The FBR has released a report on Tuesday on the collection of income tax demands from the registered taxpayers.

The FBR report stated that the CoD covered taxes levied for various defaults/taxes evaded and collected out of such tax demand. In this sense, it provides a true reflection of the departmental efforts to enhance revenue collection and ensure tax compliance in the country. Although its current share at 4.6% of the total direct taxes collection is on the lower side, however, it is promising to note that during fiscal year (2020-21), overall collection from this head stood at Rs. 80.1 billion.

Further details of collection under this head reveal that the recovery from arrear demand has shown substantial growth of around 75 percent, which is reflective of the extraordinary departmental efforts to recover due taxes. On the other hand, collection out of current demand also increased by a healthy 19.9 percent. While these are promising developments, it is still believed that a thorough desk audit by the field formations could contribute significantly in raising the revenue from this head which will be instrumental ultimately in ushering in a fair tax culture on the principle of taxing everyone according to the capacity to pay, FBR stated.

Under the head of payments with returns and advances, an amount of Rs. 465.8 billion has been collected during 2020-21 as compared to Rs. 404.5 billion in 2019-20. A major component of this head of the collection is the Advance Income Tax where a sum of Rs. 411.7 billion has been collected against Rs. 348.1 billion in FY 2019-20, registering a growth of 18.3 percent.

The other component of this head of the collection is tax payment made with income tax returns, where a sum of Rs. 54.1 billion has been collected during FY 2020-21 against Rs. 56.5 billion in FY 2019-20 registering a negative growth of 4.3 percent. Negative growth of taxes paid with income returns signifies lower incomes earned during the preceding year consequent to the economic slowdown in the country. However, this fact needs to be further confirmed through systematic tax audits to forestall the possibility of revenue leakage.

The report added that the Withholding Taxes (WHT) contribute a major chunk i.e. 72% to the total income tax collection. During FY 2020-21, Rs. 1,237.1 billion worth of WHT was made, against the figure of Rs. 1,091.7 billion in the preceding year, indicating a growth of 13.3%.

Performance of 10 major heads of WHT (which contribute about 85% of the total WHT collection) is given which shows that except technical fee and cash withdrawal, all other major items have recorded positive growth. Growth in WHT from salaries remained the highest with 17.3 percent followed by dividends and telephone with 15.6 percent each and electricity 12.8 percent.

The largest source of WHT i.e. contracts also grew by 14.6 percent. Growth in these heads of WHT indicates increased economic activity particularly in the second half in the services and manufacturing sector and higher corporate profits during the FY 2020-21.

WHT is an essential component of revenue collection across the world and even countries with developed and documented economies use it as a tool of not only revenue generation but spreading the burden of taxes on taxpayers across a financial period.

In Pakistan, the WHT collection is highly concentrated on a few heads. The highest contributors in withholding taxes are contracts with 22 percent share, followed by imports (17.7) and salaries (12.3). Further break-up reveals that the share of these three heads of WHT i.e. contract, imports, and salaries, is 52 percent in the overall WHT mix. This makes WHT vulnerable to 10 variations in these three heads. The need is, therefore, felt of fetching more revenue from other WHT items, FBR added.

Source: Pro Pakistani