Strategic Fiscal Policy

One wonders about the news item appearing in the newspapers in which World Bank issued a report stating the fact that corruption has increased in last eight years. However, people were surprised about the good governance bang during the same tenure. I reiterate my earlier year’s submission whereby I suggested that Government should be bound to present Financial Statements in line with International Public Sector Accounting Standard Board’s exposure draft 27 – Presentation of Budget Information in Financial Statements. It was suggested that Financial Statements of the Government issued on the event of budget speech must include the following.

1. Macro economic assumptions including the estimates of following
   • Aggregate Growth
   • Inflation
   • Exchange Rate
2. Fiscal Deficit or Surplus
3. Deficit Financing describing anticipated composition
4. Debt Stock including details at least for the beginning of the current year
5. Financial Assets including details at least for the beginning of the current year
6. Prior year budget out turn presented in the same format as the budget proposal
7. Current Year Budget either the revised budget or the estimated out turn
8. Summarized budget data for both revenue and expenditure according to the main head classification including data from current and previous year
9. Explanation of Budget Implication of new policy initiatives with estimates of the budget of all major revenue policy change or some major changes in expenditure programs

Financial statements possessing the above referred details would serve as a barometer for the citizens against which the performance of any government can be measured and judged while people need not wait for eight years for the revelation of World Bank. However, one still wonders about the earlier statements made by the World Bank and waiting for the reasons of contrary earlier reports.

On the contrary, FBR’s image had been over shadowed with the enthusiasm to collect targets, internal HRM improvement, IT infrastructure development and image development. Consequently, contrary to its performance remarks are almost absent owing to its continual improvement policy.

The continual improvement policy were experienced by the taxpayer themselves with little deviation owing to non-standardization of behavior. It is also felt that deviation on the straight path is within tolerable limits and FBR is self adjusting itself by incorporating the suggestions. However, this article is an endeavor to suggest a strategic policy instead of operational and tactical policies.

LEGAL AND FINANCIAL REPORTING BY FBR
We cannot wait for another eight year, Allah Forbid, to issue a report in respect of FBR by World Bank. Consequently, it is suggested that FBR should file monthly and annual statement to Auditor General of Pakistan on 10 of following month and on or before 31 August every year. This will increase the transparency in the transactions of FBR and high ups will be able to view the expenses of their field offices.

Moreover, it is also suggested that FBR should also present a Financial Statement in line with the standards issued by the International Public Sector Accounting Standard Board and specifically include the revenues bifurcation, apart from others, as follows.

• Quantum appealed before Quasi Judicial Forum
• Quantum appealed before Judicial Forums
• Quantum collected as Advance Tax of Direct Taxes
• Quantum collected as Final Tax of Direct Taxes
• Quantum collected but refundable
• Quantum collected as Final Tax of Indirect Taxes – Other tan Sales and Excise
• Quantum collected from Indirect Taxes
• Quantum collected from Indirect Taxes but refundable because of Section 8B

The Liabilities section of Financial Statement should be duly segregated into two parts – Liabilities taken directly from Donor Agencies and Liabilities taken through Ministry of Finance. On the expense sideSuch a statement would be truly representative of actual performance of FBR.

AGRICULTURE INCOME
Prior to jumping over the conclusion of taxability of agriculture income, let us first grasp the ground realities. Firstly, agriculture land is owned either by feudalist or farmers. Secondly, the land ownership data is now almost computerized.

It is suggested that small farmers can easily be segregated either through land ownership data or through PIU exemption basis. It is worthwhile here to note that Taxability of agriculture income is the domain of provincial governments as was the services sales tax. Consequently, agriculture income can also be taxed in the similar fashion as was dealt by FBR in case of harmonization of Provincial Sales Tax Ordinances and Sales Tax Act, 1990 - services and goods sales tax.

FOREIGN BRANCH Vs SUBSIDIARY
The concept is available in section 101 of Income Tax Ordinance, 2001 for normal tax regime while in section 153 read with clause (3) of Part II of Second Schedule for final tax regime.

However, more incentives need to be provided for branch offices apart from Foreign Tax Credit and Foreign Losses. This would become an important source of foreign exchange inflow in future. Consequently, a branch needs to be dealt on priority basis than a subsidiary as branch remits the net profit while a corporate entity’s subsidiary just remits the dividend.

CAPITAL GAIN ON SHARES
Capital Gain on Shares is the hottest topic not only in the town but in whole country. However, prior to jumping over the conclusion of taxability one must understand the difference between primary and secondary stock market apart from overall corporate law framework.

Primary stock market represents the new enlistment either through privatization or floating of shares by a new company while secondary stock market represents movement in prices in existing share including profitability resulting in more dividend, insider information etc.

It is worthwhile here to note that section 224 of the companies’ ordinance, 1984 provides for some restriction over trading by directors, officers and principal shareholders over a period of less than six months.

Consequently, any move to tax the capital gain on trading of shares in secondary stock market should consider the holding period, holding period by officers mentioned in section 224 of Companies Ordinance, 1984 and equitable allowance of adjustment of capital loss against capital gain accrued during the period.

It is worthwhile here to note that holding period for investment in shares of primary market has already been embodied in section 62 of the Income Tax Ordinance, 2001 for certain class of taxpayers.
HIGHER DIRECT TAX INCIDENCE
It is worthwhile here to note that Tax Rate have a significant impact over compliance. Moreover, I am not advocating any reduction in Salaried Individual, Sole Proprietorship and Partnership but for corporate entities. Pakistan’s Tax Rates are still higher in the region which puts us on competitive disadvantage.

Listing or De Listing
Currently, there is 1% reduction in tax rate for new enlistment and the result of this policy is evident from new enlistment analysis at stock exchanges. It is suggested that there must be at least 10% difference in tax rates between a listed and non listed company. This would have a significant impact over reduction in concentration of wealth in few hands.

Small Companies Vs. Non incorporated
Currently, the rates of new small companies are 20% while the tax rates of a non incorporated entity increases gradually. This is a major impediment in incorporation and ought to be removed. FBR understands the fact that documentation is increased when a business is incorporated; hence, it should align these two tax rates to induce.

SAVINGS TAX CREDIT
At the moment, section 62 of the Income Tax Ordinance, 2001 is only restricted to Investment in new Share while section 63 is related to Retirement Annuity Schemes. It is high time that consumerism behavior of taxpayer be curtailed by either extending the tax credit on investment in shares with other saving options duly restricted through a holding period. Such a tax credit would be helpful in changing the mindset of consumerist of luxuries to necessities.

Consumerist behavior has its drawback and affects the society as a whole. The seven perils of consumerism over the behavior of a person and society. Consuming is far from harmless. A lifestyle focused on consumption does the following:

Wastes your time
When you flip flyers, search aisles and wait in checkout lines, you lose precious time. When you own a bigger house, an extra car and more appliances, you organize more, clean more, repair moreand lose more precious time. Consumerism steals your time to relax with family, engage in worship or help the community.

Distracts you from your goal
Our routines absorb us each day as we earn, buy, store, clean, organize and discard stuff. We have little time to contemplate why we perform these tasks and possess these items. Slogans of Buy now! Enjoy now! emphasize instant gratification and obscure the deeper purpose and priorities of our lives. We rarely remember to show gratitude for what God gave us. The more we consume, the more consumerism distracts us from our goal of pleasing God [Quran 102: 1-2].

Increases your needs
As you own more, your needs increase. A bigger house requires more furniture, more curtains, more decorations and more cleaning supplies (maybe even a maid!). Now you need to work longer hours to maintain your bigger house. When you work longer hours, you have less time so your needs increase againyou now need outside food, more childcare, a dishwasher, and a vacation to escape the stress! Consumerism traps us in a cycle of own more, need more, work more.

Enslaves you
The fashion industry, with the medias help, creates, sells and alters styles to keep you spending. If you follow the latest trends, wear whats in and avoid whats out, ask yourself why. Are you letting wealthy fashion and media leaders control your wardrobe and your wallet?

Creates more responsibilities
Are you ready to account for everything you consumehow you bought it, how you used it, how you shared it? [Quran 102:8] As you own more, you increase your burden of responsibility.

Weakens your health
Juliet Schor, in Born to Buy, shows that children who lead a consumeristic lifestyle, spending more time watching television and shopping, face greater health problems such as obesity, depression, and low self esteem. Even adults who are responsible for more financial and physical wealth suffer greater stress and stress-related diseases. A simple lifestyle, with meaningful physical and mental activities, can protect your health.

Destroys our Environment
An individual in a developed nation consumes three times as much meat, nine times as much paper, and eleven times as much gasoline as an individual in a developing nation. This materialistic lifestyle sucks up natural resources and dumps tonnes of waste on the planet. Where does our garbage go? Many toys, electronics, and household items North Americans consume and discard ends in piles on landfill sites in developing countries where the toxic chemicals seep into water and soil. Each item we consume involves consequences we rarely consider.

DEBIT/CREDIT CARD TRANSACTIONS AND TAX CREDIT
It is evident that Pakistan is a less documented economy and any move towards documenting the economy should not be appreciated but also be facilitated. It is suggested that a tax credit of 5% be announced for the quantum of expenditure incurred through credit or debit cards. Such step would increase the documentation of economy and may be coupled with WHT deduction obligation.

RECONCILING PRINCIPLES - FINANCIAL AND TAX ACCOUNTING
The IASB is developing a financial reporting matrix whereby the various components of a company’s result are split broadly into two categories – Operating income which comprises cash or near-cash items and valuation adjustments, leading to a total performance column described as comprehensive income. This future format of profit and loss account needs to be incorporated into section 34 of the Income Tax Ordinance, 2001.

I believe that items falling into operating income should form a reasonable basis for tax reporting and assessment. Items included as valuation adjustments need to be considered in more detail. They may include items such as provisions for doubtful debts and obsolete stock etc, they may form a normal part of taxable income according to the provisions of Income Tax Ordinance, 2001 and various precedence.

However, valuation adjustments are of more subjective and volatile nature and do not therefore posses the features which have traditionally been seen necessary of costs having been incurred or income having been realized, or certainty as to amount to be appropriate to utilized for tax purposes.

There needs to be a detailed review of the items falling into the valuation adjustment category and principles must be developed in the common rules chapter of Income Tax Ordinance, 2001 in dealing with these items and any other items that may arise in future.

The main principles should revolve around the distinction between assets readily convertible into cash where adjustments would be taxed or allowed and other assets which would be dealt with on a realization basis for tax purposes. Moreover, plethora of precedence relating of principles of capital and revenue expenditure/income and realized and unrealized income needs to be immediately considered in the common rules chapter of Income Tax Ordinance, 2001.

COMPLIANCE DATES
The compliance dates mentioned in Income Tax Ordinance, 2001, Sales Tax Act, 1990, Federal Excise Act, 2005 and Companies Ordinance, 1984 needs to be aligned at least in respect of corporate entities. It is suggested that the quarterly tax compliance date should be corroborated with quarterly finalization of accounts date mentioned under Companies Ordinance, 1984, at least for corporate entities.

In furtherance, the return filing dates should be changed from specific dates to after six and nine months instead of September and December. This would align the law with section 74 of the Income Tax Ordinance, 2001. Moreover, the monthly sales tax return and monthly WHT statement dates should be changed from 10th and 15th to 20th and 25th. This would help the taxpayers to file accurate data instead of revising it every time.

PRINCIPLE BASED INDIRECT TAX
FBR is moving in the right direction by aligning the Federal Excise Act, 2005, Sales Tax Act, 1990 and Provincial Sales Tax Ordinances. However, provisions like section 8B in Sales Tax Act, 1990 are the black spot and do not match with image and grace of FBR. It is suggested that the 90% restriction should be replaced with closing stock restriction.

Moreover, it is highly understandable that indirect tax laws are normally different from direct tax laws because they cater and considers the processes of business. Consequently, there are separate rules for specific business sectors. However, confusion is created where these rules becomes principles and clash with the main enactment. Such anomalies need to be separated and alignment ought to be made.

ROBUST TAX BASE
A narrow tax base is still contributing to our budget deficit. Prolonged budget deficit has deterred the governments from adopting effective measures such as reduction of direct taxes to revitalize the economy and undermine our ability to meet our social and infrastructural needs. However, the question is of perception about taxes.

Firstly, this Income Tax was introduced in 1860 after the Ghadar or Battle of Freedom for five years and then there was a three years gap in order to subsidize the loss of this battle. It was again imposed in 1868 till 1873 and then again imposed in 1886 for around 30 years. Then in 1918 a new enactment was enacted which was renamed as 1922 after some amendments which was then changed into Income Tax Ordinance, 1979 and currently available in the shape Income Tax Ordinance, 2001.

However, in Pakistan there were and are many perceptions regarding the applicability of Income Tax being Un-Islamic as people believe that zakat, khiraj, fai and Jazia are the only prescribed taxes. You would appreciate that taxes are not limited to that but you may be surprised to note that import tax – chungi was first imposed during the period of first four Caliphs as this is a need of the society.

However, still the wrong perception about tax has not been corrected, although corrective measure has been taken by reducing tax rate, etc, still owing to the following reasons they remain intact.

1. Name based exemptions instead of industry or principle based exemptions
2. Social welfare schemes are not normally undertaken owing to non-availability of principle based exemptions for donations and deduction for the taxpayer
3. In Islam there is a concept of donation, left hand should not know when the right hand donates and one must help their poor relative, however, no such concept is recognized in Income Tax Ordinance, 2001
4. Zakat is a deductible allowance but it is not allowed to be deducted from tax payable – this strengthens the concept that Income Tax is Un-Islamic.
5. A person earning 200K required to feed a family of three member while another person earning the same income are required to feed not only his family but parents and small sister and brother – Both are taxed in the same way!
6. Concept of one’s deduction and other’s income is absent - as this may bring new taxpayers on verification.

As stated earlier, taxpayer’s need to know how their taxes are spent and I would like to quote on small part of history.

“At times, Syria (Sham) was attacked by Tatars, the King decided to take judicial decree from the Islamic Scholars for imposing a tax to meet the expenses. When the issue came before Imam Noovi [Rahmat ullah Alah], he opined

The King lives a lavish life and has a lot of wealth, he also spends a lot of money but his wealth, income and perquisites are not taxable, let him start first by donating his wealth and then the treasury has the right to tax over the common people.”

However, these issues cannot be resolved unilaterally; hence, FBR and Taxpayer both have following obligations.

Federal Board of Revenue

1. Consider tax reform which takes into account all taxes borne and collected by businesses as well as the cost of tax compliance – Total Tax Contribution
2. Increase governments accountability and communicate with taxpayers as to how taxes are spent
3. Consider clear tax education campaigns to explain the taxes, how to pay them and the benefits to all stakeholders
4. Consider how simplification of tax legislation, the ease of compliance burden, and the consolidation of taxes might generate benefits for both governments and taxpayers.
5. Consider consultation with taxpayers when developing ideas for tax changes

Taxpayers

• Gather information on the total tax contribution including all taxes borne and collected, as well as the cost of tax compliance.
• Ensure that information around the total tax contribution is made accessible to governments and tax authorities to help inform their decisions over reform.
• Communicate the total tax contribution to the wider stakeholder groups to demonstrate the extent to which they are supporting public finances through taxes.
• Engage in regular dialogue with Central Board of Revenue over the need for reform and specific areas of concern.

This problem is also linked with the literacy rate of our country and will be worsened if the proportion of allocation of budget towards education is not increased and used economically, efficiently and effectively. It is good to see the news item that FBR is now concentrating over WHT data collected from WHT Agents. However, this would not be suffice and must be complemented with incorporation of taxation into maths from early stages to create a civic sense.

REGIONAL HUB
Government should not concentrate over its ports rather use of ports as facilitation for import of raw material by new manufacturing set ups which will ultimately be exported into the region. In the past Government normally develops a zone and makes it open for investor, however, this time it is suggested that the policy should encompass Pakistan instead of any specific geographical location.

Let the provincial governments compete with each other and start a new era of healthier competition. Such strategy would help the governors to identify the areas requiring primary infrastructure which will result in infrastructure development. In furtherance, the investors normally consider the area having primary infrastructure by themselves.

In order to become the ultimate choice of multinational companies, Pakistan’s financial infrastructure needs to be sustainable and for this very purpose we need a stringent supervisory and regulatory system. Other pre-requisites include an effective legal system, transparency, certainty and consistency in government policies including interpretation of laws, lowering of tax rates and favourable tax environment, low transaction cost, pool of talented professionals and an environment that facilitates qualitative life.

Rules and regulation contributes to be ranked as one of the top problems for business today and in World Bank survey our ranking is much below as compared to regional averages. There must be a comprehensive programme of measures to address regulation which should include the commitment to significantly improve the impressions of our regulation and requires continuous assessment. We must harmonize our laws as currently there is a book available in the market which contains just the names of our laws.

A favorable tax environment provides appropriate tax incentives for businesses, transparent and predictable assessment of tax liabilities, and simple tax administration. It also includes measures to facilitate cross border economic activities. These are essential features in attracting multinational companies and foreign investors to establish businesses in Pakistan.

Currently, tax incentives for regional headquarters are provided by many jurisdictions including Singapore, Malaysia, the Philippines as well as China. For instance, in order to attract more regional headquarters to establish in the Pudong area of Shanghai, generous subsidies will be offered to new regional headquarters in the coming five years. The subsidies are calculated with reference to the local revenue retained by the Pudong government in respect of the Enterprise Income Tax, Business Tax and Individual Income Tax paid by these newly set up regional headquarters.

To further strengthen Pakistan’s edge in attracting foreign investors to establish regional headquarters or holding companies, I reiterate my proposal to provide concessionary tax rates (e.g. half rate) for regional headquarters’ activities which are of a substantial scale and are of the nature of investment, general management, financial management, and marketing with a broad geographic coverage.

Hong Kong has recently introduced the Revenue (Profits Tax Exemption for Offshore Funds) Bill 2005 to reinforce the status of Hong Kong as an international financial centre. However, the proposed legislation of Hong Kong was only meant for the benefits of overseas investors. In Singapore, tax incentives are also given to encourage fund managers’ set-up. To promote the setting up of service centers in Pakistan to manage overseas funds, I propose that concessionary tax rates, e.g. half rate as currently enjoyed by offshore reinsurance business, be given to those approved fund managers who manage overseas funds in Pakistan.

AUDIT
A section is not enough and a chapter needs to be devoted for Audit. Moreover, the existing audit section needs to be rephrased under one chapter which may include audit management, taxpayers’ obligation, authorized representative obligation, modus operandi of audit, modus operandi of audit decision, postulates of an audit order and time frame to conduct & complete the audit.

STANDARDIZATION OF ORDERS
Current practice is that good orders are awarded; however, this exercise is not cashed yet by finalizing a standard format of order. There seems to be a dire need to finalize a standard format of orders for assessment, amendment in orders, revision, appeal effect and audit.

Moreover, a standard format of order is also required for CIT Appeals and ITAT, however, when I use the word standard this means that basic principle based postulates needs to be prescribed, for instance for appellate forums transaction nature, sections applied, sections not considered, beneficial circulars, accounting and tax principles applicable, department’s argument, taxpayer’s argument, precedence available, reasons of not considering any of the afore mentioned point, argument or precedence and finally the decision itself. A good speaking order normally reflects this but we must strive to make all order speaking!

TRANSFER PRICING
Internationally, the horizon is much bigger than pharmaceuticals and time has come to bring certainty in businesses. I would suggest that Chapter VI – Transfer Pricing needs to include what State Administration of Taxation of China has done in line with OECD guidelines. They have included a principle set of documentation and includes

• Business and Industry Analysis, that is, description of the industry in which the company operates
• Functional Analysis, that is, description of the functions carried out, the assets used and the risks borne by the company in question
• Identification and quantification of the related party transactions
• Selection of the most appropriate transfer pricing methodology to analyze arm’s length nature of the related party transactions and
• Application of the most appropriate methodology, with conclusions on arm’s length nature of the pricing of the related party transaction

This documentation should be prepared before the tax return for the year in question is submitted but there will no requirement to submit the report to the Income Tax at the time of return just a box ticking, however, no time will be given when the report is required to be submitted through a special notice.

However, I would like to go beyond this and would like to suggest about the Advance Pricing Arrangements [APA], although my detailed article was published on this three years back, suggested in OECD Transfer Pricing Guidelines.

APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time. An APA is formally initiated by a taxpayer and requires negotiations between taxpayer, one or more associated enterprises and one or more tax administrations, hence, can be unilateral, bilateral and multilateral.

TAKAFUL INSURANCE
It is suggested that fourth schedule of Income Tax Ordinance, 2001 should be amended to include the concept of Takaful Insurance. This suggestion is based on the same principles and reasons which led to incorporation of Islamic Banking concept in Seventh Schedule.

SEVENTH SCHEDULE AND ISLAMIC BANKS’ DONATION
A heavy non-performing portfolio and default on part of clients is a serious problem confronted by the Islamic Banks. This problem could be threat to success of Shariah compliant financial product service provider. If clients do not honor their commitment in respect of timely payment in respect of a Shariah compliant financial product, it could cause irreparable loss to the system.

In Islam, it is permissible to penalize a financially debtor but delays payment of debt without any genuine reason. Last Prophet (PBUH) said, “A rich debtor who delays payment of debt commits zulm”. Hence, the jurists allow the punishment (Taazir) to such borrower in the form of fine. In the opinion of some Maliki jurists, a delaying borrower would be obliged to pay for charitable activities.

In view of the severity of the problem, all Shariah bodies including Shariah bench of the Supreme Court of Pakistan have approved the provision of penalty clause in the contractual agreements that keeps a balance between the requirement in view of severity of the problem and that of the Shariah conditions/principles to keep the fine difference between interest and profit on Shariah compliant financial product intact.

However, the penalty proceeds would be used for charity because penalty on default in repayment cannot become an automatic source of income for the creditor. Hence, it is imperative that a new sub-section needs to be introduced in section 20, whereby all such penalties are donated and amounts are reflected in the tax returns of such not for profit making organizations having NTN.

CORPORATE LAW REFORM
An exercise to rewrite the Companies Ordinance, 1984 was started couple of years back and currently have no clue. Following is the crux of some deficient concepts in companies’ ordinance, 1984.

Compliance Approach
At the very outset, the regulators must see whether the new piece of legislation is based on voluntary compliance or legally binding approach. The focus of company law initiative must be on the protection of stakeholders apart from redressing the balance in favour of promoting business activity. However, one cannot compromise over the essential nature of the company law – concept of limited liability.

Policies and Procedure for Risk
There is a dire need to strengthen corporate governance arrangements at legislative level instead of listing regulation level apart from the preparation of best practice guidance which needs to be incorporated into legislation. Guidance should, in particular, encourage listed companies to disclose more information on their policies and practices with regard to risk.

Information on Web
The new law should ensure that provisions to ensure that company information published under the terms of the company law and is fully and easily available to searchers from anywhere in the world through website. There should also be minimum rules governing shareholder rights and moves to harmonize insolvency procedures and creditor rights.

Rights of Auditor
The new legislation must strengthen the rights of auditors to obtain information on their client companies’ affairs. This will extend the auditor’s current statutory right to demand information from a company’s directors to all the company’s employees. Further, directors who fail to volunteer information to their company’s auditor when they know that the information concerned is material to the audit will be subject to criminal penalties. By presenting directors with the prospect of jail if they wilfully mislead auditors, the new legislation should emphasise to directors of all companies the importance of full and transparent disclosure of information.

Resignation of Auditor
In furtherance, any research would reveal the fact that resignation statements are uncommon and even when such statements are made they tend to be relatively uninformative and unhelpful to the members and creditors of the company whom they are intend to assist. A copy of resignation statement needs to be sent to appropriate authority like ACCA, ICAP or ICMAP. Where the auditors appointment being terminated concerns a listed company or where there is a major public interest in the company’s financial condition, the concerned need to pass this information no sooner it receives on the ceasing to hold office. A significant amendment is required in this area on the basis of which the court should judge the auditor’s conduct when filing a resignation statement. The courts must consider the fact that whether the auditor is abusing the rights conferred to auditor.

The key reason why resignation statements have either not been filed or have contained limited information is largely due to the concerns that auditors have had about being drawn into potential lengthy and expensive litigation with their formal client. This is exactly what happened in Jarvis Plc & Ors Vs Price water House Coopers [2000]. The company applied to court to prevent PWC filing its resignation statement with the registrar. The proceedings took a considerable time to resolve and by the time the proceedings had been resolved, the resignation statement was out of date. Whilst the application to court was being made, the content of resignation statement was prevented from coming to the attention of members and creditors at the appropriate time.

Any provision regarding auditors’ resignation needs to persuade the auditor to prepare and file informative resignation statement rather than encourage them. The provision must consider the concept that whether the auditor is using the statement to secure needless publicity for defamatory matter. The test must be based on auditor’s motive and the threshold needs to be placed at a relatively high level. In such Judiciary matters, not only the company show the material in the statement is defamatory but it must also prove bad faith on the part of the auditor. Serious consideration should be given as to how the procedure for dealing with these applications can be improved so that the wheels of justice turn a bit quicker.

Accountant
The term accountant is not defined and protected by law. This enables anyone to set him or herself up as an accountant without professional training. Normally people assume that when they deal with accountants they assume they are qualified. In case, the new companies law contain the provision that all companies are required to file its accounts then Securities and Exchange Commission of Pakistan would have ample records of many inaccurate and poor quality sets of accounts produced by unqualified accountants like the FBR.

As we know that companies are ultimately liable for the accuracy of their final accounts and it is the companies that are subject to fines. Poorly prepared accounts leave independent shareholders and creditors at risk and can make fraud harder to detect. The gulf between qualified and unqualified accountants is widening day by day as all professionally qualified accountants are now obliged to undertake continuing professional development [CPD].

Government must realize the fact that individuals must be able to state that they are tax advisors or book-keepers, but, in the way that the term advocate means a client will have the services of a qualified advocate. The term accountant should denote the services are provided by a fully qualified accountant. This is high time that currently there are four bodies running five different qualifications. ACCA itself and its accounting technician scheme of CAT, ICAP, ICMAP and PIPFA.

Operating and Financial Review
SECP should require public and large private companies to prepare an Operating & Financial Review (OFR). This new document will require companies to report to their members on the key issues which have affected their past performance and the factors which are likely to affect their future prospects. The OFR is also a great step forward for the cause of ‘inclusive’ company reporting because it will provide a statutory platform for companies to report on how they have accommodated the concerns and interests of the wider group of stakeholders who are interested in their activities.

There must be an onus on company directors to include, in their OFRs, information which is relevant to a broadly based understanding of their companies’ performances and prospects, for instance, social and environmental issues which are of great concern to other stakeholders and country regulators. These might also include issues such as child labor, bribery and corruption or localized environmental damage. There are also wider issues such as climate change and carbon risk which need to be addressed by many large companies.

SRO Mechanism
However, issuance of SRO’s and adoption of Accounting standard need a close review and I think that SECP should consider the use of alternative mechanisms, other than circulars, directives and regulations, in future company law-related initiatives. SRO’s in particular takes too long to approve and implement and are not always suitable for highly technical measures. I think that SECP in a new Action Plan on Better Regulation, where appropriate, should regulate by means of industry standards and best practice guidance. Any delegation of authority in these matters will, however, need to be subject to governmental scrutiny and backed up by remedial powers.

Small and Big Company Approach
The associated provisions need to be grouped together as far as possible. In furtherance, any decision regarding two separate statutory requirements for smaller companies and larger companies is a welcomed approach because company law must provide scope for small companies to grow and thereby become subject to the rules applicable to larger companies not merely a 1% reduction in tax rate.

Veil of Incorporation
The veil of incorporation is here to stay and should only be lifted in the most exceptional circumstances. It may be relatively easy to say with clarity when the veil should be lifted in those instances where statute allows. However, where there are no statutory guidelines the courts are becoming increasingly reluctant to do so. I think that the new company law must contain some statutory guidelines in respect of lifting of corporate veil.

Currently, one of the issues which businesses and practitioners find particularly difficult to cope with at the moment is that so many piecemeal changes have been made to the CO1984 over the past 20 years that it now lacks coherence. The company law rewrite will offer the opportunity for new legislation to be drafted afresh which is more accessible to small companies and which is sufficiently flexible to adapt to changing business conditions.

INTANGIBLE ASSET OF HUMAN RESOURCE
Talent is the key to knowledge based economy. Our tax system should create best conditions for evolving knowledge based economy. To encourage our businesses to upgrade the skills of their employees and to build up their human capital, it is suggested that 150% deduction be provided for qualifying cost of staff and training. People will support the government for providing adequate resources on education to prepare our young generation for a knowledge-intensive economy.

Government must consider the concept of important person for the foreign exchange earners. This may allow the nationals working abroad to be dealt on priority basis at the airport etc.

INTELLECTUAL PROPERTY
Intellectual capital is the key feature for an innovation driven and high value added economy. Our tax system should provide generous tax treatment for expenditure on creation of intellectual property and intangible assets. Government must subscribe the comments of world economic forum that encouraging research and development is our main policy to strive for success.

It is suggested that Government should allow a 200% deduction for research and development expenditure, incurred locally, to promote the development of brand name, high tech products and product with significant intellectual property content. Only providing amortization for intangible asset is not sufficed in this globalization.

TOURISM
Tourism is one of the fast growing sectors of our economy. In order to be consistent with the principle of supporting core industries it is suggested that Government should introduce an incentive for new investment and upgrade of service quality in tourism. It is further suggested that a one off deduction for refurbishment cost and 150% deduction for a marketing campaign on international news channels solely for Pakistan tourism purpose by the business.

FAIR SHARE OF ENVIRONMENTAL COST
On the environmental side I am of the opinion that economic loss caused by the pollution should not be borne by the society as a whole. Tax measures should be an integral part of strategy to tackle environmental pollution and polluters should share the tax burden. Many companies re locate their operation where environment is more attractive as pollution brings adverse economic impacts causing higher rate of absenteeism, higher medical bills, reduction in revenue from tourism and re-location of highly skilled person. In the past, government initiatives to tackle pollution issues were in the form of legislative restrictions. People will welcome tax measures to encourage innovation on anti-pollution technologies and equipment.

Green taxes
People will support the introduction of green taxes. Without a tax on environmental protection, costs incurred by the environmental damage are borne by the society not by the environmental polluter.

The principle of green tax is that polluter pays because those who contribute to the environmental damage should shoulder the tax burden. Green taxes will also induce the polluters to develop less polluting technologies. This will also become a new source of government revenue and can be utilized to further tackle the environmental issues or to reduce the direct taxes further.

Although green taxes are environmentally and socially justifiable but given its practical difficulties, a public consultation on the detailed proposal be conducted. The consultation should cover the types of green taxes suggested, approaches to determine the level at which the taxes are set and a study of the effect on our economy.

STABLE PROVISION FOR THE SOCIETY’S NEED
On the social side, our society has become increasingly demanding for the provisions of social welfare, healthcare and education. The capability of our government to meet these needs depends on our fiscal situation, which in turn depends upon our success in economic restructuring, broadening our tax base and efficient utilization of public resources.

The success lies in a concept similar to privatization! People will support a small government with outsourcing of public services for a better management. The capability of our government to continue to provide stable welfare and quality education depends to a great extent on our financial situation. With a structural budget deficit, we have experienced increasingly difficulties in meeting demands of different interests. This has led to public dissatisfaction with our administration and affected adversely our social stability.

Restoring our budget deficit and maintaining a sound fiscal reserve are the keys to addressing adequately the social bottom line of sustainability. The trend of increasing social needs runs parallel with the trend of global competition for capital and personnel, while against them is the trend of declining number of taxpayers. This brings about a great challenge in managing our public finance. A success in economic restructuring and broadening tax base would help meet this challenge.

As suggested, outsourcing of public services is an appropriate approach to enhance cost effectiveness and benchmarking to comparable services provided by the private sector. This will serve as a reference in order to determine whether outsourcing of certain services or projects is more cost effective! The efficiency of resource utilization in key policy areas should also be reviewed regularly and a mechanism should be put into place to conduct a full review of cost effectiveness of each policy bureau.

CONCLUSION
People believe that our major challenges are unemployment, sever competition, tax uncertainties, increased public expenditure and budget deficit. In transition towards a knowledge based and high tech economy, our society suffers a persistent and high unemployment rate apart from an enlarging gap between rich and poor. High mobility of capital and personnel resulting from globalization of economic activities subject Pakistan to worldwide competition and in particulars to our neighbours. The complicated indirect tax structure apart from the concept of afghan transit trade manipulation creates uncertainties in the interpretation of current tax legislation. There is a growing demand of increasing provision of health care, social welfare and education. A structural budget deficit continues to deplete our fiscal reserve and threatens Pakistan’s international credit rating.

As children’s do no grow within a year, hence, we must have a strategic budget not an operational or tactical one this year. This entails the fact that the theme our budget should be based on strategic fiscal policy. This theme must address our current needs without compromising the ability of our future generations to meet their own needs. A strategic look would help us to concentrate on three important aspects, that is, economic, environmental and social dimensions to achieve a sustainable development of our country – Pakistan. Global and domestic environment is changing. Our success in the future will depend upon the appropriate strategic steps now taken to address our current issues and lay down a solid foundation for future.

The writer is an International Tax Advisor and can be contacted through taxonomy.ashraf@gmail.com. The views expressed in the article are personal while no liability will be assumed unless specially agreed.

Article courtesy of Muhammad Ashraf [Via www.accountancy.com.pk]