Exploring the Tax Burden on Pakistan’s Industrial Sector
In Islamabad, the industrial sector faces a heavy tax burden with around nineteen to twenty different federal and provincial taxes, as disclosed by a senior official of the Federal Board of Revenue (FBR). This multitude of taxes is not only complicating the tax framework but also significantly increasing the cost of doing business for manufacturing units across Pakistan.
The manufacturing sector, which contributes 20 percent to the country’s Gross Domestic Product (GDP), bears over 60 percent of the tax contributions. A closer look at the tax structure reveals that, aside from corporate income tax, the remaining federal and provincial taxes are predominantly indirect taxes, which are ultimately borne by consumers, contributing to inflationary pressures.
Corporate income tax, which accounts for nearly 35.87 percent of total tax collection, comes in three forms for the industrial sector: a 29 percent tax on normal profit, a 17 percent Alternate Corporate Tax (ACT) on gross profit, and a 1.25 percent minimum tax on turnover for specific manufacturing categories. It is reported that about 90 percent of corporate entities end up paying the turnover tax.
Despite the recent skepticism expressed by the newly elected Finance Minister regarding the super tax, which ranges from 1 to 10 percent for incomes exceeding Rs 150 million, any changes would be proposed in the next finance bill. The standard sales tax rate of 18 percent applies to manufacturers, with an additional “further sales tax” of 4 percent on supplies to unregistered entities.
Manufacturing units also serve as withholding agents for the FBR without compensation, further increasing their operational costs. This includes withholding tax on electricity consumption and a 5 percent withholding tax on payments for goods, services, and contracts. Additionally, sales tax is imposed on electricity and gas bills, customs duty, and sales tax on imported raw materials.
The federal Excise duty (FED) targets certain manufacturers like those of cigarettes and beverages. Moreover, industry cannot adjust input tax beyond 90 percent of the output tax for a given period, leaving them to pay the remaining 10 percent.
Provincial sales tax registration is mandatory for manufacturers, with rates varying between 13 to 15 percent across provinces. They must also contribute to Workers Welfare Fund (WWF), Workers Participation Fund (WPF), and EOBI. Other levies include social security, property tax, stamp duty, Zila tax, and Infrastructure Cess.
For small and medium enterprises (SMEs), with turnovers not exceeding Rs 250 million, there are two categories with distinct tax rates and an option to choose a final tax regime (FTR), which precludes them from tax audits and exempts them from minimum turnover taxes.
With such a complex and heavy taxation structure, it’s clear that taxes on the industrial sector in Pakistan are a significant factor in the cost of doing business, potentially impacting the competitiveness and growth of this vital economic contributor.
