Tax culture shows very little sign of improvement with all segments of the population whether individuals, lawmakers, businessmen or the elite class demonstrating stiff resistance to pay their due taxes. The corporate sector, which plays an important role in economic activities, also shares the blame for tax avoidance.

The Securities and Exchange Commission of Pakistan (SECP) regularly announces the number of companies it registers in the outgoing month, lately claiming a healthy average growth of over 40pc on month-on-month basis. The data published in the press is without any meaningful classification as the total figure includes unspecified dormant and defunct companies. Thus the number companies declared as registered with the SECP may be misleading as it may include many which are dormant/defunct, non-active and defaulter companies.

However, as the trend shows, about 90pc of the companies registered with the SECP are private companies and the rest include public companies, single member firms and associations. This registration trend reflects growth of wealthiest group and concentration of wealth in a few hands. The mushroom growth of private companies can generally be traced to the sponsors of the listed companies who, at the cost of minority shareholders’ interest, avail financing from their listed companies for their associated companies. This practice weakens the financial strength and profitability of the listed companies, but the Companies Ordinance 1984 (CO) allows financing to associate undertakings. It would, however, be unfair to allow its misuse. This provision of the CO may be amended linking the financing to associated companies with a condition that the associated company availing and flourishing with such financing from a listed company, shall be listed within a specified time under the Rules.

The mushroom growth of private firms can be traced to the sponsors of the listed companies which, at the cost of minority shareholders, avail financing from their listed companies for their associated firms

About 60pc of the listed companies did not pay or paid low dividends to their shareholders but neither the CO has any provision to penalise the management of these defaulter companies, nor Listing Regulations of the Stock Exchange come to the rescue of the minority shareholders.

The SECP has now proposed that the FBR should levy tax at the rate of 31pc on listed companies giving cash dividend while those listed companies, which do not pay cash dividends, may be taxed at slightly higher rate of 32pc. Alternatively in order to provide an incentive to listed companies to distribute cash dividends, a rebate in tax system may be introduced, whereby a listed company, which pays dividend, may be allowed rebate from the tax liability determined on assessed taxable income. A listed company, which skips dividend, may attract additional tax on its tax liability. Besides limits on amount of retained earnings of a company may also prompt the relevant companies to declare dividends to their shareholders.

The level of avoidance of tax by the corporate sector in the tax year 2013 is alarming. While companies registered with the SECP as on June 30, 2013 were 61,989, as per the Tax Directory published by the Federal Board of Revenue, only 23,845 companies or 38pc filed income tax returns. The remaining 72pc of the total number of companies registered with the SECP did not file income returns.

It is difficult to classify companies into private, public listed or not listed firms which defaulted in complying with section 114 of the ordinance. With defaulters’ ratio being so alarming, it should have prompted the regulators to initiate forthwith penal actions against them under the ordinance. The situation calls for the coordinated efforts of the FBR and SECP to arrest this menace of tax evasion.

Further interesting facts emerged by the data analysis: of the 38pc companies which filed returns, a huge number of 10,639 (equal to 45pc of them ) have declared zero taxable income liability while 55pc companies of private sector contributed negligible 4pc of the tax amount to the exchequer. Only four fully government-owned companies voluntary contributed about 20pc of total taxes. Considering about 70pc tax is collected by the withholding tax agents, the minor share of collection of tax by the FBR with army of its officers confirms their dismal performance as pointed out by the World Bank.

Tax avoidance by the corporate sector is a global issue. The Organisation for Economic Co-operation and Development launched last year the project known as the ‘Base Erosion, Profit Shifting (BEPS) to fight against corporate tax avoidance. The project emerged from concerns of governments worldwide about tax dodging by multinational companies. Some foreign countries are using the BEPS project to get more aggressive on company tax audits. The country’s regulators may be guided with same OECD conclusion to examine the whole issue accordingly.

Published in Dawn, Economic & Business, May 19th, 2014