Why Sialkot Industry Needs FTR to survive

Introduction

The Final Tax Regime (FTR) was introduced in 1991, under the supportive framework of which the SME-driven export industry of Sialkot has thrived and progressed. This policy was instrumental in fostering growth, job creation, and empowering women entrepreneurs.

However, the recent policy shift to the Normal Tax Regime (NTR) poses a serious threat to the stability and competitiveness of Sialkot's businesses.

The Women Chamber of Commerce & Industry Sialkot (WCCIS) stands united with The Sialkot Chamber of Commerce & Industry (SCCI) and other prominent associations in urgently appealing to the Prime Minister for the reinstatement of the FTR.

It is perplexing that the same government which recognized the efficacy of FTR in supporting economic growth would now reverse this discerning policy. This is not just a budgetary adjustment but a fundamental measure to sustain our economic prosperity.

FTR vs NTR

The Final Tax Regime (FTR) and Normal Tax Regime (NTR) are two different methods of calculating income tax in Pakistan.   The key differences are:

1.     Final Tax Regime (FTR)

·         Taxes are applied directly to the total income, without considering any deductions.

·         Income sources under FTR are specific. These typically include income from certain services, dividends, and other defined sources.

·         SMEs in Pakistan benefit more from the Final Tax Regime (FTR) because of simplicity, fewer deductions and predictability as the tax liability is determined upfront, providing businesses with better financial planning.

2.     Normal Tax Regime (NTR)

·         Taxes are calculated on the profit after deducting all allowable expenses.

·         Applies to most income sources not covered under FTR.

·         Tax rates are progressive, increasing with the level of income.

The Impact of NTR on Women Entrepreneurs

The shift to NTR has introduced complex compliance requirements and higher tax rates, creating significant administrative and financial burdens for SMEs. Women entrepreneurs, who play a crucial role in the export market, are now forced to allocate their resources to navigate these bureaucratic challenges rather than focusing on innovation, production, and expansion.

In fiercely competitive international markets, this diversion of resources can be detrimental. Companies and Associations of Persons (AOPs) are struggling with unsustainable tax rates, jeopardizing their survival. The increased involvement of the Federal Board of Revenue (FBR) deteriorates the current situation, raising the risks of malpractices and business instability.

Tax Burden Comparison

To understand the gravity of the situation, let's compare the tax burdens under the current NTR and the proposed reinstated FTR:

▪ 1% Minimum Tax + 1% Advance Tax (2%) at source

▪ Tax rates: 29% for limited companies, 45% for individuals/AOPs after Assessment

▪ Surcharge: 5% for income > Rs 10M for AOP/Individuals.

▪ Super tax: 1-10% for income > Rs 150M.

This comparison clearly illustrates the complexities and higher financial burdens imposed by the NTR.

The Broader Economic Implications

For many women-led businesses, the NTR acts as a significant deterrent to formal registration and participation in the export sector. Unregistered businesses are unlikely to seek formal recognition under such onerous conditions, stifling the growth of new enterprises and innovation. This trend not only hampers individual business growth but also impacts the broader economic landscape, leading to a decline in exports and weakening Pakistan’s competitive edge globally.

In the Financial Year 1991-92, the introduction of the FTR led to a substantial increase in tax revenue from the export sector, with a 149% rise compared to the previous year. This historical success highlights the potential benefits of reinstating the FTR. Here is a breakdown of the projected tax collections under different tax rates:

Tax Collection in PKR for Different Tax Rates

A proposed increase in the tax rate to 1.5% could meet the government's revenue targets while providing relief to exporters.

A Call to Action

The Women Chamber of Commerce & Industry Sialkot representing the interests of women entrepreneurs, strongly urges the government to revive the Final Tax Regime. This move is essential to unburden our exporters, simplify the tax structure, and secure a prosperous economic future for Pakistan. Restoring the FTR will enable our SMEs to thrive, foster a conducive environment for business growth, and enhance our export potential.

Conclusion

The restoration of the Final Tax Regime is not just a fiscal necessity; it is a step towards empowering our women entrepreneurs, sustaining our SMEs, and securing Pakistan’s economic future. We call on all stakeholders to support this critical initiative and join us in advocating for a fair and supportive tax environment. By reinstating the FTR, we can ensure that our women entrepreneurs and SMEs continue to be the driving force behind Pakistan’s economic growth and global competitiveness.

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Written by:

  Adan Amjad (Secretary General WCCIS)

  Sammar Nasir (Intern WCCIS)