Tax Measures to Encourage
Women enterprises are on the rise in Pakistan as well but a huge gender gap still exists in this domain and there is a pressing need to bridge this gap through some robust policies and initiatives. There is no blinking at the fact that an increase in the number of women-led enterprises will promote economic growth and development of the country. Tax policy could be explored as an area to promote women entrepreneurship in the country.
The Government of Pakistan has introduced certain tax measures in this context. For example, clause (19), which was inserted in Part-III of the Second Schedule to the Income Tax Ordinance, 2001 (ITO 2001) through Finance Act, 2021 (FA 2021), provides that tax payable by woman enterprises on profit and gains derived from business shall be reduced by 25%.
A woman enterprise, which is a sole proprietorship concern owned by a woman or an association of persons with all women members or a company with 100% shareholding held or owned by women, qualifies for a benefit of 25% reduced tax liability. However, such a woman enterprise must be a startup and should be established on or after July 1, 2021. Furthermore, to avail the benefits under the aforementioned clause, a woman enterprise must not be formed by the transfer or reconstitution or reconstruction or splitting up of an existing business.
What are possible tax policy measures which could be further explored for promoting and encouraging women entrepreneurs?
One possibility is to increase the threshold of annual turnover for charging minimum tax under section 113 of the ITO 2001 for businesses run by women entrepreneurs not having a separate tax-free threshold. However, the government has already raised the threshold of annual turnover for charging minimum tax from Rs10 million to Rs100 million through FY 2021 for taxpayers registered as individuals and association of persons in view of a significant decline in economic activity caused by the Covid pandemic as a result of which prices of goods and services increased manifold. Therefore, further increasing the threshold of annual turnover for charging minimum tax specifically for women enterprises seems to be a distant dream.
Women enterprises may demand a separate turnover tax rate, lower than the turnover tax rate charged for businesses run by men entrepreneurs to encourage women to launch their own businesses under the prevailing poor economic situation caused by devastating floods. However, the minimum tax rate on annual turnover has already been reduced from 1.5% to 1.25% through FA 2021.
Another possibility to give relief in tax payment on the income from businesses to women enterprises is to prescribe a separate tax-free income ceiling for women-run businesses as sole proprietorship and association of persons. Currently, the tax-free income ceiling for individuals and association of persons is Rs600,000 annually.
Likewise, women enterprises may be allowed a deduction for the depreciation of depreciable assets used in the business in the tax year at a relatively higher rate compared to business enterprises run by men at least in the early two to three years for the startup businesses.
It is worth mentioning that the number of small home-based businesses launched by women has increased manifold in the wake of financial hardships due to recent floods and inflation. It is an appropriate time to facilitate women in running their businesses. Already, Women Chambers of Commerce & Industry across the country are encouraging women to set up businesses. At the same time, the office-bearers are informing tax policymakers about hardships faced by women entrepreneurs in tax compliance. Recently, office-bearers of Islamabad Women Chamber of Commerce & Industry (IWCCI) met Chairman FBR to put forth tax-related issues and concerns of women entrepreneurs. They informed the Chairman FBR that women entrepreneurs are facing hardships in tax compliance such as timely return filing and the high cost of filing tax returns, which are discouraging new women entrepreneurs to register their businesses with the FBR. They suggested that a fixed tax regime for small women entrepreneurs may be introduced. They also requested that awareness sessions on filing tax returns and tax compliance procedures may be arranged in Women Chambers of Commerce & Industry of major cities to encourage women entrepreneurs to make tax compliance with ease.
The Chairman FBR appreciated their suggestions and assured them that their valued input would be duly considered for launching initiatives to facilitate women entrepreneurs, especially those belonging to remote and marginalized areas.
The Chairman FBR has issued directions to establish a special desk at Gwadar for addressing grievances and concerns of women entrepreneurs and to facilitate them in filing tax returns. Furthermore, Chairman FBR has issued directions to field formations to hold awareness sessions in WCCIs of major cities for the facilitation of women entrepreneurs concerning tax compliance.
Reducing the cost of tax compliance is essential to promote woman enterprises. For this purpose, special desks are to be established in field formations to facilitate women in registration of their businesses and subsequent tax compliance such as return filing and tax payments. By doing this, woman enterprise will be able to save money, which otherwise was to be paid to tax practitioners for registration of their businesses with the FBR and filing of tax returns and making of tax payments.
Besides tax measures, women entrepreneurs require to be supported with special focus areas including support for greater access to finance, awareness through training and advisory services.
The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at firstname.lastname@example.org