Investor Presentaiton
FINANCING SUSTAINABLE TOURISM IN KHYBER PAKHTUNKHWA
4.1
Tax Compliance
and Exemptions
The first order problem identified by KPRA
stakeholders was the endemic lack of tax
compliance of tourism related service providers
such as hotels, restaurants, guest houses etc. in
KP. Most of these private establishments are
informal and outside the services tax net. Also,
as tourism related business activity in KP is
seasonal, there is no consistency in tax
collection. Tourism service providers and
business owners try to maximize the short
window to earn as much revenue as possible to
tide them over the inevitable dry spells. This
seasonality in earning in turn lowers the degree
of tax compliance.
According to KPRA, in the last two years there
has been a significant increase in sales tax
compliance and registration of hospitality
related businesses particularly in Galliyat.
Extensive registration drives dovetailed with
process simplification and reduced tax rates
augmented voluntary compliance, resulting in
a 31% increase in overall registration 20. Another
important reason cited by KPRA officials
was the assurance made by the KP finance
minister to spend a significant portion of the
revenue generated from Galliyat into the
provision of infrastructure development and
public service provision in the area. Although
there is no legal/constitutional provision and
administrative mechanism to hypothecate
sales tax revenues, the resultant increase in
business registration and revenue is indicative
of the potential of increased tax compliance
and revenue generation from ring-fencing.
Private sector stakeholders indicated that
while tourism is often referred by government
officials and politicians as an 'industry', the
sector has not formally been given the status of
an industry. By giving tourism sector in KP
the status of an industry, all tourism related
businesses would qualify for lower industrial
electricity tariff rates. According to some
private sector stakeholders, this would
be a significant economic incentive for
unregistered hotels, restaurants, rest houses
etc. to formalize and come into the tax net.
However, this policy would only be viable if the
resultant tax revenue increase is large enough
to compensate for the loss in revenue from the
electricity subsidy.
The tourist destination of Swat and Chitral
in KP fall under the erstwhile Provincially
Administered Tribal Areas (PATA). To give an
impetus to economic activity and tourism in
these areas, FBR and KPRA has given tax
exemptions to businesses registered locally
till 2023. These income and sales tax exemption
has attracted large scale investments from
outside KP in the hospitality sector. For
example, Pearl Continental Hotel in Malamjaba
has an owning company which is registered in
Mingora, Swat, making it a local business and
thus qualifying for the tax exemptions. These
20 Government of Khyber Pakhtunkhwa (2021-22). White Paper Fiscal Year 2021-22.
tax exemptions can only be justified in the
short run as an initial fiscal impetus to attract
private investments. Overtime such incentives
would create distortions in investment
decisions leading to regional disparities in
economic opportunities.
Given the unique natural beauty of both
Swat and Chitral, there is no expectation of
significant decline in tourist numbers nor a
resultant fall in private sector investment in
tourism from a removal of the tax benefits. In
fact, it is likely that there will be a substantial
increase in tax revenues in KP generated from
these areas which would eventually benefit
both Swat and Chitral. The benefits would be
even more pronounced if tax revenues post
2023 from Swat and Chitral are ring-fenced.
KPRA and FBR can remove the exemptions
post 2023 and the same tax rates across
income and services can be applied
throughout KP. The proposal of a ten-year tax
exemption for businesses located in ITZs also
needs careful re-consideration for the same
reasons.
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