In a country where the sky is the limit and there is hope for a better economy, the aviation industry of Pakistan is set to experience a bumpy ride primarily because of new tax measures being implemented to target non-filers.
Some measures presented in the latest budget could potentially paralyze an industry that is quite important for economic growth and exports. With the government’s increasing drive to ensure compliance with tax laws, the aviation industry becomes the hardest hit -- effects that may not be limited to the sector alone.
The FBR has also suggested that non-filers should be restricted from travelling internationally in a bid to encourage more people to file their tax returns. This measure will be expected to bring about a major impact on airlines whose business model is largely pegged on passenger traffic, especially from high-end and business travellers who often travel internationally. In a country where less than 1.3 per cent of the citizens file tax returns, this policy could significantly cut down the number of tourists, hence the revenues of airlines.
Pakistan International Airlines (PIA), already struggling with financial woes and operational challenges, could be hit hard. It has been a long time since the national carrier is trying to find its footing due to increased competition and skyrocketing operational costs. A reduction in the number of international passengers could even worsen its financial problems. Likewise, private airlines such as Airblue and SereneAir, which have been diversifying their international operations, may face the realization of their growth strategies if the number of passengers declines sharply.
However, the effect on the economy cannot be left out of the discussion. Aviation is one of the most important sectors of the Pakistani economy, as it boosts tourism, trade and employment. This means that a decline in international travel may result in a decline in tourist arrivals, which is not good for hospitality and service industries. Companies that rely on business travel for international sales and cooperation may experience some challenges in their operations, which may slow down economic activities.
The experience of other countries that have implemented strict tax compliance measures offers valuable insights. India, for instance, experienced a short-term decline in cross-border movements when it implemented complex tax compliance measures for high value transactions.
But measures to enhance the levels of tax knowledge and simplify the procedure of filing taxes in the long run contributed to the recovery and even the growth of the tourism industry in the sphere of traveling. Pakistan could learn from such examples, stressing that more attention should be paid to the fact that compliance should be achieved without hindering business.
There are pros for the government’s position as well. The issue of the large gap between the potential and actual tax revenues of Pakistan should be solved, and it is possible to start with enforcing the compliance of individuals with high income who travel often. It is important that everyone pays his or her fair share to the economy to enhance the development process.
The government might justify the disruption by stating that the long-term gains of increased revenues collected from the citizens, which can be used to fund infrastructural development and other public services, outweigh short-term inconveniences.
However, how the aviation industry will react to these policies will be important. Airline companies may require coming up with new strategies and products to counter the effects. This could include increasing domestic connectivity, improving cargo operations or venturing into international markets that are not so sensitive to non-filers.
Another way through which the adverse effects could be reduced is through cooperation with the government to address issues affecting the ease of tax compliance for travellers. Hence, despite the new tax policies that were designed to help Pakistan overcome its fiscal issues, the consequences for the aviation industry might be dramatic. Regulation of compliance and the support of the economy are two sides of the same coin. The government and the aviation sector need to find their way through this storm, to keep the skies open and beneficial for all.
The writer is an intern at the Ministry of Foreign Affairs, Islamabad. She can be reached at: amnahashmee@gmail.com
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