Government of Pakistan needs to watch out as CPEC-related debt soars
Pakistan has made progress, which is evident from its completion of the International Monetary Fund’s (IMF) bailout programme, but challenges remain as the country maneuvers its way through worrying economic indicators and depleting foreign exchange reserves.
At the 51st Annual Meeting of the Board of Governors, Asian Development Bank (ADB) President Takehiko Nakao acknowledged Pakistan has progressed. But he also had words of caution for the over $300-billion economy.
“I have visited Pakistan two times, and there has been progress,” Takehiko said during the meeting.
The remarks make sense since GDP growth will hit a 12-year high at the end of the current fiscal year, according to official figures. From 4.1% in fiscal year 2014, GDP growth has surged to 5.8%. The PML-N may have missed its target but an improvement has been made.
However, there are always two sides to a story and the other one is not too pretty.
Firstly, the growth has come on the back of massive debt, pointing to the need for sustainable returns if the trajectory is to remain positive.
Pakistan’s total debt has surged to Rs22.8 trillion as of December 2017, owing to loans under the China-Pakistan Economic Corridor (CPEC), borrowings to maintain foreign reserves and infrastructure, and floating Euro and Sukuk bonds.
Few weeks ago, at a Belt and Road conference in Beijing, IMF Managing Director Christine Lagarde stated that the Belt and Road Initiative (BRI) can provide infrastructure financing to countries, but it should not be considered “a free lunch”.
She expressed concerns over the increase in global debt due to BRI, which would pose balance of payment challenges.
This particularly holds true for countries that already have a debt problem including Pakistan. What began as an investment project of $46 billion has now grown to $62 billion. This means that over the next 30 years the country will be repaying billions of dollars. The IMF has already expressed apprehensions and cautioned the government of adverse implications.
Speaking on the issue, Nakao said that connectivity is important and the ADB is willing to cooperate but at the same time, economic reality and feasibility should be considered.
“If we invest in borrowed money then we need economic return. If countries borrow too much without assessing economic viability it would cause issues in repayment.
“I agree with Christine Lagarde’s concern. Owing to the presence of ideas like BRI, we should consider debt sustainability issues thoroughly,” he stressed.
Pakistan moves to tax US tech giants counting google, facebook
Pakistan has proposed 5% tax on digital revenues, hitting US tech giants like Google, Amazon and Facebook, while also moving to bring offshore-controlled companies in its tax ambit in an apparent attempt to tax Chinese earnings from the country.
The tax measures have been laid before parliament as part of the Budget 2018-19, which is currently being discussed by the Senate Standing Committee on Finance. While the standing committee rejected all such tax proposals, it will not deter the government from taxing the income of tech giants and other offshore-controlled entities.
The government wants to tax the digital advertising space along with hosting and maintenance of websites to tax the revenues of tech companies like Google and Yahoo, said Dr Mohammad Iqbal, Member Inland Revenue Policy of the FBR in a briefing to the standing committee.
If the proposal is passed by the National Assembly, technology companies will have to pay 5% tax on money earned from user data or digital advertising in Pakistan, regardless of their bricks-and-mortar presence. The move also captures companies doing business in user data and online market places, such as Airbnb and Uber.
The new tax proposal is a departure from the current system under which companies are taxed on profits where they are headquartered, often in countries offering lower tax rates.
“If the FBR starts taxing the big data, this could undermine Pakistan’s ability to get benefit from the digital revolution,” said Dr Musaddiq Malik, member of the standing committee and spokesman of the prime minister.
The PM’s spokesman also came down hard on the FBR and said that Pakistan was not a tax-liberal country and its tax laws were draconian.
The standing committee rejected the FBR’s budget proposal to tax tech giants but it will not have material effect on the tax body’s plans. In case of the Finance Bill, the Senate cannot vote.
The PM’s spokesman was also bitter about those tax proposals that are aimed at taxing the income of foreign nationals or those Pakistani nationals who have offshore assets.
“It seems that the FBR has made the budget on the assumption that it can no more tax people in Pakistan and has decided to go after offshore jurisdictions,” said Dr Malik.
The standing committee rejected the FBR’s proposal to tax the income of those foreign companies that split their business entities to avoid taxes in Pakistan. Tax planning is a legitimate activity and the proposed amendment will increase problems of foreign companies working in Pakistan.
Dr Malik went to the extent of describing the Finance Bill as “anti-investment and anti-capital formulation”. He vehemently opposed the FBR’s proposal to tax the undistributed profits of companies, which he said was discouraging capital formulation.
According to another proposed measure, the FBR will have a right to declare a business transaction by a foreign entity fictitious, if it deems fit that the transaction does not have economic value and is only aimed at avoiding taxes, said Dr Mohammad Iqbal.
He said that the amendment has been proposed after a foreign entity sold its Rs10-billion company at Rs85 billion to another entity to avoid Rs20 billion in taxes.
According to the proposal, the FBR will have right to even tax the transactions carried out by those companies who are covered under the avoidance of double taxation treaties. The FBR has proposed another amendment that will allow it to tax the offshore-controlled company.
Dr Iqbal argued that companies doing business in Pakistan have foreign ownerships just to avoid taxes. He said that under the new clause, the FBR will even tax the passive income of such companies.
“The budgetary proposals suggest that the FBR has concerns regarding foreign friends that are investing in Pakistan,” said Senator Mohsin Aziz in a veiled reference to China.
The investment under the China-Pakistan Economic Corridor is exempted from all types of income tax, sales tax, customs duty and regulatory duty.
Pakistan has to tax those who are earning billons of rupees from our country at the name of bringing foreign direct investment, said Dr Mohammad Iqbal. He said that the money being repatriated from Pakistan is higher than the quantum of foreign investment.
‘Govt has allocated Rs100bn for Diamer-Basha, Dasu Dams’
State Minister for Finance Rana Muhammad Afzal Khan on Friday informed the Senate that an amount of Rs100 billion has been allocated in the budget 2018-19 for Diamer-Basha and Dasu dams.
Responding to a query raised by Opposition Leader Sherry Rehman, he said the country is wasting huge amounts of water due to non-construction of reservoirs.
“We have allocated Rs100 billion for the Diamer-Basha and Dasu dams and it is up to the next government to decide about their construction,” he added.
He suggested inviting experts from universities and other departments to advise on how to handle the shortage of water.
He said that members of the water caucus should come up with an open mind to give their recommendations.
Minimum wage matter left ‘untouched’ in budget-fy2018-19 announcement
In election year, many expected the government to announce incentives that would appeal to the masses.
However, it completely ignored minimum wage earners that remain the most vulnerable segment of the economy.
The government left the matter untouched in its budget for 2018-19, against its past practice of increasing the minimum wage each year. Last year, it increased the amount by Rs1,000, taking it to a minimum of Rs15,000 per month.
While the PML-N government announced a 10% increase in salaries of federal government employees, it maintained complete silence over minimum wages, sources familiar with the development confirmed.
At the same time, it remained uncertain whether the provincial governments would announce any increase in minimum wages in their respective budgets after some stakeholders urged to let their ‘provincial minimum wage boards’ decide the new amounts instead.They are tripartite boards comprising employers (40% representation), workers (40%) and government (20%).
The boards, which were constituted in light of the 18th Amendment, should have ‘unanimously’ decided the new minimum wages before the provincial budgets and recommended the same to the chief ministers for their approval and announcements.
However, the boards in some of the provinces have yet to hold their very first meeting in this regard and are unlikely to achieve the given task of deciding a new ‘unanimous’ minimum wage before their provincial budgets.
Simultaneously, there is no clear mention of a timeline.
“In front of ministers and other high officials, I advised Sindh chief minister on May 1, 2018 (Labour Day) that he should not announce the (new) minimum wage in the forthcoming budget scheduled for May 10,” Employers’ Federation of Pakistan President Majyd Aziz said.
“However, the chief minister may still announce an increase in the minimum wage in the budget,” he said.
“Provincial minimum wage boards should be empowered to make a unanimous decision regarding minimum wages,” he said, adding its recommendation may be made part of the next budget to be announced by the new government.
‘First right to buy’ scheme improbable to see light of day
Prime Minister Shahid Khaqan Abbasi’s pet scheme to acquire the ‘first right to buy’ a property in a bid to discourage tax evasion is unlikely to see the light of day, as both Senators and the Federal Board of Revenue (FBR) have doubted its success.
The Senate Standing Committee on Finance and Revenue on Friday declared the scheme unconstitutional, falling short of killing it. It gave the federal government a chance to withdraw the package from the Finance Bill 2018 or else it would recommend against the scheme. However, its recommendations are not binding.
It seems that the FBR highly doubts its success. Instead of implementing it from July 1, the FBR has proposed in the Finance Bill that the government should decide the date of implementation.
The Benami Transaction Prohibition Act, another law that has been approved by parliament to discourage concealment of assets, remains inactive due to delay in approval of its rules.
“According to the Constitution, taxes on immovable property are not a federal subject,” said Senate Standing Committee on Finance Chairman Farooq Naek. “The government should restrict itself to the subject of recovering unpaid taxes arising from the undeclared value of the property. The concept of understatement of the asset value can only be known when the FBR knows beforehand what the fair market value is.
“The proposal that the fair market value would be assessed after the transaction is similar to putting the cart before the horse.”
In the first week of April, Prime Minister Abbasi announced a five-point economic-reforms package, which included property rights. It entitles the government to purchase any asset – residential or commercial – at 100% higher price than the one declared by the owner at the time of registration. The move is meant to control under-declaration of asset values at the time of registration.
In the Finance Bill 2018, the FBR has proposed to set up the Directorate General of Immovable Property, which the committee members termed unconstitutional. “The scheme is a non-starter, as acquiring property is not a federal subject”, said former finance secretary Dr Waqar Masood, who is assisting the committee as an expert.
“We also acknowledge that until the provinces abolish the deputy collector rates and stamp duties rates, the scheme cannot be successful,” said Member Inland Revenue Policy of the FBR Dr Mohammad Iqbal before the standing committee.
Masood added that the provinces would not lower their taxes, which amount to 8% of the value of the property transaction. Iqbal said that the scheme will not be applicable from the start of the fiscal year, which was contrary to the announcement made by Prime Minister Abbasi.