Fixing corporate tax at 29% a jolt to industry; salary raise of lower grade employees a great job
Interview with Mr. Barkatullah Lone – Chairman, GB International Economic Forum
PAGE: What is your take on Federal Budget 2019-2020?
Barkatullah Lone: Federal Budget 2019-20 is though as traditional as the previous all budgets but there are a few areas that are unique in this budget. Revenue target set at Rs 5,550 billion against the target in the last budget of Rs 4,100 billion is an increase of 35%. We have never experienced such a huge increase in revenue target in previous budgets. The government has failed to present the policy framework to show as to how this huge target can be achieved. This government has not been able to achieve the target set in the budget of year 2018-19 therefore achievement of the huge target set for the year 2019-20 seems just a wishlist of the government. The government should have drafted the policy framework to widen the tax net to meet the revenue target set instead it has increased taxes, which will directly burden the poor who are already under miserable situation due to hyper-inflation.
The other significant area in this budget which is different from the previous budgets is the salary increment given to the government employees. The government has done a great job by giving 10% increase from grade 1 to grade 16 and only 5% from grade 17 to grade 20 and no increment has been given to the employees above grade 20. Previous governments gave big increments to government employees to please them, which burdened the exchequer. This government has compensated low grade employees by bigger percentage of increment and high grade employees by lower percentage of increment, which fulfills the law of equitability. The government has taken many austerity measures in this budget which is revealed in the reduction of salaries made for the cabinet members but in my opinion the government instead of using its energies in austerity should focus to bring the elite class into tax net that is out of the tax net.
Pakistan has annual documented economy of around $350 billion and un-documented economy of around $250 billion. This existing economy has the potential of Rs 10,000 billion annual tax collection but due to the tax evasion culture (one of the largest in the world), even half of this amount is not collected. The corrupt culture has made Pakistan a heaven for the tax evaders and therefore there is a big gap in the distribution of wealth in our society. PTI government needs to make sure to document the parallel economy, which is around $ 250 billion and bring all elite class into tax net during its tenure.
PAGE: Could you tell us about the impact of the Federal Budget 2019-20 on the industry of Pakistan?
Barkatullah Lone: Federal budget 2019-20 will impact various sectors of economy in different ways. Taking agriculture first, the following are the key areas:
- For building water infrastructure, an amount of Rs 218 billion has been proposed in the budget. The yield of agricultural land will increase with the timely availability of water and this water infrastructure will bring barren land under cultivation which will also help increase in agriculture sector GDP.
- Rs 44.8 billion has been fixed for the yields of wheat, rice, sugar cane and cotton.
But in industrial sector, increase in various taxes will increase the cost of sugar and a few imported products such as dry milk. But this cost will be ultimately be borne by the poor masses who are the end users. The budget has, however, given a jolt to the industry by fixing the corporate tax rate at 29%, which was supposed to be decreased by 1% each year till it reaches 25%. In my opinion, this action is counterproductive to the industry. The lesser the income tax rate on industry, the more the tax compliance. Pakistan has kept Corporate Tax rate too high (it was 35% few years back) due to which the industry tries to find ways to hide tax.
PAGE: What are the main problems of the industry at the moment?
Barkatullah Lone: Our industry has been under various problems since the 70s when the entire industrial sector was devastated due to the Nationalization Policy of the then government. But in recent years, energy crises has made the industrial sector, in particular, textile sector too vulnerable and has caused the cost of production high making it non-competitive in the international market. This has proven in the decrease in our exports in last few years. Our market share was snatched by many countries such as China, Bangladesh and Vietnam. The other big issue that our industry is facing at the moment is huge markup rate. State Bank has been using its Monetary Policy tool to keep inflation rate under control for last one year and therefore has been increasing the discount rate. This increase in KIBOR rate has drastically increased cost of finance for the industry. Our existing industry is suffocating due to this increase cost of finance and the new investors are hesitant to invest just because of high markup rate.
The government should not make use of Monetary Policy to keep inflation under control instead it should focus at increasing the overall GDP. Inflation will reduce with the increase in the growth of GDP only as the artificial arrangement of keeping inflation under check by increasing KIBOR rate is counterproductive to the industry.
The third issue our industry is facing is the recent massive devaluation of rupee. As the industry imports raw material for billions of dollars and fixed assets and payment is made in dollar, devaluation of rupee has caused the payment to increase which the industry is not able to cover up by charging to the customers just because the increase in selling price adversely impacts the demand of the product. When the incremental cost due to devaluation of rupee is not fully passed to the final consumer, the industry profit margin is dented. The fourth issue is lack of infrastructure like roads. Good infrastructure of a country stimulates industrial growth but in case of Pakistan our infrastructure is one of the worst in the world. Political instability has also been a worrisome area for the industrial development since the 90s but this issue is not that much alarming as all know that the existing government will complete its five years come what may.