THE OUTLOOK FOR FOREIGN INVESTORS

Jun 22 - 28, 1996

Views from the American Business Council, The Overseas Chamber of Commerce and Industry, and the German Business Council

With the imposition of the sales and other taxes on almost all sectors of the economy, and the resultant gloom in analysts forecasts for corporate earnings, the outlook for foreign investors looking to put their money in the stock exchange, ( as they have done especially in PTC over the past few weeks), seems, at least at first sight ,very negative.

On top of that, the overall taxation measures which are unfavourable for all, are also so for foreign investors. Expatriates income, which was previously exempt from income tax will now be taxable, and other measures, such as the Rs 1000 increase in foreign travel tax on all travels originating from Pakistan, and the withdrawal of the exemption of foreign travel tax on tickets purchased abroad or through the PTA, as well as the 40% CED on foreign phone calls, will all negatively affect the foreign investor.

During the first nine months of 1995-96, the foreign investment has been recorded at $ 639.2 million as against $ 329.3 million in the preceding year.

Of course the measure which will probably most affect foreign investors, is the increased taxation of corporate employees. The increase in the effective tax rate for the salaried class (non-government) will put extra pressure on corporate earnings in the form of wage increases; tax exemptions have been removed on all allowances which are now taxed along with basic salaries.

According to Farooq Hadi, President of the American Business Council, ABC, private corporate employees already make the major contribution to the total personal income tax collection in the country; and the companies employing them are the most significant contributors to the national exchequer. He said that it was astounding that this class was being singled out for further payments as opposed to broadening the tax base. Several significant sectors of the economy have been excluded from the tax net. Mr. Hadi went on to say that aside from extreme dissatisfaction for employees, the effect of the budget is likely to be a severe brain drain as employees choose to move overseas. This in turn will cause not only foreign but local investment as well to decline as their human resource base is depleted.

Joint Statement

In a joint statement by Mr. Hadi of the ABC, Tariq Ikram, the President of the Overseas Chamber of Commerce and Industry, and M. Younus Khan, the Chairman of the German Business Council, the three chambers stated that the move to increase taxes would not only cause financial difficulty to the employees of private corporations but result in a significant increase in the operating expenses of companies; such as employers' contribution to the Provident Fund, Gratuity and pensions which may all need to be substantially revised upwards. Furthermore, the move will discourage well-qualified Pakistani professionals, who, in many cases have just begun to return to the country, to move overseas where taxation rates are more favourable.

After the anoucement of the budget, a team of foreign investors from Karachi, led by Mr Ikram and including the heads of the American Business Council, the German Business Council and several multi-national companies held a discussion with the federal government in Islamabad. In their discussion with the PM's Advisor on Finance and Economic Affairs, V. A. Jafarey, and the Secretary of the Board of Investment, Syed Mohibullah Shah, the group urged them to suspend the additional taxes on the corporate sector since employees take-home salary would be drastically reduced and foreign investment into the country would be negatively affected. Although the stance of the government on taxing allowances of private corporate employees remained unchanged after their return, it is believed that dialogue will be resumed in a week''s time; and the team is also seeking an interview with the Prime Minister Benazir Bhutto.

Since the government is increasingly turning to the private sector for further investment, it does not seem to stand to logic why such action should be taken which can and will only serve to deter the growth of this important sector. The members of these chambers strongly believe that the very high inflationary trends over the past several years have greatly diminished the real incomes and therefore it is tax relief that is really required instead of additional levies. According to estimates by the three chambers, the increase in taxation of lower level staff will increase by over 200% and that of middle and high level by between 150% to 200%; the future of foreign investment in Pakistan depends not only on stable political and economic policies but also on the ability to attract skilled and trained professionals.