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OICCI links forex inflow with business confidence

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Action against loan defaulters, tax evaders and corrupt officials are part of accountability which, if conducted in a true sense, would enhance the credibility of the new government

By Syed M. Aslam
Nov 08 - 14, 1999

Revival of economy and restoring the confidence of investors were two main priorities of Gen Pervez Musharraf when he held his first press conference on November 1 after assuming the charge of Chief Executive of Pakistan. He also talked of an across-the-board accountability as a prerequisite for good governance.

The Overseas Investors Chamber of Commerce and Industry (OICCI) has welcomed the measures being taken to restore the investors’ confidence.

Talking to PAGE the Secretary General of OICCI, Zahid Zaheer said that the domestic economy was in slumber because of poor domestic demand as a result of the large cuts in government’s development programmes and erosion of the purchasing power. These factors combined with smuggling and gingerly treatment of the informal sector on the matter of its GST obligations have created an uneven playing field for the large sub-segment of the formal industrial sectors, which cannot continue to operate efficiently in our unjust taxation structure that taxes incomes from different sectors differently.

He suggested that Pakistan must be willing to give a new shape to its future agenda to restore business confidence. There is a need, he said, for good governance the essentials of which include credibility, consistency, predictability and effective implementation of policies. The new government has already put these essentials on its agenda, he added.

He said that the action against loan defaulters, tax evaders and corrupt officials are all part of accountability which, if conducted in a true sense, would enhance the credibility of the new government. The government should, in addition, build a reputation for being fair and impartial and create the level playing field for economic activities. Pakistan must not be seen as a country where in impropriety is easily, and frequently, committed and goes unpunished.

We recognize that achieving the above goals is not going to be an easy task and it will be time consuming. However, democracy and elections must be on lower priority unless the above objectives are achieved, he said.

Zahid said that local investment is a prerequisite for foreign investment because it reflects the confidence conducive for economic activities. Why should a foreigner choose to bring his investment into any country if the local entrepreneurs don’t have the confidence to invest in the economy themselves, he added.

The Chamber has submitted a policy paper to the government of Pakistan emphasizing the need to initiate fiscal measures to address the concerns of foreign investors which can be categorized and summarized as follows, Zahid said.

i) The balance of payments: In the medium term, Pakistan has to make sustained efforts to contain the trade imbalance to reduce the vulnerability of payments position. Home-grown efforts to achieve this objective will be more robust than mere reliance on assistance from the International Funding Institutions (IFIs).

Promoting exports should be continued. While the duty drawback system must be streamlined to help existing exporters, the fact that achieving export growth due to the sluggish global economy will be difficult. A prudent strategy hence be adopted to contain non-essential imports.

To achieve this objective, and to pursue its demonstrated commitment to trade liberalization, the government should implement its policy on cascading tariffs. All lacunae should be removed to ensure an essential degree of protection to the domestic industrial base.

However, a delicate balance should be maintained between protecting domestic manufacturers through an optimal tariff structure and ensuring that tariffs are not excessively high to encourage smuggling.

It is also important that import duty tariff regime must recognize the need to be supportive to local manufacturers and the degree of local value addition, in addition to realistic cost anomalies between Pakistan and other economies.

The import duty tariff regime must be rationalized to recognize each successive stage of value addition in a particular product chain. For instance, raw materials should not have higher duties than the finished products.

Lastly, a minimum duty should be imposed on the capital goods. This is a must because they are the ‘engine’ for value addition.

ii) The tax administration needs a fundamental revamping to help broaden the tax revenue base. There is a need to address all critical issues relating to taxes like retrospective tax, presumptive tax and advance tax, to attract foreign investment into Pakistan.

Retrospective taxes on past incomes should be avoided as they put an unexpected burden on current operations and restrict the ability of companies to undertake capital expenditure programmes. It also does not bode well for existing investors as it can be construed as a breach of goodwill with the government.

Locally incorporated companies have to pay withholding taxes on the import of finished goods. For companies that are fully documented, which is the case with the members of OICCI, such presumptive taxes are inappropriate. Documented companies must have all their operations evaluated according to Pakistan’s tax system and presumptive taxes where levied must be made adjustable in the overall tax liability.

The recent change in the basis for calculating a company’s advance tax, from income to sales turnover, is adhoc and inflexible which penalizes the existing tax payers. What is even more damaging is the fact that in this new assessment system, entities including banks are not given the option to declare tax losses. Either the government should be conservative with revenue targets or bring more tax payers in the tax net.

iii) The government must remain committed to the agriculture sector which has played a critical role in the overall growth of the GDP. In short-term foreign investment must be encouraged in agri-business and government should continue to provide better support prices of agri products.

In medium-term, the government should be cognizant of the fact that a very limited number of potential areas for foreign investment currently exist in Pakistan.

Commercial farming should be encouraged with active interaction between the public and private sector. The bold measures to establish trade ties with India should continue and include mutually beneficial categories of items which do not disrupt, or make redundant, the existing manufacturing concerns.

The privatization and deregulation process should not only continue but also be accelerated to boost the growth and bring investment.