Pakistan has received second tranche from the International
Monetary Fund (IMF) under stand-by funding arrangement and chances for entering
into a long-term assistance programme under PRFG are bright. It has not been an
easy task. While nature was kind enough to bless the country in the shape of
bumper wheat crop, the economic managers were able to make certain difficult
decisions, to implement policies and to provide necessary impetus for revival of
the economy. The signs of recovery have started appearing. The Management
Association of Pakistan (MAP) organized a pre-budget seminar during this past
week. Mueen Afzal, Secretary General, Finance and Economic Affairs presented the
key note. Khalid Rafi, Senior Partner, A. F. Ferguson & Company and Ebrahim
Sidat were the other two speakers.
Mueen said, "Over the last eighteen months the GoP has
been able to overcome short-term problems and was also able to address three key
issues: Foreign exchange reserves, budget deficit and investors' confidence. The
success can be gauged from re-entry into the IMF assistance programme. Now the
measures are directed to achieve medium and long term objectives. Two indicators
are prominent: collection of CBR-related revenue and export performance. Present
government has assigned priority to some key areas. These are Agriculture, small
and medium enterprises, energy sector, information technology and public sector
development. These are the areas which can help in boosting GDP growth rate and
contain trade deficit. Along with this tax reforms, tariff reforms, support
price for wheat and improvement in over all governance level have started
yielding results. Efforts are also being made to keep various policies
consistent. The GoP was also able to reduce prices of POL products. This was not
an easy task and government also made some decisions, i.e. increased electricity
and gas tariffs, imposed GST on a number of products and system for support
prices for agricultural products was discontinued — except for wheat."
Mueen agreed that the achievements are not spectacular but,
in way, should not be considered small. Referring to a general complaint the GoP
fixes unrealistic targets, he said, "The situation demands that the only
way out is working hard to achieve difficult targets. Pakistan's exports have
been stagnant for a number of years. The initial export target for the year
2000-2001 was US$ 10 billion. Many critics said we could not achieve this.
However, efforts are being made. We estimate that exports will be above US$ 9.25
billion. We would have succeeded in containing trade deficit, had prices of
crude oil not gone so high. After a long time investors have started BMR and
fresh investment. Revenue collection by CBR have increased substantially and the
GoP has also reduced reliance on development surcharge on POL products.
Alongwith this efforts are being made to completely deregulate POL trade.
Necessary steps have been taken to expedite process of privatization."
Indicating the complexion of next budget, Mueen said,
"As all of you are aware, Pakistan has to set realistic and achievable
targets and to make efforts to achieve difficult targets. However, options are
limited. Import tariff and corporate tax rates have to be rationalized. It is
expected that as a result of documentation of economy, we would be able to
increase tax net, improve competitiveness of local industries. We are
negotiating with international donors to reschedule debts to ensure sustainable
debt servicing level. At the same time, we are aware of the adverse impact of
drought-like situation. We estimate that agri output may go down, but at the
same time efforts are being made to convince farmers to cultivate those crops
which require lesser water."
Responding to a point that various associations are asked to
submit budget proposals, but these are hardly incorporated in the budget, Mueen
made an offer to MAP. He said, "We are trying to minimize post budget
controversies. I invite the MAP members individually and collectively to send
budget proposals. After the announcement of budget, I will also ensure that MAP
representatives and CBR officials sit together to thrash out why these proposals
could not be accepted. We want greater participation of people in preparing a
friendly budget, minimize pressure of various 'pressure groups'. Our commitment
is evident from a fact that, it was for the first time details of stand-by
agreement with the IMF were released. We want Pakistanis to share our
limitations or reasons for imposing a tax or withdrawing an exemption.
Earlier in his presentation, Khalid Rafi discussed two key
issues assessment and refund procedures. His remarks regarding various amnesty
schemes must be remembered by those who advocate such schemes. He said,
"This is a slap on the face of tax payers." He also discussed various
issues which are often termed 'small irritants' but all of them put together
encourage tax evasion in the society. In his view corruption cannot be one
sided. He suggested that GoP should fix realistic and achievable targets. Soon
after announcement of budget, practice of downward revision of targets must end.
Referring to CBR-related target, he said, expected refunds should be kept in
mind. While talking about self-assessment scheme, he said, "This option
should also be offered to the most documented sectors." At the same time he
demanded abolishing the scheme due to under-declaration of income. Discussing
refunds and its process, he said, "Over the years the quantum of
accumulated refunds has gone so high that speedy payment can only enhance budget
deficit. Delays also encourage corruption."
He also emphasized curbing discretionary powers of tax regime
as well as induction of qualified professionals. Discretionary powers allow the
tax officials to extort money and even reopen cases when companies insist of
timely and full payment of refund. The lack of qualified people in the regime
creates situation like demand for withholding tax on accrued expenses. It is
beyond that any one demands withholding tax on a payment which has not been
paid. He also made a few suggestions like: acceptance of returns on face value,
detailed audit only once in three years and out sourcing of detailed audit. He
was of the opinion that the amount being paid to professional auditors by income
tax department is peanut.
Ebrahim Sidat termed budget preparing a daunting task. While
budget has to be prepared on broad guide line provided by the IMF, other harsh
realities have to be kept in mind. More than 44 million people live below
poverty line in the country and it is the development budget which is slashed at
the slightest pretext. While external debt exceeds US$ 32 billion, domestic debt
has crossed Rs 260 billion. The result is two heads alone — debt servicing and
defence expenditure take the largest percentage of total current expenditure.
Pakistan has been borrowing to meet debt servicing obligation which has become
un-sustainable. He also seconded Khalid Rafi's point that targets set in
Pakistan are often unrealistic. While CBR often fails to meet the target, it is
once again given a higher target. Often efforts have been made to tax the
existing tax payers by hiking the tax rate. The classical example is withholding
tax which was initially 2.5 per cent and its current rate is 10 per cent. Not
only that tax and duty rates are high there is multiplicity of taxes.
Referring to tax structure of limited companies, Sidat said,
"Limited companies and partnerships are not charged income tax at the same
rate. The rate for limited companies is 43 per cent whereas partnership firms
have to pay income tax at 35 per cent. This practice discourages formation of
limited companies. It may be true that small business entities have their own
role, but at the same time limited companies should not be penalized."
Sidat was very critical of the law of taxing reserves of
listed companies. He was of the opinion that while the law may not force those
companies who hardly pay any dividend, dividend paying companies are being
penalized for their efficiency." The forced payment of dividend would not
allow the good companies to undertake BMR and expansion. On the one hand such
companies will pay dividend and on the other hand will be forced to borrow in
case their cashflow is disturbed due to any reason. Economic fundamentals do not
remain constant year after year.
Taking the advantage of the presence of Mueen Afzal, Sidat
made a few suggestions. These included reducing number of taxes, rationalizing
tax rates and doing away with exemptions. He also stressed the need for
formulating Sales Tax Laws and stopping discrimination between registered and
un-registered entities. In his opinion un-registered entities should be charged
a higher rate to enforce the concept of documentation. The effort should be to
go after tax evaders and not the existing tax payers.
Earlier Moin Fudda, President of MAP introduced the topic,
the speakers and also explained why this seminar could not be held in March —
reason being a very hectic schedule of Mueen Afzal. Chairman, CBR could not
attend the seminar due to his 'other pressing engagements'. At the end, Masood
Naqvi, Vice President of MAP offered vote of thanks.