We will have to evolve national priorities with the consensus of the people from all walks of life.
By AMANULLAH BASHAR
Apr 14 - 20, 2003
The improved economic environment and stronger macroeconomic fundamentals have kindled the hopes of the people for a friendly federal budget for fiscal 2003-04.
Despite tough times the global economy had to go through due to war destruction in Iraq, which is being described as yet another world shaking event after September 9/11, the prospects for economic growth are brighter in the context of Pakistan.
According to IMF assessment of economic growth, Bangladesh, India and Pakistan growth would rise from 4.7 per cent last year to 5.1 per cent in 2003 and 5.8 per cent next year. The international donor agency, however, has laid emphasis on consistency of the economic policies introduced in Pakistan some three years back. IMF in its semi-annual world economic outlook said the war in Iraq was just one of several factors holding back the global economy which the IMF said grew 3.0 per cent in 2002.
Better economic results i.e. unprecedented growth in foreign exchange reserves touching $11 billion mark, record level of home remittances crossing the mark of $4 billion, meeting the export target of $10 billion besides hitting the revenue target worth Rs460 billion altogether have encouraged high hopes of the people in general and business community in particular to get much sought after relief in taxation and utility charges in the next budget.
While framing the policies for the next budget special attention, according to informed sources, would be given for the creation of new job opportunities to combat the problem of unemployment growing out of proportion.
The federal budget is likely to seek enhancing development spending and reducing the corporate tax. Housing and construction industry is another area having great potential for creating job openings as well generate economic activity has been identified for special incentives.
According to informed sources, in order to activate housing and construction sector and over 80 allied industries, commercial banks are also being asked to enter into the house financing business which was so far confined the government-owned House Building Finance Corporation. In order to provide legal cover to the commercial banks for secure house financing business, the ministry of law has already framed force maejuere law for smooth handling of disputes with the defaulters. Speedy trial courts will also be working for early settlement of the loan disputes. As a result of arrival of the commercial banks into house financing sector, the construction sector is likely to play more active role in the economy. Country needs at least 6 million new housing units to meet the housing needs while there is an annual demand for 7 lakh new housing units every year. This is the area which has been remained out of the orbit of the commercial banks so far. Another salient feature of the next budget would be considerable relief to the salaried class and increase in the salaries of the government employees. The focus of the new budget would be to ensure an adequate increase in the salaries of the government employees, especially after having drastic reduction in the amount of annul debt servicing from 64 per cent to 42 per cent this year. The reduction in the current expenditure and falling interest rates have provided some good fiscal space to the government to consider certain increase in the pay structure of the government employees.
The Central Board of Revenue (CBR) also performed well in respect of tax collection during the first nine months of the current year. According to an estimate, the total collection of revenue may exceed the target of Rs460 billion at the end of the current financial year. In the backdrop of the improved economic conditions, the government could fix the GDP growth target at 5.5 percent or 6 percent in 2003-04 against current year target of 4.5 percent. Likewise, revenue collection target could be easily fixed at Rs480 billion for the next financial year.
The CBR has also done away with the general apprehensions that a 15 per cent GST may be levied on food items in the next budget for 2003-04.
It is learnt that neither the IMF has poroposed withdrawal of GST exemption on food items nor the tax authorities would consider such proposal as it was an internationally accepted principal across the world to exempt food items. Hence, GST exemption would continue during next fiscal year on vegetables, fruits, eggs, poultry, fresh and dried milk, bread including nans, chapatties, shermal, bun, rusk, ice and water, table salt, red chillies, ginger, turmeric, potatoes, garlic and all other exempted food items as per the 6th schedule of the Sales Tax Act, 1990. The CBR would, however, continue a levy of 15 per cent tax at retail price of juices, beverages, syrups/squashes etc.
FOCUS OF THE BUDGET
The sources said that the government will be concentrating on job creation rather than reducing the prices of electricity, gas, flour etc. Greater emphasis is likely to be given on growth and investment in the new budget. However, to attract investment both from local and external resources, people at the helm of affairs will have to take some radical steps and follow up to ensure their implementation in letter and spirit.
The government has time and again pledged that the focus of the reform strategy of CBR is to create an environment in which there will be minimum contact between the taxpayers and the tax collectors and the voluntary compliance of the tax laws.
In this direction the government has introduced various remedial steps in the newly promulgated Ordinance but the presence of the discretionary provisions hampering the desired results. The issuance of notices to the tax payers in the last three months of the financial year is so huge and unparalleled, that once cannot imagine, said Abdul Qadeer Memon at Karachi Chamber of Commerce. This is all harassment. Eradicating this harassment attitude would be a great challenge for the present government. However, a simplified procedure for tax collection is of vital importance for creating a tax culture in Pakistan.
In her observation regarding the significant of creating a conducive environment for attracting investment, Ms Mieko Nishimzu, one of the senior officials of the IMF says, "there is no investment in Pakistan because of the 'harassment factor' and the government must make sure the tax collectors did not harass and create problems for the investors and businessmen. One of the main reasons for low investment is that the CBR suppressed the investors and taxpayers," she said.
There had been 8.4 percent industrial growth during the first nine months of the current fiscal which the is likely to increase further. In the light of industrial growth the economic manager are of view that since housing and construction industry and a large number of allied industries it may help boosting the manufacturing growth hence the industrial sector may get a major thrust in the next budget. Enhanced loaning facilities are likely to be earmarked to the housing and construction industries in the new budget for which the commercial banks would be given certain directives by the ministry of finance.
Budget composition will be changed in favour of social sector.
Actually, the government was in a better position to do something for its people. The government's banking and non-banking borrowing had reduced due to decline in interest rates, including that of the National Saving schemes. The new budget may have considerable increase in the Public Sector Development Program against the current year allocation of Rs134 billion.
The government plans to fix $1.5 billion foreign investment target in 2003-2004 after having received sizeable investment worth $630 million in the first eight months and expected to achieve over $1 billion target by the end of the current financial year. During the corresponding period of 8 months of the previous fiscal, the total investment from external resources was estimated at mere $250 million. However, the response during the current year is very encouraging and boost the hopes that the next year would sure to hit the target of $1.5 billion. The main sectors which will be attracted for foreign investment have been pointed out as oil and gas, financial sector, agriculture, tourism and infrastructure development. People are also expecting that a greater amount of foreign investment would start coming in Pakistan especially from Islamic States in the backdrop of Iraq war causing a serious concerns amidst the Muslim world.
EXPORT PROCESSING ZONES
Despite having special strategic location offering tremendous opportunities for attracting investment in export-oriented industries especially at the export processing zone, the people responsible for running the export processing zones miserably failed to deliver the goods.
Shaikh Javed, Chairman of the sub-committee of the FPCCI for Free Zones says that for over two decades, the hopeless performance in terms of attracting foreign investment as well as promoting country's exports, Karachi Export Processing Zone is a glaring example of this failure. Some of the foreign investors in the initial stage of the KEPZ decided to pack up their business due to undesirable activities and allegedly rampant corruption at the zone. Shaikh Javed feels that KEPZ is located at a point from where it serves the interest of the investors in the Middle East region, South Asia region as well as the most attractive market of Central Asian States. However, this ideal opportunity to attract foreign investment at Karachi zone was never allowed to avail by the corrupt and the vested interest in the past. Now the investors from friendly country China have expressed their intention to do business at KEPZ, Sheikh Javed strongly suggested that before the arrival of Chinese investors, it is vitally important that our house should be put in order by removing all sorts of discrepancies to avoid recurrence of the past experience the foreign investors had to go through. Sheikh Javed strongly believes that it is the private sector alone which can produce the desired results at the KEPZ. "The results produced by the public sector during last 20 years are not a secret. Enough is enough, let the private sector now handle this project of international importance."
The government has set out an ambitious export plan, achievement of which could be possible only when the entrepreneurs are provided incentives for investment and for minimizing the cost of production to withstand the international competition in the textile industry which is the major export partner.
To promote exports, the government allowed import of plant and machinery, not manufactured locally, free of Customs duty and free of Sales Tax. However, Generating Sets are excluded from this facility and attract statutory Customs duty of 10 per cent and Sales Tax of 15 per cent.
Customs duty was reduced to 5 per cent and Sales Tax remains at 15 per cent but is adjustable against output in terms of Sales Tax Act, 1990.
The textile mills operate on 24 hours basis, throughout the year, and as uninterrupted supply of electricity is not available, the mills have been compelled to import and install gas generators for captive power. As such, the gas generators are an integral part of textile machinery and plant without which continuous operation of the mills is not possible.
APTMA suggests that gas generators, imported for captive power (not manufactured locally) by textile mills, be allowed exemption at import stage from Customs duty and from Sales Tax.
India is producing good quality of textile machinery and spares in technical collaboration with world renowned textile machinery producers. The price of Indian textile machinery is also lower than its competitors prices. Since Pakistan is presently not producing textile machinery it will save considerable foreign exchange if textile machinery and spares are allowed and imported from India, APTMA recommends.
Poverty alleviation and growth of Small and Medium Enterprises (SMEs) are also on top of the agenda for achieving the social and economic growth. However, unless economic activity at a large is encouraged by taking steps to bring the cost of production at an affordable level, the target seems much harder to achieve.
The power and petroleum sectors are being treated as a major source for revenue generation by the federal government under different heads including development surcharge or additional surcharge. Though, the energy sector including POL, gas and electricity are generating bulk of revenues, yet at the cost of stalled economic growth. Instead of making the energy sector as the engine for rapid economic growth unfortunately it is being treated as the sources for revenue mobilization. There is no second opinion that cheaper energy sector including utilities can do the magic by encouraging industrial growth at a massive scale. People in trade and industry are of the view that reduced cost of production will generate much more revenue than what it is being generated from POL, gas and electricity by using them as the direct source of revenue. The recommendations certainly offer food for thought for the economic managers and the think tank instituted by the government for economic growth of the country.
As far as the poverty alleviation program was concerned, the World Bank and the IMF have ratified Pakistan's poverty reduction strategy for qualifying concessional financial assistance from these two world bodies. The Fund and the World Bank are considering Pakistan to award it more debt relief by including it into highly indebted poor countries which could simply wave its debts to give it more space to spend more on social sector and poverty alleviation projects.
Mian Nasser Hyatt Maggo, President Karachi Chamber of Commerce and Industry (KCCI) expressing his views on tax regime in Pakistan, said that the tax-net must be broadened and income be taxed, wherever it is generated, regardless, any exception;
The discretionary and arbitrary powers of the tax-collectors be curtailed and ultimately be removed. The Federal Tax Ombudsman has mostly given verdicts against tax-net machinery, which is evident of the excessive use of discretionary powers. The tax laws must be simplified and understandable by the common man;
A two-way traffic for discharging financial liabilities be adopted. As the government is keen to recover its tax revenue and other government liabilities from the people, justice and equity demands that in the same spirit, various dues of the taxpayers in the form of refund, duty drawback, rebate, etc. are made to them in time. The flaws in the duty and tax remission for export rules (DTRE) must be removed;
The number of tax assessees and tax payers can be raised through reduction in tax rates. The sales tax at the rate of 15 per cent and 18 per cent is quite exorbitant. Similarly, the income tax rate of around 47 per cent on private limited companies is not conducive for saving and investment. Likewise, there is no justification of 5 per cent Customs duty on the import of plants and machinery. It must be zero-rated;
The export sector must only be treated as a source of foreign exchange earning and certainly not as a tool for revenue mobilization;
Some mechanism must be evolved to contain the prices of petrol and electricity, in order to avoid their recurring adverse impact on the cost of production and prices. Although the government is keen to promote Small and Medium Enterprises, but in the face of current taxation policy and the labour policy, the growth of SMEs was not possible; and
The budget must focus on evolving some fiscal and physical measures to combat the menace of smuggling.
Taseer Hadi Khalid & Company, leading auditors of the country feel that in a developing country where economy is not thoroughly documented and with an inflationary trend, 15 per cent rate of tax is too high. It is therefore suggested that to broaden the tax base, rate of tax should be lowered to 10 per cent.
Farrukh Junaidy, partner of Taseer Hadi Khalid, while speaking on the subject at a seminar was of the view that the taxpayer is subject to all sorts of penal actions by the authorities even in case of inadvertent error on his part. However, the law does not provide for any penal action for the authorities when they resort to arbitrary manner of assessment/collection of tax.
In order to bridge the credibility gap between taxpayer and collector, he suggested that tax authorities should also be subject to accountability in case where the order passed by them fails to test of appeal and where the taxpayer is subjected to high handedness on the part of tax authorities.
While the overall economic picture looks good at the end of the current financial year which perhaps the first year in the economic history of Pakistan that almost all targets appear to be within the reach. However, global economic, financial and political changes which are in the stock call for steps to consolidate all possible resources to make Pakistan a strong nation in spheres of life. In order to move collectively in certain directions, people of this country which are the real asset will have to be taken care of.
In order to achieve the most cherished goal of economic prosperity, political cohesiveness and a will to work for the welfare of the people and not for the personal or party gains, we will have to evolve national priorities with the consensus of the people from all walks of life to build Pakistan a strong nation on the world map.