FAST ERODING PURCHASING POWER CALLS FOR CORRECTIVE STEPS

The home-grown plan may not be as charming as it should have been but it is certainly free from shekels of the multilateral lenders

By SHABBIR H. KAZMI
May 29 - June 04, 2006

The federal budget for 2006-07 is about to come shortly. By this time policy makers must have decided the facets of the budget. Interestingly, discussions are being held on different forum to show that the policy planners are still considering ways and means to provide some more relief to common man. However, the statements of consultants and advisors to multilateral donors clearly show that they are still trying to influence thinking of those who wish to work on a home-grown plan. The home-grown plans may not be as charming as these should have been but these are certainly free from shekels of conditions of the multilateral lenders.

While the government is never tired of narrating its success stories, some analysts discard these individually or collectively. They reject these claims on the simplest pretext that despite all these achievements and glorious performance of the economy the percentage of people living below the poverty line is on the rise. Foreign exchange reserves of over US$ 13 billion, per capita income of $800 and GDP growth rate of around 7% are meaningless because of fast eroding purchasing power of people. Most of the apparent signs of wellbeing are due to living on borrowed means. They also say that the traditional 'middle class' is on the extinction as the size of rich and poor classes are bulging. They also say that the poor are getting poorer and rich are becoming richer. Some of the cynics even go to the extent of saying that the holdings of middle and poor classes are being grabbed by the rich.

Lately, a statement of a famous economist has been published in various newspapers. He had said, "Policies of present government make me nervous". Ironically, when Pakistan was under the sever debt burden, no one was really bothered. All such advisors and consultants were confident that the IMF and the World Bank would continue to support Pakistan because of the USA and its allies enjoying discretionary powers in the executive boards of these institutions. However, they feel jittery that in case of any mishap Pakistan would not get the support because Pakistan is no longer under assistance program. They also warn about mounting trade deficit, narrow tax base, poor spending on education, health and infrastructure. However, they tend to forget that even much lesser amounts were being allocated under these heads in the past, simply because the GoP had the least in its kitty in those days.

Two points are being discussed at length, trade deficit and revenues. As regards trade deficit the policy planners can do the least because of inelastic nature of Pakistan's imports. Bulk of the import bill consists of oil and POL, plant and machinery and raw materials. On top of this import of fertilizer, sugar, automobiles and cement have added to the burden. Unless corrective steps are taken to first contain import and then to produce exportable surplus of these commodities, trade deficit cannot be narrowed. At the same time effective policies have to be implemented to curb import of unessential items. Two items which deserves immediate attention are automobiles in completely built units (CBUs) condition and parts and accessories under the tariff based measures (TBM). While the proponents of recently announced automobile policy may have all the arguments to support the new policy, its negative impacts would be far hazardous than the stated advantages. Though, the proponents do not agree with the potential threats only time will tell who was right and who was wrong.

Though, one may have all the complaints against the assemblers for not abiding to their own proposed deletion program, it is also a fact that parts and accessories manufacturing units have not only grown in number but also increased their production. It is evident from the fact that these manufacturers were meeting the requirements of local automobile assemblers when they were producing around 50,000 units annually and they are also meeting the requirements when about 200,000 units are being produced. It is also on record that the quality of locally manufactured parts and accessories has also improved significantly. This has enabled them to export these components. The overwhelming consensus is that TBM will harm the vendor industry as well as the existing assembling units. Only the new entrants will benefit because the new brands will not be able to grab any significant share of the existing market.

Along with efforts to contain imports supportive policies have to be introduced to broaden the mix of export products and cater to new markets. It is true that lately Pakistan has been able to enhance its exports but bulk of it remains confined to textiles and clothing and the USA and European Union being the major markets. It is also true that textiles and clothing have helped in enhancing the exports but unless new products and markets are added Pakistan's export could not take quantum leap. One of the areas in which Pakistan has not been able to make any progress is foreign investment in textiles and clothing business. Unless local entrepreneurs succeed in forming joint ventures or becoming outsourcing agent volume of exports and unit price realization would remain low. While India earns billions of dollars from exports of software and other related services, Pakistan's export of software has remained disappointingly low. The country has the potential to export software and related services worth billions of dollars but the recorded proceeds are pathetically low.

Following the past practice of enhancing revenue collection, the Central Board of Revenue (CBR) has been finding ways and means to extract more from those who are already paying taxes. Many segments of society continue to remain tax exempt, agriculturists being the largest beneficiary. Lately, there is some effort to expand the tax net as well as to bring down duties and taxes. The record shows that despite reduction in duties and taxes overall collection has improved. However, bulk of collection still pertains to indirect taxes and import duties, sales tax and income tax contributing the largest share. Tax collection under these heads has increased mainly because of increase in imports, higher production and improvement in income of people living in urban areas.

Collection of corporate tax has improved because profitability of corporates, particularly listed companies, has improved. This improvement could be attributed to growth in volume, resulting in higher margins due to improved production and productivity. However, it is also true that cost of doing business in Pakistan is still higher compared to others countries located in this region. Utility tariffs are also higher due to inefficiency, pilferage and higher cost of production. Electricity tariff are high because of exceptionally high T&D losses bulk of which is theft. Another factor responsible for higher cost of generation is dependence on furnace oil and gas. The wellhead prices of oil and gas are directly linked with international prices of these commodities.

However, it is also true that the government collects very handsome amount as development levy on oil and gas. According to some estimates annual collection of levy on oil is around Rs 80 billion and levy on gas is on top of this. Ironically government has been saying that it is paying subsidy on certain POL products but the latest statement of Public Accounts Committee (PAC) finds the tax component of POL products as high as 50%. However, many analysts are of the view that the estimate is very conservative, they term it as high as 75% of the retail price for certain products. It is believed that a thorough probe by the PAC would remove the ambiguity.

Institute of Cost and Management Accountants of Pakistan (ICMAP) has always played an important role as neutral facilitator in the budget-making process. This year also it has organized several pre-budget seminars, and invited heads and representatives of FPCCI, chambers and trade associations, corporate leaders, senior executives and decision-makers, to make their proposals for consideration in the budget for the financial year 2006-07. It has also prepared consolidated summary of the proposals, submitted by most of the trade associations. These include Federation of Chambers of Commerce and Industry (FPCCI), Karachi Chamber of Commerce and Industry (KCCI), Lahore Chamber of Commerce and Industry (LCCI), Overseas Investors' Chamber of Commerce and Industry (OICCI), SITE Association, Pakistan Petroleum Exploration and Production Companies Association (PPEPCA), All Pakistan Textile Mills Association (APTMA), All Pakistan Cement Manufacturers Association (APCMA), Pakistan Hosiery Manufacturers Association (PHMA), Towel Manufacturers Association (TMA), Pakistan Tanners Association (PTA), Pakistan Vanaspati Manufacturers Association (PVMA), Pakistan Steel Re-Rolling Mills Association, All Pakistan Cement Manufacturers Association (APCMA) and Pakistan Association of Auto Parts Exporters (Paapex).

The ICMAP has urged the government to take necessary and tough decisions to make Pakistan a respectable place to live, work and invest in. It has emphasized that the increase in reserves and GDP, increasing number of cars on the road, and other positive macroeconomic indicators cannot have fruitful impact, unless steps are taken to change life of masses of this country. Since the main purpose of a budget is to bring change in the destiny of the people the ICMAP it has highlighted various that need to be addressed in the forthcoming budget. Some of the suggestions are:

* The government shall take measures to strengthen public trust on the Institutions.

* The government spending shall generate public approval.

* The measures shall be taken to build public confidence that their hard-earned money is being properly utilized for the general public welfare, and not for the benefit of selected groups.

* The resources shall carefully be employed through proper feasibility and planning, in order to avoid unnecessary expenditures.

* There shall be an incentive for taxpayer; some assurances against any contingency will definitely encourage the taxpayer to pay the right amount of tax. Similarly, there shall be strong disincentive for not paying the correct taxes.

* The government shall fix average living expenditures after appropriate analysis of a family with four core and two extended dependant family members. The minimum wage for a full-time (8-hour) working individual shall fix to Rs 8,000/month. This shall also be applicable to both public and private sector. While analyzing average living expenditures, cost of shelter, education for children, health, groceries and other daily consumable items along with 20% contingency expenditures shall be accounted for.

* The government shall fix minimum pension to Rs 5,000.

* In case of individuals, tax exemption slab may be raised to an income up to Rs 250,000 and @10% for an income from Rs 250,000 to Rs 500,000.

* Along with tax returns, every individual assessee shall file a statement of his assets and liabilities as on 30th June of the tax year. No tax deductions shall be allowed for savings of up to Rs 250,000 per family.

* The government shall take initiative to get cost audit compulsory like of financial accounting for business concerns. The Cost and Management Accountants play a vital role in accurate determination of income of both the manufacturing and service concerns, and this income definitely helps CBR and tax departments to determine the true profits of business organizations.

* There is a need to develop strategy to ensure equitable distribution of income, employment generation, and social sector development.

* Measures shall be taken to remove infrastructure bottlenecks both for internal corporatization and industrialization and foreign investments.

* Measures shall be taken to fully restore both domestic and foreign investor's confidence, as it is inevitable for an economy like Pakistan, due to fast growing trends of aggressive globalization and increasing regional competition.

* The taxation should serve as a catalyst for industrial expansion and economic growth, and tax regulations should not become a great divide between the rich and the poor.

* Speedily implement second-generation reforms to improve institutions and governance.

* Address emerging macro-economic imbalances.

* Take measures to stabilize following macro-economic imbalances.

* The government shall supplement its supply-side measures with policies to address market structure problems. It is important to note that monetary policy alone will not be able to contain inflationary pressures.

* Take measures to encourage rise in savings

* Measures shall be taken to maintain and improve the purchasing power of lower income groups.

* Exports may be made more competitive.

* The government shall take measures with State Bank of Pakistan (SBP) that financing of the deficit shall be through a healthy mix of bank and non-bank borrowings. As borrowings from domestic sources, other than SBP, simply result in a shift of demand from the private sector to the government, but borrowings from SBP are more inflationary as they add to aggregate demand.

* The government shall make fresh PIB issues to lower dependence on SBP borrowings and to provide a market driven benchmark, which is needed for the development of the corporate bond market

* Take measure to lower widening current account deficit which resulted in a rising savings-investment gap.

* The government shall revise policy and ensure sustained reforms to meet the challenge of increasing both investment and savings.

* The growth in imports is inevitable for a developing economy such as Pakistan. Measures shall be taken to reduce the need for imports by containing the growth in aggregate demand, promoting exports, and attracting non-debt inflows.

* The legal and administrative measures shall be taken to control speculative hoarding and collusive price-setting, which have an impact on domestic inflationary pressures in markets for many key commodities.

* Measures shall be taken to reduce current account deficit, which is expected to swell to 4.7% of GDP by end of current fiscal year. If this will not be taken carefully, these may initiate a vicious circle of debt creation, exchange rate deprecation and have and severe impact on inflation.

* To promote agriculture related activities, the government shall ensure higher credit disbursements, enabling farmers to increase the use of quality inputs to increase productivity.

* Extraordinary measures shall be taken to promote dairy industry for achieving significant growth as the industry seems poised to increase production on the back of sustained government and private sector efforts in recent years.

* Textile sector is growing despite higher prices of cotton, and it is important to take measures to ensure faster grow of this sector to meet to growing demand.

* Measures shall be taken to stabilize cement industry.

* Chemical industry shall also be given incentives as it shows deceleration, primarily due to capacity constraints.

* The government shall announce pragmatic Fertilizer policy to contain growing import of urea.

* The government should revisit its mew auto policy to achieve the desired results.

* The government shall keep consistent policy for paper and board sub-sector.

* The government shall take measure to guard the risk of a further deterioration in fiscal performance.

* The government shall ensure additional facilitation to taxpayers especially, after Central Board of Revenue's decision to seek one percentage point increase in the tax-GDP ratios in the next five years. It is appreciating that the government has introduced tax-to-GDP ratio as number of sectors with major shares in GDP are not contributing requisite level of tax. In a country where billions of rupees are being made on daily basis in speculative transactions in real estate and shares, plans to increase in tax-to-GDP ratio is a positive step to get these transactions documented. Currently, the tax-to-GDP ratio in Pakistan stands at only 9 per cent, which is one of the lowest in the world.

* The government shall improve the system to broaden base of the tax net, and improve collections from under-taxed areas of the economy such as agriculture, services sectors, and equity markets.

* The government shall be consistent in its monetary policy.

* The government shall take measures to protect intellectual property rights.

* The rate of GST shall be reduced. Currently, on an imported article of public consumption, the effective rate of indirect tax before any further supply is 41.80%.

* The government shall take serious measures to bring oil prices to sustainable level as rising price of POL products cripples the purchasing power of the people.

* The government shall make effective plan to utilize the enhanced amount of Public Sector Development Program. In the past, PSDP utilization has been very low.

* The government shall take measures to counter tax-evasion and money-laundering. There is colossal unaccounted cash supply circulating in the economy in search of further undercover gains.

* The government shall take solid measures to safeguard honest taxpayers, as day by day they are being disillusioned by the fact that tax-evaders are still getting benefit of loopholes in the systems.

* The measures shall be taken to simplify the taxation procedure, by introducing efficient taxation system through availability of integrated data on taxpayers of all categories. The CBR in collaboration with Integrated Tax Management System (ITMS) shall devise process to ensure prompt availability of sales tax, income tax and Federal excise data of taxpayers.

* The government shall effectively administer the tax appellate system and it shall keep pace with the changing business environment and the legislative program. The main objective of all the tax reform measures should be promotion of investment and facilitating decision-making that is driven by commercial factors rather than by tax considerations.

* The measures shall be taken to encourage industry to establish Alternate Dispute Resolution Committees (ADRC), in order to resolve conflicts and difference of opinions without approaching courts. The government shall facilitate the trade bodies and associations to form committees.

* The government shall bring in further positive change in existing tax policy, in order to provide an equitable, pragmatic, investment-oriented and business-friendly tax system, integrating good tax administration with simplified tax laws that are easily understood and hassle-free from procedural implementation.

* The government shall devise a system, whereby each taxpayer should contribute in line with his ability-to-pay taxes. Those who possess more economic power should contribute more to the public exchequer and vice versa.

* Dividend income shall be taxable in the hands of recipient. Dividend withholding tax should be done away with. Rather imputed credits shall be allowed.

* In case any company does not pay any tax in spite of income due to various deductions, incentives or exemptions, no imputed credits shall be allowed. In nutshell imputed credits shall be allowed only against the actual tax paid by such companies.

* Depreciation to be provided in the books of account under the Companies Ordinance, shall be the same as provided under the Income Tax Ordinance, on written down value (WDV) basis. The rates of depreciation under the Income Tax Ordinance shall be rationalized on realistic basis.

* No sale / purchase / rent agreement of moveable / immoveable property in Pakistan shall be a valid agreement, till it is registered with the Registrar or Sub Registrar of the area or registering authority. Payment of advance or sales consideration in cash shall not be a valid mode of payment. This step will ensure eradication of black money in real estate transactions and property prices will tend to stabilize. Power of attorneys in respect of immoveable properties, containing powers to sell, mortgage, gift or lease of properties, including transfer of lease rights in respect of leasehold properties, shall be valid only if given to blood relations and not otherwise.

* There shall be only one tax namely goods and services tax called GST or VAT, all transactions of sale and purchase and services, shall be covered under GST/VAT regime. There shall be no exclusion under any category and should include agriculture produce and inputs also. Only one rate of GST @ 10% shall be fixed for all types of goods and services, on the pattern of VAT. All other levies under whatever name, like excise duty, market fees, octroi, service tax, customs duty, local taxes etc. shall be abolished in one go.

* GST paid on purchases or inputs shall be deducted from GST paid or payable on sale. If GST paid on inputs is in excess of GST payable on sales in a particular month or quarter, the same shall be allowed to be carried over to next period. Even stamp duty on real estate can be replaced with GST.

* All services under whatever name including consultancy, doctors, advocates, consultants, photographers, beauty clinics, property dealers, financial services, brokerage services, electricity, services by municipal corporations, communication services etc. shall be covered. Each and every item of sale, every product, under whatever category it may be, shall be covered, no exclusions, no exceptions and no differential rates for any item.

* Every trader or service-provider having turnover exceeding Rs 500,000 shall be registered under GST and must issue a tax invoice. GST calculation should be automatic in the invoice.

The government claims that it wishes to make budget making process participative, whereby all the stakeholders submit there proposals and after due diligence the final text is prepared for the approval of cabinet. In the past this practice was hardly followed, let us see what happens this time.