OICCI BUDGET PROPOSALS

Interview with Adnan Afridi

SADAF AURANGZAIB, Senior Correspondent
June 04 - 10, 2007

Overseas Investors Chamber of Commerce and Industry (OICCI, incorporated in 1860, is the oldest Chamber of Commerce of Pakistan. The Chamber's primary function is to promote the commercial, industrial and financial interests of foreign investors engaged in Pakistan. It has 166 members including 42 US companies, 88 UK/European companies. They employ around 50,000 people. PAGE had the opportunity to meet Mr. Adnan Afridi, the Chief Executive/Secretary General of the Chamber and to discuss his views on the upcoming budget.

PAGE: What benefits do you think these recommendations will have on the over all development of the policies?

AA: Overall the government has been fixing things and improving the over all environment regarding more user friendly policies, eliminating anomalies in the systems and rationalizing and stream lining the tax structure. The proposals we have given will provide some further improvements of current polices. If the government listens to industry, as it has been doing, it improves the investment climate and helps further the growth of the country's economy. For example, the reduction in corporate taxes, custom duties and elimination of certain taxes like Octroi, Excise Duty on Laundry and Soaps have encouraged further investment in Pakistan which can be seen in the high GDP growth rates as well as improved investment outlook by local and foreign companies.

PAGE: What predictions are there from the foreign investors in this budget especially with regard to the expanding business scenario in Pakistan?

AA: Predictions for further investment by foreign investors is not linked to this budget per se, but has a lot to do what has been happening for the last 4 to 5 years - consistencies of policy, lowering of taxes and streamlining of polices and procedures. These have helped create a positive image of the Finance Ministry as well as the CBR in the eyes of local as well as foreign investors. The resolution of long standing cases at the tribunal level or High or Supreme Court has helped encourage and improve the perception of many towards the good intent of the government. Still many things remain, some of which we have highlighted in our proposals, but the key prediction I have for this budget is that the government will continue to follow their strategy of lowering overall tariffs, creating a level playing field for all and finally streamlining and bringing transparency in its dealing with investors.

PAGE: How do you see the elimination of WWPF will help workers ?

AA: We have made two proposals, the first is to eliminate WPPF and the other to convert it into a Provident Fund type concept where funds are utilized by the company in building schools, hospitals and housing in the area where their employees and workers live. Currently, the bulk of these funds ends up in government coffers and is not translated into direct benefits for workers. Hence this tax is seen as an additional tax on the company. The companies are not against improving the lives of their employees as long as they can see the money being converted into usable funds and projects.

PAGE: What are the key points you are emphasizing on regarding foreign investment?

AA: The key points are:

a) Lowering the corporate tax rate to be competitive against countries we compete with for foreign investment;

b) Eliminating Excise Duty on Shampoos, Shaving preparation and Skin care, the only consumer goods categories which are not luxurious or are injurious to health;

c) Eliminating or modifying the Presumptive Tax Regime (PTR) not to penalize companies that keep complete and proper accounting books. The suggestion is made to create a set of criteria for companies, in terms of asset size, turnover, automated accounting systems, etc. on which exemption to move from PTR to normal assessment on P/L is allowed. This will encourage foreign companies to invest in Pakistan.

OICCI has given ten proposals for the coming budget, a brief summary of the following are as follows.

1. HIGH CORPORATE TAX RATE

Rate of Corporate tax is high in Pakistan at 35% as compared to developing and developed markets. I n addition to Corporate Tax, WWF (Workers Welfare Fund) and WPPF (Workers Profit Participation Fund) combined increase the rate to 42% for companies. Snap shot of various tax rates prevailing in different countries:

MALAYSIA

KOREA

INDONESIA

CHINA

INDIA

28%

29.7%

30%

33%

33.66%

Pakistan tax rate with comparison to Malaysia is higher by 25% and with India is higher by 4%.

OICCI recommended that the corporate tax rate should be reduced to 30% for Private Companies and 25% for public limited companies. It will make Pakistan more investment friendly and competitive with the surrounding markets and it will also increase the shareholders return.

2. WORKERS PROFIT PARTICIPATION FUND

WPPF is an additional burden on the manufacturing sector in addition to High Corporate Tax rates. Snap shot of welfare benefit structure prevailing in different countries

*PAKISTAN

**INDONESIA

**KOREA

***SINGAPORE

INDIA

7%

3.7%

3-4%

Various %

0%

Except for Pakistan all the welfare benefits are calculated by taking salary/wages as a base rather then the profitability of the company.

It is an additional cost to the manufacturing sector and the real benefit does not get transferred to the workers. WPPF actual paid to the workers in 2005/06 (e.g)

WORKERS WELFARE FUND

WORKERS PROFIT PARTICIPATION FUND

DISTRIBUTION OF WPPF TO WORKERS

% OF DISTRIBUTION TO WORKERS

PKR 516 million

PKR 1,096 million

PKR 53 million

4.9%

Data collected from 28 Manufacturing Companies, all members of OICCI

OICCI recommended that the government should eliminate WPPF in its entirety or allow it to be utilized by the company as a fund (just like Provident Fund) for the benefit of their workers to build schools, hospitals etc. (as 95% of the contribution on account of WPPF goes to the Government after allocation to the workers). It will provide the manufacturing sector with a level playing field with its competition. It will attract more investors to install / expand their manufacturing operations. The utilization of funds in building schools / hospitals by the organization themselves will also facilitate government efforts in these areas.

3. FEDERAL EXCISE DUTY

The true essence of levy of Excise Duty is to regulate and discourage consumption of items that are either luxurious or injurious to health. Government has implemented this policy by eliminating Excise from most consumer goods the most recent being Toilet Soaps and Powder Detergents. This will ultimately result in lower prices & thus there will be an increased consumption by consumers. Increased consumption will compensate government revenue through higher custom duties, sales tax and income taxes. It will help the companies to compete with the prices of parallels and counterfeit products.

4. WITHDRAWAL OF PTR

Pakistan is the only country with this concept of Presumptive Tax .The government also abolished the option to opt in / out from Presumptive Tax. (Option was available only for manufacturing). Same concept also introduced in Sales Tax in 2005.

OICCI has recommended that on income tax the option should be awarded to those companies fulfilling a preset criteria to either opt in / opt out of Presumptive tax or Government should relax the rate of PTR to the companies falling in the above mentioned criteria and bring it down to 4% from the existing 6%. On sales tax Government should abolish the concept of value addition as it is not as per the true concept of recoverability of Sales tax in a VAT mode or it should allow registered person to get a refund of the value addition if that said addition is less then 10%. An auditor's certificate should be provided to the sales tax authorities for the claiming of this refund.

5. MARGINAL TAX RELIEF FOR SALARIED CLASS

Marginal tax relief to salaried individuals should be provided whose salary marginally crosses one bracket to another. Snap shot of the incremental tax by minimal change in salary depicts as under

TAXABLE SALARY INCOME

INCOME TAX RATE APPLICABLE

INCOME TAX AMOUNT

% INCREASE IN THE TAX AMOUNT

% CHANGE IN NET TAKE HOME SALARY

   

850,000

7.5%

63,750

850,001

9%

76,500

20%

-19%

OICCI has recommended that the marginal tax relief should be introduced for the salaried class. This change will help salaried class. It will remove a key complain of the salaried class.

6. 3RD SCHEDULE ITEMS (SALES TAX)

This schedule specifies products on which the importer/manufacturer is liable to deposit the sales tax on the Retail Price. It is recommended that the Third schedule should be deleted from Sales Tax Act as it obliges companies to suffer the sales tax on the sale price which doesn't pertain to the Company, thereby eroding the true concept of sales tax law. Implementation of this suggestion will provide companies a level playing field across categories. Also will help their liquidity and provide more funding for internal investment and growing their business.

7. POST RETIREMENT MEDICAL FUND

Retirement Medical Fund plan is not approved under the Income Tax Law. Companies providing such benefits can not claim this as a tax allowable expense. OICCI recommended that the medical benefits should also comes under the ambit of Income Tax Law and should be duly approved so as to allow companies to claim their legitimate expenses against their income. This will encourage companies to provide such benefits to its retired employees. This will also improve the lives of the retired employees which will ultimately help the Government cause.

8. FED ON ROYALTY & TECHNICAL SERVICES FEE

The section 3 of FED Act 2005 limits the application to the following activities:

Goods produced and manufactured in Pakistan:

Import of goods into Pakistan territory;

Service provided or rendered in Pakistan.

Through the Finance Act, 2006 the Board introduced Rule 43 A to the Federal Excise Rule of 2005 whereby it arbitrarily levied excise duty on payment of Royalty and Technical services Fee.

It is recommended that this arbitrarily imposed Excise Duty should be immediately abolished as: this levy will hinder inflow of F/X investment in the shape of know how and brands etc. And Excise Duty on Royalty and Technical services fee is against the principal statute. The removal of FED on Royalty and Technical Service fee will help foreign brands / companies to enter into Pakistan market thereby increasing the Foreign Direct Investments (FDI) as well as encourage existing foreign companies to invest more.

9. NON ALLOWABILITY OF SALES TAX CREDIT

The law makes the purchaser responsible if the supplier does not pay the Sales Tax on goods supplied to the purchaser. This provision is detrimental to a conducive business environment that is being aspired both by the Government and the multinational business organizations. Through the database of Collectors of Sales Tax, unscrupulous suppliers can be detected & recovery can be forced. The implementation of the said proposal will be a huge relief to the bona-fide purchasers who will not be penalized due to the default of unscrupulous suppliers.

10. REFUND OF S.TAX ON INPUT / ZERO RATED SUPPLIES

It is proposed that the extent of payment of refund to the input tax paid on goods consumed in manufacture should not be restricted to avoid unnecessary blocking of funds of the business and delay in issuing the refunds. Further the details required under Rule 38 should also be rationalized as it is cumbersome especially for the engineering industry where hundreds of input goods are used for the manufacture of the plant, machinery and equipments. The proposals if accepted will result in timely processing of refund claims, further this can be counter checked through audits. The rationalization of the details required will greatly facilitate tax payers.