May 16 - 22, 20

Karachi Chamber of Commerce and Industry (KCCI), having 17,000 members from diversified small-, medium-, and large-sized industries of Pakistan's largest city, unveiled its comprehensive recommendations for the federal budget 2011-12 last week. The copy of proposal released to the media highlights potential revenue sources as well as issues that it believes should be addressed to abridge gap between revenue and expenditures. It zeros in on tax administration and regulation reforms that it suggests are imperative to promote foreign and local investments in the country. It also seeks equitable taxes for all the economic sectors and zero tax for the individuals.

According to the proposal, investors in Pakistan prefer trading over manufacturing because of lack of protection and incentives from the government to the manufacturing sector. Therefore, there is a need to devise a tax framework with the consultation of all stakeholders to improve the domestic industrial competitiveness and review indirect taxes. The report comes hard on the government for preparing the policies in general in isolation from the main stakeholders thus what turn out in effect are impractical solutions.

While inconsistent tax policies are brought under the broadside, KCCI also counts policy response to the floods, energy setbacks, weak consumers and investors confidences, and disturbed law order situation as negative factors. On the positive side, it however enumerates upsurge in inflows of remittances, foreign aids, and exports especially of textile.

KCCI has always been in favour of expanding the tax network and bringing the undocumented sectors of the economy into the net, says the president in his note. Saeed Shafiq bewails low tax collections by the government from agriculture and services sectors are equal to a disincentive to other taxpaying economic sectors. Being a representative of the city's leading trade association, he expresses his full support to the reformative measures in the system of taxation.

The proposal points out wide disparity in the nationwide tax collection, saying minority is sustaining the burden of taxes collected from around the country. Agriculture sector that has 22 per cent contribution towards the gross domestic products has comparatively insignificant share in the tax pool, it underscores noting that agriculture sector has the potential to generate Rs200 billion tax revenue whilst four provinces managed to collect only two billion rupees taxes from the sector in 2009-10.

Criticising the general sales tax rate, the association says the rate highest in the world is giving a rise to the 'tax evasion, corruption, and smuggling' and therefore it should be brought down to a uniformed 10 per cent from existing multiple 17, 18.5, and 21 per cents. Reduction will automatically expand the tax revenue from this head, it believes. The government should also reduce tax burdens on the salaried class for their relief in the midst of backbreaking inflation.

KCCI says Afghan transit trade is rendering millions of dollars revenue losses to the FBR annually. Unauthorised trade volume of $1.7 billion surpassed the authorised trade of two billion dollar, suggests a pie chart. Customs would have generated $135 million revenue had unauthorised trade been eliminated, according to the association. Loss to fair trade because of smuggling is separate. The document says $118 million worth of tires are annually smuggled into Pakistan from Afghanistan while the imported quantity of 3.5 million units exceeded the 2.5 million units produced locally. Smuggled tires get its way into Pakistan because of the weak custom infrastructure. Modern monitoring mechanism should be installed to tackle the menace of smuggling, it advises.

The government should document and tax doctors, lawyers, transporters, schools having high fees, luxury automobile, and consultants to increase tax to GDP ratio, it recommends.

In other recommendations, the association proposes the government should bring the turnover tax rate from current one per cent down straight to 0.25 per cent for all entities to discourage tax evasion practices. Withholding tax on services of stitching, dyeing, printing, embroidery, washing, sizing, and weaving should be reduced to 0.5 per cent to facilitate genuine businesspersons, propel exports, and give a boost to economic activities. Withholding tax of above four per cent on import stage should not be levied to stop importers from selling imported raw materials in the market. The government needs to limit the regulatory and excise duties on luxury items to discourage surplus imports. Two slabs of taxes of 35 per cent on large and 25 per cent on small companies should be equalised at 20 per cent for all the companies with turnover of up to Rs500 million to prop up developments of small companies. Corporate tax should be cut to 25 per cent for manufacturing and 30 per cent for non-manufacturing sectors.

About pending refunds, it says billions of rupees are stuck in FBR due to the indecisiveness over GST law. KCCI recommends automated system for the processing of refund claims to clear cash flow stumbles of the businesses.

Touching the cord of monetary policy in the budget proposal, it seeks interest free loans for the imports of machineries aimed at balancing and modernization. It says the government's excessive borrowings have crowded out private sector and hampered the productive economic activities. High-rise in non-performing loans was, it says, also one of the reasons of fund diversion towards the budgetary support financing.

Inflation is increasing and only job creation and targeted subsidies can hold back the rising poverty. According to KCCI, it is unwise on the part of the government to waste huge amounts on the upkeeps of the state owned enterprises. The government should use the billions of rupees wisely, it recommends.

In order to broaden the tax base, improve economic documentation, push up the numbers of sales taxpayers, it is necessary to persuade people to have sales tax numbers, the proposal underlines.

However, taxation is justified only when the government takes "proper steps into the right direction", says the president KCCI with reference to the tax administration and regulations.