INTERVIEW WITH PRESIDENT KCCI
TARIQ AHMED SAEEDI
June 13 - 19, 2011
Karachi chamber of commerce and industry (KCCI) represents 17,000 small, medium, and large sized businesses in the financial and commercial hub of Pakistan. Total tax revenue contribution of KCCI member companies run in hundreds of billion of rupees. Comprising of members from manufacturing and services sector, the trade body reflects the general industrial mood, satisfaction or dissatisfaction, in relation to the government policies. The mandate of KCCI is accepted internationally. The chamber published the budget proposals 2011-12 seeking tax administrations & regulations and policy actions from the government to improve investment friendly climate in Karachi. Pakistan & Gulf Economist (PAGE) published its analysis in the pre-budget issue. Last week, Page interviewed President KCCI, Muhammad Saeed Shafiq, to get the chamber's viewpoints on the recently announced federal budget 2011-12. Federal government proposed in the budget reduction of fiscal deficit to four per cent of gross domestic product from 5.1 per cent, bringing down inflation (consumer price index) to 12 per cent from 15.5 per cent, elimination of tariff differential subsidy, increment in tax collection to Rs1952 billion from over Rs1500 billion, and rationalization of government expenditures.
PAGE: WE WOULD LIKE YOU TO HIGHLIGHT THE FEDERAL BUDGET PROPOSALS 2011-12 IN LIGHT OF THE KCCI'S RECOMMENDATIONS.
SAEED SHAFIQ: We have analysed the budget document and found out only ten statements relevant to our recommendations. You can say that the government had included ten points of our detailed proposals in the federal budget 2011-12. These include regulatory duty abolished on 342 items, removal of special excise duty of 2.5 per cent, removal of federal excise duty on 15 items and complete withdrawal within two-years, reduction in general sales tax from 17 to 16 per cent, reduction in duty on pharmaceutical raw materials to five per cent, increase in wealth statement limit from Rs500,000 to one million rupees, increase in basic exemption limit from Rs300,000 to Rs350,000, tax incentive for new investments, withdrawal of exemption on agriculture and defence items, and reduction in tax rates on cash withdrawal.
PAGE: WHAT ARE YOUR VIEWS ABOUT THE TARGETS SET FOR GDP, INFLATION, AND FISCAL DEFICIT IN THE BUDGET 2011-12?
SAEED SHAFIQ: It will be very difficult for the government to achieve targets set in the budget. Sales tax has been reduced from 17 to 16 per cent. How will the government increase revenue. See, fortunately the country was able to record good exports because of the high prices in the international market. In addition, textile sector was the only major force behind good export figures. I am not overoptimistic about the growth pattern, which in fact I do not see as a growth at all. As said, high prices in foreign markets were the causes. Situation in Pakistan is going bad to worst. Take an example of energy crisis. Gas and electricity load shedding are paralysing the industrial production. Industries will not be able to utilise the production capacities in view of the present condition.
PAGE: HOW EFFECTIVE THE PROPOSED TAX MEASURES WILL BE IN EXPANDING THE TAX NETWORK, ESPECIALLY TO AGRICULTURE AND SERVICES SECTOR?
SAEED SHAFIQ: It is too early to comment on how the tax measures will stretch out during the fiscal year 2011-12. Minibudgets will actually unveil the plans. I believe the measures would not be in favour of the masses. The government slapped taxes on import of machineries. It should have reduced the taxes on machineries to help industries create employments. Agriculture tax contribution is much lesser than the size of the sector. We target agriculture sector because its share in GDP is disproportionate to its contribution towards the national exchequer. All provinces collected meagrely two billion rupees from the sector in a wide contrast to its latent potential of Rs200 billion. I would say if there is a need of legislation action to improve tax collection from the agriculture sector, there should not be any further delay. Moreover, I think every income generating entity should be brought under the tax net.
PAGE: WHAT DO YOU SAY ABOUT THE TAX EXEMPTIONS PROPOSED IN THE BUDGET?
SAEED SHAFIQ: I have reservations about the exemptions of regulatory duties given to the luxury products. Let me ask how many the buyers of imported pet foods in Pakistan are. You can minutely count them on fingertips. They can afford high prices. Government justified exemptions on the ground that those were smuggling-prone products. But, is the fiscal action suitable to tackle the smuggling phenomenon. Another point I would add here. Finished products under Pak-China free trade agreement (FTA) are giving tough times to the consumer and durable goods in Pakistan since businesses could not compete them in prices. I would ask the government to revisit the FTA with China and confine its ambit to industrial raw materials to develop local value addition sector.
PAGE: IT IS SEEN THAT ALLOCATIONS TO THE PUBLIC SECTOR DEVELOPMENT PROGRAM (PSDP), HOWEVER VOLUMETRIC, UNDERGO CUTBACK INTERMITTENTLY DURING A FISCAL YEAR. IN THIS BACKDROP, WHAT DO PSDP ALLOCATIONS HAVE PRACTICAL VALUE?
SAEED SHAFIQ: What else can you expect from a politically weak government? There are also bureaucratic hurdles right in every inch of the governance system.
PAGE: WILL THE TAX HOLIDAY FOR FIVE YEARS ATTRACT INVESTMENTS?
SAEED SHAFIQ: It is not a big incentive. No investors are interested to risk their total equity in return of income tax holiday and that are so in absence of the financial assistance from even banks. I am sure it will not attract any number of investors by yearend.
PAGE: THE GOVERNMENT CLAIMS THAT THE BUDGET 2011-12 IS PRO-POOR. WHAT DO YOU THINK?
SAEED SHAFIQ: There is no relief for the public. I am anticipating a flood of price inflation. Especially, the bombshell in form of removal of cost differential subsidies will take a high toll on society and the economy. People are already paying through the nose exorbitantly high electricity tariffs. On the other hand, business units will have to factor high electricity tariffs in their cost of doing business to aggravate the inflation all the more as the government withdraws financial assistance to the power consumers.