YUSUF H.SHIRAZI

The present Economic Package is a subject matter of great concern these days. Briefly, the prevalent highest rate of customs duty stands lowered to 35% from 65%, with across the board reductions having been made in several items. At the same time sales tax is at a rate of 17% together with varied rates of excise duty on a number of items – an unusual phenomenon all over the world in the field of taxation. The combination of these multiple taxes have given rise to several anomalies; for example, the custom duty has been reduced on the imported spare parts and components, while customs duty on the raw materials used in manufacturing these very parts and sub-assemblies locally remain as high as before. In fact, in several cases it has been increased! Where there is excise duty no sales tax is imposed and vice versa. In Pakistan in a number of items both these indirect taxes are in vogue. This situation remains generally the same, despite the fact that the government has been re-examining it for a long time now!

DISINCENTIVES

These anomalies were to be rectified through the Anomaly Committee set up for this very purpose or through the Tariff Commission, which has not been done. The package overall has been more trade friendly, encouraging smuggling and under-invoicing than industry friendly. It discourages investment, fuller employment, improved production and increased export. Industry, in fact, has all along received only lip service for the last over 55 years of Pakistan economic history.

The ten basic industries including the basic steel and engineering industry nationalized during the 70’s are begging for development. They are all hi-tech, hi-value added and hi-volume industries with potential of exportable surpluses and capable of net foreign exchange earnings as against our current restricted devaluation-driven traditional export approach. Only hi-tech, hi-value-added and hi-exportable surplus industry can help deficit finance, trade imbalance and inflation. The deficit finance is now a higher percentage of our GDP, trade gap is over billions and about the same current balance of payment – a not too good a state of affairs indeed. These issues can only be tackled through an Industrial Package, not a Trade Package, which is what the present Economic Package is!

WHO DOES NOT PAY TAXES?

Tax evasion is normally higher in the trade sector which, in fact, is largely an un-organized sector as compared to industry, which alone is the organized sector. The landed aristocracy hardly pays any tax. The agriculture is most inefficient and normally the cost of input is higher than the output. The yields are extremely poor and productivity minimal and, therefore, genuine income from agriculture is not high. The landed aristocracy’s main source of income is from the ‘business of politics’. A line has to be drawn, sooner rather than later in order to set this matter right! Tax is also not paid by the drug barons. The main responsibility for this falls on the guardians of our tax frontiers, whosoever and wherever they may be! Then, there is the unorganized sector, of course, which has the “street power” and no one can dare touch them. It includes those people who actually indulge in under-invoicing and smuggling not excluding trade through Afghanistan and in the out of book business arrangement, evading taxes. They say that since they cannot maintain books of accounts, how they can determine their tax liability! Surely: If they can earn income, how is it that they cannot determine the tax on this income? This hard fact must be recognized and the tax loopholes identified and effectually plugged: this is the only way to increase tax receipts.

The high interest rates despite reduction continue to be an anti-growth measure. The rates of income and wealth tax have been slashed. The latter is not worth having at all. The time spent on its recovery and its cost is not worth the recovery. No change has been made in the basic concept of taxes on income that is, a real matter of concern. The basic structure of our taxation is presumptive in nature - tax on receipts, whether there is profit or not - and deduction of income tax at source, generally at rates higher on imports and supplies - whether the taxes are due, or not due, remains as it was. The tax deducted at source is higher of the entire collection. With  the collection cost bigger of collection! These measures increase cost to the consumer, deprive the tax payer of working capital and, as such, their real income and government’s taxes thereon.

COMPETITIVE DISPARITIES

This also brings our taxation system into sharp contradiction with the system prevalent in other countries and particularly in the neighboring one, with whom Pakistan is expected to compete and have a free trade policy - sooner or later! In India, the rate of sales taxes generally lower varying from province to province. They do not have presumptive tax, while Pakistan has presumptive tax at source. They have much of the raw materials locally available as also machines and machine tools, while Pakistan is totally dependent on imports. Their interest rate is from 10% to 13.5% while in Pakistan it is 16% to 18.25% after having just reduced it a little. Pakistani’s lowest rate is India’s highest.

India’s economy is heavily subsidized which raises consumer demand while Pakistan’s is not and this, in fact, a great restraint on consumers. Their infrastructural costs i.e. water, power and gas rates are substantially cheaper than Pakistan’s and this is a major cost factor. Besides the above, India with a population size which is seven times that of Pakistan is a large sized economy and therefore has the advantage of economy of scale for all products.

The same is the case in many other countries comparable with Pakistan. There are several exemptions for localization of industry, particularly where there is value addition. There is no presumptive tax or deduction of tax at source except to the extent of the actual income tax liability, avoiding the menace of refund, which costs a fortune - a malpractice right under the government’s nose!

These are some of the basic differences about which, it is hoped, the planners are fully cognizant. Tax payers are rightly expecting some material change in the next budgets. Without an industry friendly approach no economic package is likely to give the results intended to be achieved.

FINANCIAL INTEGRATION

Financial integration is the key to national business integration. There is now a long list of financial institutions. Pakistan has over 50 commercial banks with paid up capital of over billions. It consists of 21 Pakistani and 21 foreign banks; paid up capital of the Pakistani banks is billions of rupees while that of foreign banks being the same. There are 33 leasing companies whose paid up capital is Rs. 4.7 billion and 17 modaraba companies with paid up capital o f Rs. 3.8 billion. There are 15 investment banks with paid up capital of Rs. 4.4 billion, 11 DFIs with paid up capital of Rs. 10.0 billion, 39 Mutual Funds with paid up capital of Rs, 4.8 billion, 2 unit trusts with paid up capital of Rs. 0.5 billion, 2 venture capital companies with paid up capital of over billions and over 50 insurance companies with paid up capital in billions.

The total paid up capital of the above organizations is in billions, more or less, equivalent to the capital of an average banking institution. Perhaps it does not fit in with the economy of scale in relation to the size of our economy. By international standards, hardly any sector would fit in and as such there is a need to stabilize it with a new approach. In view of the economy of scale and consolidation, mergers are taking place all over the world. Similarly, Pakistan also needs to reduce their quantity by mergers for consolidation! The earlier Pakistan does it, the better it would be for effective and productive utilization of the available resources, otherwise, it would lead to deterioration which will be difficult to manage and thus will result in financial dis-equilibrium and the whole economic situation will be seriously disturbed.

So long as the reconstruction of the financial institutions is not accomplished, their working must be streamlined. The government’s solemn commitments must not be violated in whatsoever case, as for example, through helping hostile take-overs particularly when the rights for such ownership’s were acquired through preferential allotment of capital or assets at the cost of the very management or not to create any conditions for ‘buy-back’ at exorbitant costs, affecting government’s credibility, resulting into shying away entrepreneurship if not the investment. ‘Cartelization’ for achievement of unholy alliance with the force of public funds or in the name of small shareholders must be shunned in the larger interest of the economy: otherwise, the overall collective losses to the nation will be greater than the individual gains!

SELF RELIANCE

There are funds in billions of resident and non-resident Pakistanis in foreign banks according to the late Dr Mahbubul Haq and billions according to Mr Douglas B. Archard, a former Consul General of US. Such measures as proposed above will encourage repatriation of such funds back to Pakistan with continuous flow back of such earnings into the country of origin. It will fulfill the financial requirement of the country and we can develop a respectable relationship with the world financing agencies besides consolidating our economy. These funds will tend to ensure socio-economic and political self-reliance of Pakistan.