shabbar z_pakistan ecnomic policies 2008-2009

8/7/2019 Shabbar Z_Pakistan Ecnomic Policies 2008-2009

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PAKISTAN ECONOMIC POLICIESFOR 2008-2009

SPECIAL EMPHASIS INDIRECT TAXES

BY

Syed Shabbar Zaidi

Partner, A.F. Ferguson & Co.Former President, The Institute of Chartered Accountants

of Pakistan

Karachi April 10, 2008


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TABLE OF CONTENTS

- Economic Policy & Tax Management

- Growth in Indirect Taxes in Pakistan Sustainability

- Review of the Taxation Policy (indirect Taxes) in the Past Decade

Effects & Consequences

- Custom Duty - Administration Issues

- Policy Issues- Role of Tariff Commission

- Sales Taxes

Retailers & wholesalers sector - The Missing Link

Imports - Presumptive Taxation

Manufacturing - Burden of Tax

- Services Taxes - The Fundamental Issues Tax to GDP

- Federal vs. Provincial Government

- NFC Award & Allocation of earnings


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ECONOMIC POLICY & TAXATION MANAGEMENT (1)

In the post cold war era, we are living in unipolar system ofeconomic policy. Communism is burried in Tienmann Square andcapitalism is dying with Subprime scandal in this Wall Street.

The solution is welfare state. Government efficacy is judged by itsgovernance of employment, poverty alleviation and quality ofservices of health, education and other amenities.

Collection of taxation revenue from all sources equitably is theonly mechanism that can provide resources to the government

for welfare. There are numerous studies and empirical evidencesthat availability of reasonable resources (at least 10 to 15 percent of GDP) is necessary to sustain the society. In thedeveloping country the need is even more. Thus, economycannot survive unless we are ready to pay equitable taxes.


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The unfortunate part is that we in Pakistan, are now laggingbehind, even the people around us. I reproduce the extract from arecent speech of P.Chidambaram the Finance Minister of India:

In the last four years, we have increased the tax to GDP ratio

from 9.2 per cent to 12.5 per cent this year and next year it willbe 13 per cent. This allows us to do what we have to onhealth, education, etc.

Secondly, our government has been extremely prudentfiscally. We inherited a fiscal deficit of 4.5 per cent; this year

we have reduced it to 3.1 per cent, and next year we will reacha fiscal deficit of only 2.5 per cent. On the revenue side, weinherited a revenue deficit of 3.6 per cent, this year we havebrought it down to 1.4 per cent, and next year we will bring itdown to 1 per cent. Now what does this mean ?


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This means that I have more revenues, I have created fiscal

space for the government to borrow more, if necessary, and I

have created space for the Government in Parliament to spend

on what they think are desirable objectives. The desirable

objectives are, of course, education, health, ruralinfrastructure, drinking water, sanitation; You might ask what

is there for industry. Well, infrastructure of industry is important. I

believe we have laid the conditions for high growth and we have

laid the pre-conditions for making this growth more inclusive.

Can we in Pakistan, be able to provide such facilities with less than

10 per cent Tax to GDP ratio ?


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At the moment the matters are under control, however, over the years things

Will not remain the same, if we do not change.


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GROWTH IN TAX COLLECTION INDIRECT TAXES (1)

Over the last ten (10) years there has been a phenomenal

increase in the taxation revenue of the country by way of

Indirect Taxation. We were around Rs 200 billion in all

indirect taxes in 2000. Now the expected collection for 2007-

2008 is around RS 625 billion. This increase has resultedfrom:

Increase in the size of GDP

Increasing in the range of taxation

Effective tax administration


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Another important factor is that over the period reliance on ImportDuty has substantially reduced. Now the question isSustainability of growth in such taxes. The size of GDP is nowexpected to grow by 6 per cent as against 7.2 per cent thereforea conservative and prudent approach has to be adopted whilstprojecting revenues. The estimate should not exceed Rs 640billion.

Indirect taxes are directly effecting the consumer prices of theproduct. I reiterate my comments made earlier that incidence ofindirect taxes that effect:

the product prices of goods used by lower strata of society; cost of industrial raw materials;

be reduced and examined.


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The projected break up could be:

Rs in billion

2007 2008

Custom Duty 154 150

Sales Tax 375 380

Federal Excise 91 100

Other 2 -622 640


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REVIEW OF THE TAXATION POLICY (1)

There is no dispute that in post WTO period the wordProtectionism has been taken out from the dictionary offiscal management.

However, for countries like, where employment promotionand alleviation of poverty remains a major issue; there hasto be facilitation for local manufacturing industries thatcan boost exports, and provide employment.

Increase in the number of mobile connections, expensivemotor vehicles and increase in KSE Index do not representthat we are having a sustainable growth.


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The State Bank of Pakistans quarterly report of this quarter

states about the manufacturing sector as under::

Pakistans large scale manufacturing (LSM) has been

encountering headwinds since the start of FY08. Domesticas well as external factors are responsible for the relatively

slower growth in this sector compared to the stellar

performance of preceding years. These factors include: the

continued strong increases in international commodity prices,

domestic energy woes and dampened demand(Particularlyfor textile exports). Economic losses in the aftermath of

December 27, 2007 have further weakened the chances of

meeting the annual target.


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Overall, the slowdown in LSM during HI-FY08 was broadbased and was seen in 11 out of 15 industrial groups. Ofthese, paper & board, metals, fertilizer and electronicsindustries registered a decline in production. In contrast tothese under-performers, pharmaceuticals POL, cement,engineering and wood industries depict reasonably stronggrowth.


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CUSTOM DUTY (1)

In the developing economies, industries and businesses in thepast were run with reference to Custom Duty. In our country wecall it a SRO Culture. In post WTO regime that paradigm haschanged. With reference to Customs the issues are:

- Administration Reforms - In clearance of exports,

speedier clearance, least time

and effort for clearance of

raw materials

- Discrimination for sectors,

regions, persons and

influences

- Policy Issues - Cascading

- Proper identification of

products required for local

industry


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CUSTOM DUTY (2)

- Role of Tariff Commission - Tariff Commission is a body to

settle the issue of tariff

imbalances and to settle the

issue of unnecessary pressure

of local industry. Thisinstitution is required to be

revisited


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SALES TAX (1)

Retailers & wholesalers The Missing Link:

1) Over the last 10 to 15 years. We as a country not beenable to repair the missing link in the VAT system.

1) There is in short-cut solution. This requires coordinatedefforts for income tax and sales tax. Primary problem forthe traders is not sales tax. This represents an issue ofdocumentation and taxability of the service sector.


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SALES TAX (2)

Import Presumptive Taxation

The major issue for the sales tax for imports is againdocumentation the trail. We have used various modes to

charge sales tax on imports and at present, we are inprinciple on presumptive basis of taxability.

This presumptive basis of taxation for imported products isin effect increasing the cost of materials by 15 per cent. Wecannot attain efficiency in cost of input for industry. This

distortion has to be removed.


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SALES TAX (3)

Manufacturing sector in Pakistan is suffering due to:

Higher incidence of sales tax on inputs;

Competition against unregistered local manufacturingsectors;

Cheaper imported products where sales tax is presumptive

in nature.

This situation is not sustainable.

The solutions are:

Reducing sales tax to 10 per cent;

Improving tax administration to that all manufacturingsector is brought within the tax net;

Imposing a regulatory duty of 10 per cent for facilitation oflocal manufacturing sector.


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SERVICES TAX (1)

The State Bank report talks about the Services Sector as under:

Most of the indicators for the services sector suggestrobust growth in this sector during the first half of FY08.Wholesale and retail trade seems likely to perform wellgiven a significant increase in imports (which accounts for

more than half of the value addition in this sub-sector).This sub-sector is also likely to benefit from expansionin the network of domestic and foreign chain stores.

In the transport & communication sub-sector, a relativeweakness in transportation sub-sector could be offset

by a strong growth in the electronic media andtelecommunication sub-sectors on the back ofgovernments liberal policy as well as large FDI inrecent years. In particular, expansion in cellularservices is impressive as cellular density has morethan doubled during July 2006 to December 2007.


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SERVICES TAX (2)

The combined impact of a likely improvement in theprofitability of the overall banking sector, coupled withsome improvement in value-addition by other financialinstitutions is expected to support the high growthmomentum in finance & insurance sub-sector as well. In

addition, growth in value addition by public administration &defense as well as community & social services (otherservices) is likely to be strong.

In all the other countries, including India, the contribution ofindirect taxes on services is commensurate with their

contribution in the GDP. We cannot improve tax to GDP ratiounless indirect tax contribution by services sector is improved.There is a need to shift the burden from the manufacturingsector to other which are primarily used by upper strata of thesociety.


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SERVICES TAX (3)

The sectors which consideration are:

Transportation

Tele communication services

Media & Communication

Professional Services Services provided to higher income brackets such as

beauty parlour, property dealers, sliming, saloons etc.

There has to be either non-adjustable services tax of 5 per centon such sector or adequate adjustment for sales to cater for thesame.


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SERVICES TAX (4)

Federal vs Provincial Taxes

The constitutional impediment for the charge of sales taxon services by the Federal Government be removed.There cannot be any system of VAT with ProvincialCollection of taxes.

There is a need to re-align the National FinanceCommission Award for distribution rather than disturbingthe collection mechanism


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CONCLUSION

There is a need for serious debate on economic affairs speciallytaxation management of the country. We do not have too manyoptions. The solution ties in building confidence, hope andpassion for integrity and equity in the society.

Thank you


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