Value Chain
Monthly Magazine recently talked to Majyd Aziz, Former President Karachi Chamber of Commerce and
Industry, to solicit his views on the economy, especially the Federal Budget
2013-14. (The interview done on June 23, 2013 was published in the July 2013 issue
1.
On the face of
it, the recently announced federal budget has not imposed a new indirect tax except
for a 1% increase in GST. Do you agree with this view that no new indirect
taxes have been imposed?
Yes,
GST has
been raised from 16 percent to 17 percent and FBR expects to collect over Rs
63.5 billion while at the same time it estimates an additional Rs 18.5 billion to
be realized through Federal Excise Duty.
2.
What in your
view are the venues for increasing direct taxes?
The
prevailing culture of people to keep away from the tax net is one prime factor
in government depending on indirect taxes to achieve the targets. However, the
worst part is that it is through the complicity of corrupt elements in FBR that
people are facilitated in evading their tax responsibilities. Moreover, FBR has
seldom played the role of a facilitator and so there is a sense of averseness
when it comes to entering the tax syndrome. It is therefore more convenient for
FBR to reach towards the revenue target by relying more on indirect taxation.
The
country has become a laughing stock in the comity of nations since her
tax-to-GDP ratio is about 8.5% and continuing to decrease every year. The ideal
way to collect direct taxes is to reduce the percentage of income tax and
making it attractive for taxpayers to document their businesses or earnings. Although
the Finance Minister did announce a reduction of 1% in corporate tax, i.e. from
35 to 34%, the bare fact is that it created ripples and not waves in corporate
corridors.
It
is incumbent upon FBR to identify tax evaders, to formulate a practical
strategy to induce them to pay taxes, and to ensure that those who are
identified are not allowed to escape the net. In well-established societies,
people who pay taxes are aware that in return
they would be able to get good schools, better health facilities,
peaceful law and order environment, workable and sustainable physical
infrastructure, accountability of errant bureaucrats and politicians, and a
better and safe future for themselves, their families and businesses. When the
state abdicates its responsibility, when the state wastes precious resources,
and when the state treats citizens with scorn and disdain, then it loses the
moral high ground to demand taxes and levies from those citizens who are
obligated to pay their share in the country’s financial resources pool.
3.
Will the 1%
rise in GST have a significant impact on the cost of doing business and on
inflation?
Government spin doctors regularly show their
faces on various TV talk shows and vehemently and forcefully try to impress
upon the viewers that the added 1% is not something to worry about and that
there would be no negative impact on inflation or even on cost of doing
business. The worrisome thought is that for the next five years, the country
would be listening again to ill-informed political sycophants in the same
manner and style witnessed in the last five years.
Why wouldn’t this increase in GST have an
impact? There is a multiplier effect on everything that costs more or costs
less. It is very simple to say that the end-user or end-consumer would not feel
the added cost and would bear it in normal stride. On the contrary, whenever
prices rise, for whatever reason, the impact is immediately felt and there is
then the reaction to take this increase, add some more, and then pass it on. In
cases where it is impractical to pass the added cost, then the producers absorb
the increase and, in the process, either reduce their profit margin, either cut
corners, or resort to non-documentation tactics. Another factor is that in many
markets, the goods are often sold on credit and most of the time, the
settlements are delayed or the credit period is longer. In that scenario, the
working capital of the seller comes under pressure since the tax portion is
also part of the credit given to the buyer.
4.
People,
business, and industry rightly expect the state to repair the infrastructure,
especially the power sector, but this can’t be done without higher tax
revenues. Then why is a rise in taxes resented by them?
There is generally a trust deficit between
the business sector and the tax collectors. At times, there are many different
tax collecting agencies, each with its own priorities and own dynamics. Trade
and industry, as well as households, all expect the government to plan and
provide the required and needed infrastructure so that the wheels of economy
move smoothly and the citizens enjoy quality of life. Inspite of continuous
lobbying and representations, Pakistan’s trade and industrial sectors are being
denied their rightful share of sustainable infrastructure and the blame more
often than not lies at the portals of the policymakers and the government of
the day. The availability of resources is fundamental for development of any
infrastructure and the low resource mobilization precludes any notion of
initiating mega infrastructure projects.
The situation becomes more depressing when
the government has to resort to external financing and agreeing to stringent
conditionalities set by the international development financing institutions. These
measures further alienate the people from the government and at times become
the catalyst that sparks discontent and restlessness in the country. However,
the scenario becomes deplorable when the government squanders away the
resources on frivolous adventures and non-developmental expenses. That is why
any increase in duties and taxes also results in agitation by trade and
industry.
5.
The Federal
PSDP has been allocated Rs 540 billion out of which Rs 222 billion will be
spent on repairing the power sector. Do you think this investment will improve
electricity production and cut losses?
Public Sector Development Projects are meant
to being about the positive change in the country and through which various
facilities and improvements are conceived, planned and approved. Usually, due
to myriad reasons, PSDP funds are under-utilized and the blame eventually is
placed on non-implementation of the projects. Furthermore, whenever FBR is
unable to reach revenue targets and the non-developmental expenses become a
budgetary headache, or at times when natural calamities inflict monumental
losses of lives and assets, the government diverts allocated PSDP funds to tackle
these issues. Therefore, while PSDP funds are supposedly the outcome of a
planned vision, the performance at the end of the year tells a different story.
The allocation of a formidable amount of
nearly 50% of the Federal PSDP (including Federal financing of Rs107 billion while another
Rs118 billion to be arranged by the Water and Power Development Authority
(WAPDA) from its own kitty) towards
the power sector manifests the government’s desire to address its election
campaign promise to resolve the menace of loadshedding and power outages. Among
the various measures in the energy strategy, such as resolution of the circular
debt, prompt availability of fuel, fast track conversion of generation to coal,
immediate introduction of renewable energy, etc, a very crucial step is to
rehabilitate and upgrade the existing power network. Years of neglect,
corruption, sabotage, use of shoddy material and other factors have affected
the network in many areas. Even USAID has undertaken to provide funds and
expertise to improve the power network in selected areas. The proper and
judicious utilization of the funds would go a long way in bettering efficiency,
reducing transmission and distribution losses, providing proper voltage to
end-consumer, and maybe, just maybe, reduce costs for the power producing
units. Hence, this step of the government needs to be conditionally lauded
provided it achieves the purpose and objective.
6.
The budget
assumes that in 2013-14 exports will touch $26 billion. Will that be possible?
The government is to be complimented for
focusing on a doable target rather than setting unconsidered export targets.
There are many factors that debilitate a high enhancement in export figures.
The horrible infrastructure scenario is a significant cause for snags in improving
the country’s production of goods and services. These shortages also result in
high production costs due to non attainability of economies of scale. The
country’s agriculture output is also pathetically low with an annual growth not
exceeding 3 to 3.5%. The agriculture sector still relies on out-dated farming
equipment and methods and there is low awareness of seed technology and
productivity enhancement tools. Inheritance plays a major role in division of
agriculture lands and this cultural custom always impacts the cost of
production and reliance of modern farming equipment. Thus Pakistan is not able
to produce substantial cash crops at cheaper prices.
Pakistan has not been able to channelize
software exports through a transparent and friendly official process and thus
most of the software exports are out of the legal domain. Information
technology software development is a 30% annual worldwide growth opportunity
that this country should not miss. Mineral exports have picked up substantially in the last few
years. However, the major impediment has been the mindset of the miners and the
middlemen who do not subscribe to global market dynamics. They take the
prevailing price as the benchmark figure and are averse to reducing it when
world demand slows down. This creates frustration among exporters and the
hard-earned space in global minerals market is lost to other countries whose
miners are tuned in to the world market trends.
A very
important factor that can enhance the export base is the attitude of the
government and the official policy makers in export promotion. The present
scenario is that there is a Trade Development Authority of Pakistan that is
more or less concerned with improving the trade base and facilitating exporters.
However, the desired advancement and effectiveness of this vital organ is
nothing to write home about. Furthermore, the steps taken by the government in
areas such as increase of sales tax, the withdrawal of subsidies, the late
payment of duty drawback and rebate cheques, the display of cronyism and
favoritism, and the proverbial red-tape and bureaucratic indolence, have all
contributed towards the stagnation of exports. The stranglehold of big time
exporters and godfathers, especially in the affairs of export based trade
associations and chambers, have demoralized small and medium exporters who
suffer from a perpetual lack of a level playing field.
There is
this hope that Pakistan would be able to obtain GSP Plus status from the EU on
January 01, 2014. This would surely enable the exporters, especially
textiles-based, to increase exports to EU countries. At the same time, there is
a need to introduce Track II diplomacy by the business community by lobbying vigorously
in Washington with Congress, with labor federations, with government officials,
and with business counterparts so that Pakistani products also get a wider
window for entry into the United States at competitive rates vis-à-vis regional
competitors. Moreover, efforts should be made to enhance exports to
Afghanistan, China and India. This strategy would pave the way for boosting the
export figures otherwise the stagnation in exports would in a couple of years
would prove to be an unmitigated disaster.
7.
To reduce the
cost of doing business and contain inflation, the exchange rate of the Rupee
must be stabilized, in fact improved by at least 5% but for that we need higher
exchange reserves. Besides borrowing from the IMF, what other options Pakistan
has and how useful they could be?
There is scant possibility of reduction in cost of doing business
while the hope is that inflation would be contained in single digit figures. It
should be noted that external circumstances impact upon the domestic cost of
production, such as global oil rates, strong foreign currencies, and changing
goalposts through various policies (introduction of Non-Tariff Barriers, denial
of preferential trade facilities, regional economic blocs, etc). The incidence
of imported input in textile exports is over 30% and therefore this also
affects the cost of production. The continued deterioration of the Rupee in the
last five years from Rs 60 to nearly Rs 100 has had a wrecking-ball impact on
the various inputs.
Normally, a depreciating currency does help a country in marketing
products at a favorable rate in the global marketplace. This induces buyers to
source their requirements from a country that has a low currency rate, skilled
manpower, and capacity to produce. Notwithstanding these advantages, Pakistan
has not been able to cash in these advantages, albeit in whatever status these
are. Therefore, improvement in the value of the Rupee would not bring about any
marked improvement in the cost of production.
The country’s Foreign Exchange Reserves continue to dwindle down inspite
of pronouncements from the State Bank of Pakistan. The situation is precarious,
to say the least, and these are less than two months of imports bill. The
inclusion of reserves held by banks and private citizens as if these are Treasury’s
reserves is another way of hoodwinking the world. Recently, the IMF team was
here and probably not satisfied with the presentations given by the Pakistani
economic managers. A loan of $5 billion is being sought. What this new loan
would do is to rollover the outstanding loan already due to IMF. The proverbial
begging bowl has been polished once again.
Pakistan’s finance managers are banking on a steep increase in
foreign remittances from expatriates and expect this amount to cross $15
billion. They are hoping that the Pakistani Diaspora would use official
channels to remit the money. The government is also contemplating new incentives
to boost up foreign remittances. The financial managers are advised to study
the Indian, Sri Lankan and Philippine models as these are success stories. The distressing
news that Saudi Arabia would deport over 50,000 Pakistani workers should be
viewed with serious consternation. This would negatively impact on the inflow
of remittances.
Pakistan can be the recipient of foreign exchange through export
proceeds, remittances, foreign investment –portfolio and capital, grants, and
foreign loans. It is advisable and important that the government concentrates
more on generating revenue from domestic resources and the ideal way is to broaden
the tax base, remove untargeted subsidies, facilitate capital investment,
reduce the GST rate so that more units are brought into the net as it would
increase revenue and not decrease as is publicized, and more importantly
drastically reduce non-developmental expenses, especially colonial-era
ostentation, casual foreign visits, all kinds of wastage, unbridled corruption,
and excessive unannounced holidays. Prosperity comes through a full force
activity of the economy. As US Congressman and Vice Presidential candidate Paul
Ryan stated: “Borrowing and spending is not the way to
prosperity.”
