960411

FPCCI for breathing space

before implementing

tariff reforms

RECORDER REPORT

KARACHI: The Federation of Pakistan Chambers of Commerce and Industry in its proposals for federal budget 1996-97 submitted to the Ministry of Finance and Central Board of Revenue on April 3, has warned that "if the government implements the tariff reforms as required under the WTO agreement without giving breathing space to our industrial sector to adjust to the new environment of liberal imports at reduced duties, most of our industrial units will be closed down, sooner or later."

It has been pointed out in the preamble of the proposals that in order to make our products competitive in local as well as in international markets, the government must ensure that the local manufacturers would work under similar terms and conditions and environment as their foreign competitors which means that the incidence of taxes, duties and levies and the costs of inputs and utilities would be more or less the same for both.

If we want our country to march ahead on the road to progress and prosperity, FPCCI said, we must make determined and joint efforts to correct the situation. The policies must be formulated after thorough consultation and open debate while our decision making process should be transparent, timely and above-board and once decision is taken it should be implemented with despatch and speed and should not be allowed to be bogged down in the regulatory cobwebs.

At present "our economic system is suffering from uncertain policies, opaque decision making, regulatory hang-over and ineffective and lethargic implementation process."

After critically analyzing various policies, detailed suggestions have been made which in FPCCI's opinion could bring rich dividends for the country. In the words of Senator Ilyas Bilour, the choice is before the government: either to turn the country into a smuggler's heaven or make it industrially strong to become the pride of developing world.

Income tax, wealth tax, sales tax and customs are some of the important areas which have been discussed in detail and suggestions made for improvement of the system.

It has been emphasised that "the taxation system in Pakistan is very complicated due to utter violation of the universal principle of taxing all income from whatever source. By giving wide-spread exemptions and by not employing the tool of direct taxes the objective to achieve redistribution of income and to provide relief to the down-trodden people has not been met. As a result while in many countries of the world the direct taxes contribute about 80 percent of the total taxes, the position in Pakistan is almost reverse.

FPCCI said, "hardly one percent of the population pays tax. Since the tax rates are high, the tax-evasion and the malpractices associated with it are also high.

"Since the direct taxation rates are already very high, the managers and planners of our economy have contrived to use income tax which is a direct tax as an indirect tax in the form of presumptive and advance tax. Even indirect taxes are being used to the maximum extent. Our planners are planning to make full use of Sales Tax in place of Custom Duty whose tariff they are forced to reduce drastically under international pressure. They know fully well that this form of tax will be passed on to the end users and consumers, resulting in increased cost of production and cost push inflation, bringing in misery for the common man.

"To make matters worse, serious efforts are lacking to rid the national economy of various ailments afflicting it for last several years. Budget deficit as a percentage of GDP, although lower than the 8.7 percent in 1990-91 is still higher than the desired level. This is so because there appears to be no let up in the lavish non-development expenditure of the government or the huge waste in public spending. Even the proceeds of privatisation are being used to reduce deficit financing instead of retiring costly debts.

"The failure of government to reduce deficit financing to manageable limits, its policy to arbitrarily increase the support prices of various agricultural products and fixing administratively the rates of utilities like electricity, fuel and gas are all contributing to increasing the inflation rate. Inflation is a syndrome of diseases afflicting an economy, the higher the rate of inflation, the more acute are the diseases and the higher the inflation rate, the lower is the GDP growth rate. While in Pakistan the inflation rate is 13 percent and GDP growth rate is 4.7 percent, the corresponding figures for Singapore are 1.3 percent and 9 percent, for Taiwan 2 percent and 6.5 percent for Malaysia 3.4 percent and 9.3 percent for South Korean 4.7 percent and 9.9 percent for Thailand 6.4 percent and 8.5 percent and for India 8.4 percent and 5.3 percent.

"During the last seven years the electricity tariff in Pakistan has been increased by 371 percent to offset the huge losses of the power generating and distributing organisations which have resulted from their inefficient operations, huge surplus staff and heavy leakage of revenue and transmission losses. Although our country has enormous potential of hydel power generation which is the cheapest source of energy, we have been forced to invite foreign investment for thermal or gas/coal fired power generation by offering the most lucrative incentives. This would mean that when the power from these units is supplied to WAPDA or KESC the power rates will be further increased.

"Due to decapping of ceiling on mark-up the mark-up rate on bank borrowings has shot up to 25 percent as a result of which all economic activities have come under great strain. Coupled with high mark-up rate, the low saving rate in the country has greatly squeezed the availability of investible funds for investment. There is thus urgent need to adopt such policies as would encourage savings.

"Although we achieved the export target of US$8 billion in 1994-95 the results of the first eight months of the current fiscal are discouraging. The most pronounced reasons for the setback in the export sector are the ever increasing production costs, abrupt change in the policies including unilateral reduction in duty drawback rates and inordinate delays in implementation of export friendly policies.

Some of the important proposals of the FPCCI are:

Rate of Income Tax:

In case of every individual, un-registered firm, association of persons, Hindu Undivided Family and artificial jurisdiction person referred in clause (32) of Section 2 of Income Tax Ordinance 1979, the Income Tax should be charged on total income at the following rates:

a. Where the total income does not exceed Rs 150,000 Income Tax to be charged should be 10 percent of total incomes.

b. Where the total income exceeds Rs 150,000 but does not exceeds Rs 250,000 the Income Tax to be charged should be Rs 15,000.

c. Where the total income exceeds Rs 250,000 but does not exceed Rs 350,000 Income Tax to be charged should be Rs 35,000 plus 30 percent of the amount exceeding Rs 250,000.

d. Where the total income exceeds Rs 350,000 the Income Tax to be charged should be Rs 65,000 plus 35 percent of the amount exceeding Rs 350,000.

e. Special tax rebate of an amount equal to 35 percent of tax payable by an assessee of 65 years of age or above as and on first day of relevant income year and earning income upto Rs 2,50,000.

Penalties:

Under Sections 139 to 144 of Income Tax Ordinance 1979, for late filing of Income Tax returns and statements penalty is levied under Section 108 of Income Tax Ordinance 1979 even if the assessee has given genuine reason. The rate of penalty of Rs 200 per day is very much excessive. In certain cases Income Tax demand stands at Rs 200 only and penalty imposed exceeds, Rs 6,000. Penalty therefore should be in proportion to tax averted.

Refunds:

Refunds if any, due to an assessee be paid immediately but not late than a month after completion of assessment or order by the appellate authorities. The payments on account of refunds which are due to the assessees, if paid later than one month, additional amount for such late payment be paid to the assessees. Refunds should be made to the assessees on its creation immediately with or without an application from the assessees.

Tax on financial transactions:

With-holding tax (Advance Tax) of .02 percent on the financial transactions is creating a lot of problems to the small businesses. It is proposed that this with-holding tax may be made applicable to only large amounts of Rs 500,000 and above.

1. Withholding Tax

The budget for 1995-96 has increased the rate of Withholding Tax from 3 percent to 5 percent on income representing payments on account of execution of construction contracts by a resident. This increase involves all the major inputs in the housing industry like cement, iron and steel, etc. The persons affected by this increase are not willing to pay it. The result will be that the incidence of the tax will have to be passed on to the consumers which will add to the cost of the housing units. It is, therefore, suggested that above tax may be withdrawn.

Wealth Tax

1. Limit of exemption

It is an old standing demands of all the trade bodies of the country that due to high rate of inflation, exemption from Wealth Tax to one self occupied house, one self occupied shop/trade premises and a car be allowed. The exemption limit from Rs 5 lakhs was increased to Rs 10 lakhs in the assessment year 1985-86 and has lost its value due to inflation. Hence it is suggested that the same be increased to Rs 30 lakh as promised.

2. valuation process:

i. For the purpose of valuation of properties, the present market value of land and structure should not the made the basis but valuation should be made on the basis of the year of its construction or purchase. It is essential to link the valuation with the rate of inflation officially announced by the government.

ii. value of Commercial Buildings owned by assessees be based upon the written down value which has been arrived at after allowance of depreciation. Similarly the value of a vehicle liable to Wealth Tax be based upon the written down value of the vehicle which has been arrived at after availing the necessary depreciation.

3. Investment in stock shares

Investment upto Rs 200,000 instead of Rs 100,000 in shares of Public Limited Companies engaged in an Industrial Undertaking should be exempted from Wealth Tax for three years in the hands of original allottees. Further, it is suggested that shares of Public Companies be declared exempted from Wealth Tax as at the time of payment of profit by means of Dividend Warrants, ZAKAT has been deducted from the payment of profits made through dividend Warrants.

4. Valuation of jewellery

value of jewellery be made on the basis of the rate of gold prevailing in the market but with a reduction of 30 percent instead of 20 percent. Further it is suggested that jewellery upto 50 tolas be declared exempted from Wealth Tax.

5. Valuation of shares and securities

Value of shares and securities quoted on stock exchange on which ZAKAT has been deducted from the profits paid, should not be included in Wealth Tax assessment. Shares and securities of Private Cos and Public Cos not enlisted on stock exchange from which Zakat has not been deducted be included in the Wealth Tax assessment on the basis of Break-up Value of Face value of such shares, which ever is lower.

6. Taxation of agricultural assets

All assets of agricultural should be brought in the orbit of Wealth Tax.

7. Filing of Wealth Tax return

Persons having less than Rs 200,000 as declared or assessed income in the last assessment year be excluded from filing of Wealth tax return. At present this facility is allowed for assessees of Income Tax having less than Rs 100,000 declared or assessed income.

8. Rate of Wealth tax

Rate of Wealth Tax payable should be reduced as follows:

i. On the first Net Wealth of Rs 100,000 Rs 0.50 percent

ii. On the next Net Wealth of Rs 100,000 Rs 1.00 percent

iii. On the next Net Wealth of Rs 100,000 Rs 1.50 percent"

iv. On the next Net Wealth of Rs 100,000 Rs 2.00 percent

v. On the balance of Net Wealth Rs 2.50 percent.

SALES TAX

Extension of GST:

We understand from meetings with Central Board of Revenue officials and through reports in the press that the government proposes to extend sales tax coverage to import and manufacturing levels, to extend sales tax at retail stage on a few commodities, to discontinue fixed tax scheme, to withdraw all standard rebate rate SROs on exports and to abolish the concept of "Cottage Industry" from 1st of July, 1996.

The success of GST scheme depends on documentation which is no where in sight. Rather certain measures of the government have discouraged documentation. For example the levy of excise duty on bank drafts and other banking instruments is discouraging business transactions through banking channels. Hardly 5 percent shops in the country keep cash registers and there is no incentive for keeping it. In the rural areas where 70 percent of the population lives there is hardly any awareness of the concept of documentation. In a country where sanctity of cheques is not guaranteed and there is no incentive for documentation, the success of GST scheme cannot be ensured.

The government should not do away with the fixed sales tax scheme under which some 27 industrial sub-sectors are paying fixed amount of sales tax based on capacity of installed machines after exhaustive negotiations between the representatives of these industries and CBR officials. Since the introduction of fixed tax scheme thousands of small industrial units have voluntarily registered themselves under the scheme, generating huge amount of Rs 3.25 billion in revenue to the government without the involvement of sales tax staff. It is therefore suggested that the fixed sales tax scheme should not be disturbed and be allowed to continue, as it is in the best interest of the country.

The government proposed to abolish the concept of cottage industry in the budget 1996-97 and fix a threshold of turnover and the manufacturers falling below the threshold will be required to pay a nominal turnover tax. This proposal is fraught with danger of fragmentation of industrial units. It is therefore suggested that instead of abolishing the concept of cottage industry it should be developed and nurtured with exemption limit of capital of Rs 20 lac.

In view of above outstanding performance of small and cottage industry of India, our government should focus on promoting growth of this sector in Pakistan and consider its horizons, problems and perspective and must allow following incentives.

i. Exemption from sales tax for cottage industry should be continued.

ii. The exemption limit for investment for cottage industry should be Rs 20 lacs, instead of Rs 2 lacs and total sales tax exemption should be allowed.

GST on exports:

1. We understand that under the pressure of IMF, the government has decided to impose "General Sales Tax on all textile products" at multiple stage in the coming budget. The very idea of taxing the export is against the export policy according to which there is no rule for taxation on export. Now when the government has decided to refund it later on, the idea of collecting the same is illogical.

CUSTOMS

WTO tariff policy:

We are the co-signatory of the WTO (World Trade Organisation) agreement. According to which we have to reduce all tariff and non-tariff trade barriers gradually by the years 2005.

We urge upon the government to remove immediately all duties and taxes on import of machinery, capital goods, technology and raw material, keeping in view the larger national economic interests.

Free trade as such will not benefit Pakistan where industrial base is narrow and technology is in its infancy. Rather free trade will jeopardize our weak industrial base. Despite of all these disadvantageous factors there exist room for Pakistan to benefit. This can be done only with the help of right planning and right implementation at right time.

In order to cope with this intricate situation, the implementation of WTO may be divided into two phases. In phase I duties, taxes and non-tariff restrictions on the import of capital goods should be waived off.

In the second phase, remaining provisions of the WTO may be brought into effect. Industrial promotion cell may be created which should help to broaden the technological base in Pakistan, to help the industrialists to qualify for ISO 9000 certificates.

MISCELLANEOUS

Engineering industry

Engineering industry has the potential to provide a strong base to develop economy and exports on sound footing. Recently in Pakistan a member of companies have brought technology for manufacturing cars such as Honda, Toyota, Suzuki & Kia Ceres. This development could further be made beneficial for the industry, if Autopart Vendor Industry is developed. It will not only help overcome chronic problem of unemployment but also broaden the base for indigenization of a number of products. The Tractor Industry has contributed a lot to the promotion of vendors. As a result, Car Industry could immediately use their manufacturing facilities. The following suggestions are made for the development of Vendor Industry in the country.

Investment

Vendors have to make investment on long term basis to install machinery, bring technical know-how and train the labour to get required results. It is not a one time process. The development is a continuous process which keeps on demanding more and more investment. The Vendors should therefore be given the incentives and facilities to bring investment and technical know-how. For this purpose it is suggested that:-

i. Import of raw materials

Import of its raw materials be liberalized. Further there should not be any restriction on any type of steel because the Pakistan Steel is not able to meet the requirements of Steel required by the Engineering, Automobiles & Autopart Industry, Industry in private sector should be allowed to import steel freely.

ii. SROs

The concessionary SROs No. 24/96 dated 09/01/96, 602(1)/83 dated 11-06-83 and others for import of raw materials should be retained in order to ensure consistency in government policies for Autoparts/Vendors. if the present concessionary SROs to Engineering Industry are withdrawn the industry will flop immediately because it has still to achieve the level it could get the benefits of economy and seals which the long established industries in developed countries are able to avail.

iii. The present conditions of SROs Nos 24/96 dated 09/01/1996, 602(1)/83 dated 11-06-83 and others of post dated cheques and guarantees should be waived. The Industry should be given raw materials on their undertaking. We do understand that certain industries have failed to meet their liabilities in this regard. For this purpose we suggest that the industries should be judged on the basis of their credibility and track record. The industry with good record should only be asked for submitting undertaking for the release of raw materials while the defaulting industry should be given the condition of post dated cheques and undertakings. It will also serve as an incentive to the defaulting units to improve their credibility to avail the incentives of simple undertaking.

iv. Bond period

There is a crisis in the availability of steel, the industry has no way out except to import steel according to its requirement when it is available. So the general principle of zero inventory usually suggested under ISO 9000 is not feasible in a country like Pakistan which depends upon imports subject to availability in international markets. While in developed countries the situation is different, domestic industry gets preference over exports.

In order to help the industry to build inventory of imported raw materials the Bond Period should be restored to one year. present period of three months in respect of steel and other imported raw materials is highly insufficient.

Certification by ISO 9000

Certification by ISO 9000 seems to be indispensable for future exports. The vendor industry needs help in this regard. Government should provide them services of some experts to guide them to adopt the procedures and the working conditions as are necessary for certification under ISO 9000.

Trade with India

The MFN treatment is being given to India while the government is being constantly requested by the business community that before taking any decision regarding trade with India details should be discussed from product to product & industry to industry. In respect of Autopart Industry this suggestion gains further strength. Since recently General Motors, USA, has signed a contract with India as OEM part supplier for its motors. It shows that the Autoparts Industry in India has now develop to an International level while in Pakistan it is just getting started. Our government should therefore be conscious of this fact while holding talks with India. It should argue that India closed its markets for over 30 years to develop its Autopart Industry. Pakistan has the right to adopt similar approach. The government should therefore make no commitment with the Indian government to improve autoparts. It will adversely affect the Local Vendor Industry.

Transit trade with Afghanistan

Government is considering a fresh Transit Trade Agreement with Afghanistan. As far as transit facility is concerned, the government has to facilitate trade of the neighbouring countries but if the facility is mis-used the government must take necessary steps. So far many measures have been adopted by the Government of Pakistan including deletion of certain items from the Trade list, but it has not helped much. Afghanistan Transit Trade alone is not affecting government revenue. Smuggling is taking place at Indo-Pakistan border as well as through Balochistan, Karachi and so on. Our country is safe have for smugglers and tax evaders. In fact we have a tax evader's culture for which government has not taken any proper initiative.

Ship agency business

Pakistan has high degree of expertise in ship agency business, providing satisfactory service to shipowners who ships will call at Pakistan Ports and saving valuable foreign exchange of the country.

Despite this laudable programme for our local ship agents, a disturbing trend is being observed for the last several years which is that the government has allowed some 100 percent foreign owned companies to invade this service industry. Even when the companies are not 100 percent foreign-owned, the foreign companies are allowed to cloak themselves in Pakistani colours by incorporating locally and utilising the services of Pakistanis as nominal directors.

In our opinion, such a liberal entry of foreign companies in a sector where local expertise, organisation, and finance is available (and which hitherto was operating satisfactory) is detrimental to the national interest.

Our attention has been drawn to reports that Government is contemplating to allow foreign shipping lines to open their own offices in Pakistan with foreign personnel being permitted to man and manage them.

The Federation of Pakistan Chambers of Commerce and Industry wishes to emphasise the seriousness of the effect of granting such permission. Almost the entire seaborne trade of Pakistan will be controlled by foreigners and their foreign representatives employed in Pakistan. The influence that responsible Pakistani Agents wield in restricting the foreign lines from indiscriminately raising freights and charges will be removed. This will additionally hamper Pakistan's Export Trade which is solely reliant on such lines at the moment.

FPCCI therefore strongly urges the government not the issue permission to foreign shipping lines to open their own offices in Pakistan and permission tentatively given so far should be withdrawn.