Proposed ST Rage Gy For Economic Growth

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PROPOSED STRATEGY

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Proposed Strategy for
Economic and
Industrial Growth
of Pakistan
A brief Assessment of current major issues facing the
national economy and the industrial sector; and their
possible short and long term solutions
Also includes Taxation Proposals for Federal Budget 2013-14
submitted to FBR by ICMA Pakistan in May 2013
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ALL RIGHTS RESERVED
No part of this publication covered by the Copyright may be reproduced, stored in a
retrieval system or transmitted in any form or by any means electronic, mechanical,
photocopying, recording or otherwise without prior written permission of the Research
& Publications Department, ICMA Pakistan, Karachi.
Institute of Cost and Management
Accountants of Pakistan, 2013
Published by:
Institute of Cost and Management Accountants of Pakistan
E-mail: [email protected]
Website: http://www.icmap.com.pk
Fax: +92-21-99243342
Published in 2013
Disclaimer
This document has been developed to serve as a comprehensive reference guide to the
prospective investors/ entrepreneurs, in general, and the Government of Pakistan, in
particular. It is neither intended to be exhaustive nor does it purport to be a legal
document. In case of any variance between what has been stated and that contained in
the relevant act, rules, regulations, policy statements etc, the latter shall prevail. While
utmost care has been taken in the preparation of this publication, it should not be relied
upon as a substitute for legal advice.
Brief Contents
Foreword .......................................................................................................................9
Preface .....................................................................................................................10
Key Recommendations ...................................................................................................13
Chapter 1: Proposed Strategies for Economic Growth ...............................................23
Chapter 2: Assessment of major Economic Issues.......................................................35
Chapter 3: Assessment of major issues of Industry,
Services and Financial Sectors ...................................................................61
Chapter 4: Assessment of Taxation Policies ..............................................................87
Annxure: ICMA Pakistans Suggestions for 10-Point Agenda of ..............................108
New Government of Pakistan Muslim League (PML)
Submitted in May, 2013
| 3
ProposedStrategy for Economic andIndustrial Growth of Pakistan
Contents
Foreword .........................................................................................................................9
Preface ......................................................................................................................10
Key Recommendations .....................................................................................................13
Chapter 1: Proposed Strategies for Economic Growth
Strategy 1: Generating Economic Growth through
Accelerating Industrialization process.................................................................23
An Integrated Industrial Policy should be announced and implemented ...........24
Government and Private Sector should engage in
mutually supportive relationship...........................................................................24
An Export- led Industrial Development strategy should be adopted ....................25
Capital goods industry should be the core of Industrial policy .............................26
Services Sector should be given priority in Industrialization .................................26
Strategy 2: Creating Employment Opportunities through
Encouraging SME Development ...........................................................................27
Pakistan should learn lessons from SMEs-Driven Success Stories ........................27
Government should extend support to boost SMEs capabilities ..........................28
Special Priority be given to SME Development ......................................................29
Incentives for Increasing Employment through SMEs ...........................................29
A comprehensive SME Policy should be developed ..............................................29
Strategy 3: Stimulating Foreign and local Investment through
Promoting Savings and Capital Formation ........................................................30
Reasons for low investment rate in Pakistan.........................................................30
Lucrative tax Incentives should be provided to lure investments ........................30
Special Status and Incentives for mega investment projects ................................31
Investment Projects on Public-Private Partnership Initiatives be encouraged .....31
Mutual and Pension Funds Industry be strengthened to mobilize
funds for investment ............................................................................................32
Corporate Debt Market should be expanded to channelize
funds to private sector .........................................................................................32
All Money Whitening Schemes be abolished to divert money
into investment schemes ......................................................................................32
Tax Exemption Limit on National Savings Certificates should be
enhanced to attract savings ..................................................................................33
Policy Reforms in Public Sector should be undertaken to
accelerate investment ...........................................................................................33
Chapter 2: Assessment of major Economic Issues
Severe Energy crisis ...............................................................................................35
Alarming Security Situation ...................................................................................37
Depleting Foreign Reserves....................................................................................39
Declining Investments ............................................................................................41
Spiraling Inflation ..................................................................................................43
Growing Fiscal Budget Deficit.................................................................................45
Expanding Foreign Debts........................................................................................48
4 |
Proposed Strategy for Economic and Industrial Growth of Pakistan
Unbridled Tax Evasion............................................................................................50
Rising Un-employment...........................................................................................52
Loss-making Public sector Enterprises ..................................................................54
Rampant Corruption ..............................................................................................56
Growing Informal Economy....................................................................................58
Chapter 3: Assessment of major issues of Industry, Services
and Financial Sector
Industry / Manufacturing Sector ..........................................................................61
Textiles Industry .....................................................................................................61
Cement Industry.....................................................................................................63
Sugar Industry ........................................................................................................64
Automobile Industry ..............................................................................................66
Leather Industry .....................................................................................................67
Pharmaceutical Industry ........................................................................................68
Fertilizer Industry ...................................................................................................70
Edible Oil Industry ..................................................................................................71
Oil and Gas Industry ...............................................................................................73
Services Sector .........................................................................................................75
Information Technology Sector .............................................................................75
Telecommunication Sector ....................................................................................77
Housing and Construction Sector...........................................................................79
Transport and Communication Sector ..................................................................81
Financial Sector ........................................................................................................83
Banking Industry.....................................................................................................83
Insurance Industry ................................................................................................85
Chapter 4: Assessment of Taxation Policies
Note: ICMA Pakistan had submitted these taxation proposals, prepared by its Research
Department, to the Member Legal/ Tax Policy FBR vide letter dated 16
th
May 2013 to
consider for inclusion in the Federal Budget 2013-2014. It is now published with this
Booklet as a record and reference of our members)
Income Tax
1. Tax on Companies ..............................................................................................87
1.1. Reduction in Corporate Tax Rate ...........................................................87
1.2. Tax Rebate for Listed Companies ..........................................................87
1.3. Levy and collection of Workers Welfare Fund (WWF) ...........................87
2. Tax on Dividends (Section 5) ..............................................................................88
2.1 Imposition of Tax based on period of holding Shares.................................88
3. Deductions not Allowed (Section 21).................................................................88
3.1. Enhancement in Threshold of payment through Cash ............................88
4. Contribution to an Approved Pension Fund (Section 63) ..................................88
4.1. Enhancement in amount of Annual Contribution made by Employer ....88
Contents | 5
5. Tax Credit for Enlistment (Section 65C) .............................................................88
5.1. Increase in Tax Credit Rate for Enlistment ...............................................88
6. Minimum Tax on Turnover (Section 113)
6.1. Reduction in Minimum Tax rate to 0.2% on Total Turnover
of Taxpayer...............................................................................................89
6.2. Exemption of Refineries and OMCs from Turnover Tax ..........................89
7. Advance Tax paid by Taxpayers (Section 147) ...................................................89
7.1. Reversal of Advance Tax Payment Dates to 15
th
of next month
of each quarter.........................................................................................89
8. Withholding Tax on Imports (Section 148) ........................................................90
8.1. Re-instatement of Final Discharge of Liability on Imported Edible Oil ....90
9. Tax on Salaried Individuals (Section 149)...........................................................90
9.1. Rectification of anomalies in Tax Slabs for Salaried Persons ...................90
9.2. Tax Credit for Salaried Persons ..............................................................90
9.3. Extension in Date of Filing Tax Returns .................................................91
9.4. Extension in Date of Filing Annual Statements under
Section 149 and 165 .............................................................................91
9.5. Allowing Credit to Salaried Person under Section 62 and 63 ..................91
9.6. Adjustment of Refund to Salaried Person ...............................................91
10. Withholding Tax on Payment for Goods, Services & Contracts (Section 153) ..91
10.1. Adjustment of tax collected against final tax liability ..............................91
11. Withholding Tax on Payment to Traders and Distributors (Section 153A) .......92
11.1. Withdrawal of Withholding Tax Collection under Section 153A .............92
12. Withholding Tax on Petroleum Products (Section 156A) ..................................92
12.1. Sale of Petroleum Products by OMCs to Petrol Pumps in AJK ................92
12.2. Interpretation of Discount allowed to customers ...................................92
13. Withholding Tax Exemption (Section 159).........................................................93
13.1. Doing Away with Requirement of Withholding Tax
Exemption Certificates .............................................................................93
14. Payment of Tax Collected or Deducted (Section 160) ......................................93
14.1. Extension in period for deposit of tax collection amount
by Withholding Agents ............................................................................93
15. Statements (Section 165)...................................................................................93
15.1. Filing of Monthly Statements of Withholding of Tax ...............................93
16. Refunds (Section 170) ........................................................................................94
16.1. Reducing period allowed to Commissioner
from 60 days to 15 days for Refund ........................................................94
17. Notice to obtain Information or Evidence (Section 176) ...................................94
17.1. Notices be issued after verification of Data available at PRAL ................94
18. Offences and Penalties (Section 182).................................................................94
18.1. Insertion of new provision of penalty on offences by Tax Officers ..........94
19. Appointment of Income Tax Authorities (Section 205) ....................................95
19.1. Disclosure of Imposition of Withholding tax on Sale of Air Tickets..........95
20. Cash Withdrawal from a Bank (Section 231A) ...................................................95
20.1. No advance tax deduction from cash withdrawal by NTN holder ...........95
6 | Contents
21. Advance Tax on Brokerage and Commission (Section 233)...............................95
21.1. Disclosure of Imposition of Withholding tax on Sale of Air Tickets..........95
21.2. Tax Credit for Withholding Agents on Performing State Duty ................95
22. Telephone Users (Section 236) ...........................................................................96
22.1. Imposition of tax on Mobile Connection .................................................96
23. Second Schedule Part II ................................................................................96
23.1. Withdrawal of Tax Reduction on Import of Gold,
Silver and Mobile Sets .............................................................................96
23.2. Tax Incentive for handicapped Tax payer ................................................96
24. Sixth Schedule Part 1 ......................................................................................96
24.1. Enhancement in amount of Annual Contribution made by Employer .....96
Sales Tax
1. Definitions (Section 2) ........................................................................................97
1.1 Enhancing the exemption limit for Cottage Industry ................................97
2. Change in the Rate of Tax (Section 5).................................................................97
2.1 Reduction in Sales Tax Rate .....................................................................97
3. Determination of Tax Liability (Section 7)..........................................................97
3.1 Allowing Input within one year from Invoice Date
for Refineries and OMCs ..........................................................................97
4. Adjustable Input Tax (Section 8B) ......................................................................98
4.1 Allowing 100% Input Tax Adjustment ......................................................98
5. Debit and Credit Note (Section 9).......................................................................98
5.1 Relaxation or Extension in Time Restriction
for issuing Debit/Credit Notes..................................................................98
6. Refund of Input Tax (Section 10) Including e-refund claims...........................98
6.1 Integration of STARR System with FBR e-Portal
for speedy Sales Tax Refunds ..................................................................98
6.2 Streamlining of Flawed Automated STARR System of
Sales Tax Refund Claims ..........................................................................98
6.3 Allowing Listed Companies to avail PRAL system of
claiming Refunds ......................................................................................99
6.4 Allowing Offsetting Income Tax Liabilities / Refunds
against Sales Tax ......................................................................................99
6.5 Allowing Option of Duplicate Invoice in Sales Tax Act .............................99
7. Assessment of Tax (Section 11) ..........................................................................99
7.1 Rectification of mistake in Assessment Orders ........................................99
8. Sales Tax Exemption (Section 13).....................................................................100
8.1 Exemption to OMCs from Payment of Sales Tax
on import of POL products ....................................................................100
8.2 Exemption of the Vegetable Ghee/Cooking Oil from Sales Tax ............100
9. Sales Tax Return (Section 26) ...........................................................................100
9.1 Declaration of Exports in Sales Tax Return.............................................100
9.2 Amendments in Sales Tax Return format through E-Portal ...................100
9.3 Allowing Manual Feeding of Computerized
Payment Receipts (CPR) for E&Ps...........................................................101
Contents | 7
10. Power to Call for Information (Section 38A)....................................................101
10.1 Withdrawal of discretionary powers of Commissioner
for seeking information .........................................................................101
11. Refund to be Claimed within One Year (Section 66) .......................................101
11. 1 Extension in period of claiming Input Tax.................................................101
12. Delayed Refund (Section 67) ............................................................................101
12.1 Allowing ST Department to release amount at time of refund claim ....101
13. Certain Transactions not admissible (Section 73)............................................102
13.1 Extension in limit of payment ..............................................................102
14. New Areas for Generating Tax Revenue ..........................................................102
14.1 Tax on revenues of Ship breakers .......................................................102
Customs Duty
1. Duty and Tax Remission for Export (DTRE) [Chapter XII (7)
Custom Rules 2001........................................................................................103
1.1 Simplification of DTRE Approval Process ............................................103
1.2 Provision of DTRE Facility to SME Garment Sector ...............................103
1.3 Doing away with Requirement of Bank Guarantee/
Bond for DTRE Approval ........................................................................103
1.4 Extension in DTRE utilization Period to two years .................................104
1.5 Application of DTRE Scheme for Vegetable Ghee/
Cooking Oil Exporter .............................................................................104
2. General Power to Exempt from Custom Duties
[Section 19 Customs Act 1969] ......................................................................104
2.1 Duty Exemption on Import of Palm Stearin ...........................................104
3. Reduction in Custom Duty................................................................................104
3.1 Reduction in Custom Duty on Imported edible oil .................................104
3.2 Reduction in Custom Duty on Imported Tinplate ..................................105
4. Warehousing Period [Rule 350, Chapter XV Customs Rules 2001] ..............105
4.1 Enhancement in Warehousing Period for Ghee and Oil ........................105
Federal Excise
1. Levy, Collection and Payment of Duty [Section 3] ........................................106
1.1 Basis of Charging and Recovery of Federal Excise Duty ........................106
1.2 FED on Franchise Services (Tariff Heading 9812.9410) .........................106
1.3 Rate of provincial sales tax on Franchise Services..................................106
2. Deposit, pending appeal, of duty demanded or penalty levied [Section 37] .106
2.1 Refund of FED on Export for Tax Payers ................................................106
3. Refund of Duty [Section 44]...........................................................................107
3.1 Refund of FED on Export for Tax Payers ................................................107
Annxure: ICMA Pakistans Suggestions for 10-Point Agenda of
New Government of Pakistan Muslim League (PML)
Submitted in May, 2013 ...................................................................................108
8 | Contents
Foreword
The industrial growth and economic prosperity of any country are intertwined with its
political stability and persuasion of prudent economic policies by the government. Today,
Pakistan is confronted with enormous economic challenges, marked by sluggish economic
growth, energy crisis, security concerns, rising public debts and external liabilities,
widening fiscal deficits, soaring inflation and unemployment and so on.
Now that a new government of Muslim League, spearheaded by the experienced Mian
Muhammad Nawaz Sharif sahib, has taken over the reins of this country, it is anticipated
that these economic challenges will be dealt with seriously and prudently. The nation
expects that the new government would pursue and implement an effective economic
revival plan to make our economy move forward with appropriate strategies towards the
path of rapid and sustained economic growth. Keeping in view of the magnitude and
intensity of economy-related problems, this seems to be formidable task, however, the
concern and avidness shown by the Prime Minister signifies his strong resolve and
commitment to steer the country out of the economic crisis.
The two most important and crucial challenges facing our economy at present are the
acute energy crisis and deteriorating security situation. These two challenges need
immediate attention of the new government as without improving them, it would not be
possible to achieve industrial productivity and attract investments, both local and
international. The power and gas shortages have crippled our industries and are having a
negative effect on the national economy and GDP growth rates, besides leading to
massive unemployment. After tackling these two challenges, the other priority areas to be
focused on by the government are to root out the menace of corruption, especially in the
government machinery and public offices.
From the perspective of the common people, it is imperative that the government should
put in place an effective national price-control mechanismto control and check sustained
inflationary pressures and undue profitability in the market by determining the actual cost
of every product sold and discouraging hoarding. The ICMA Pakistan would be pleased to
extend its professional services in cost determination and audit.
In the end, I would like to express my deepest appreciation to Mr. Shahzad Ahmed Awan,
Chairman and members of the ICMA Pakistans Research and Publications Committee for
publishing this useful booklet titled Proposed Strategy for Economic and Industrial
Growth of Pakistan. I also acknowledge the hard work put in by the Research &
Publications Department in developing this comprehensive booklet. I hope that the
relevant government organizations would give due considerations to these
recommendations.
Zia ul Mustafa, FCMA
President and Chief Executive
| 9
Preface
It gives me immense pleasure to launch this brief, yet comprehensive, booklet titled
Proposed Strategy for Economic and Industrial Growth of Pakistan developed by the
Research and Publications Directorate of ICMA Pakistan. The recommendations cover the
economic, industrial and taxation policies and intended to provide a useful reference to
the policy makers and trade and industry in assessing the current economic scenario.
The booklet has been classified into four Chapters.
Chapter 1 is the most important part of this booklet in which the Research Department of
ICMA Pakistan has proposed a three-pronged strategy for achieving sustained economic
growth. These strategies are as under:
Strategy 1: Generating Economic Growth through accelerating
Industrialization process
It is proposed that the government should immediately announce an Integrated
Industrial Policy and set up a Permanent Task Force to implement the strategies to
speed up industrialization in the country. The government and private sector should
engage in mutually supportive relationship so as to work collectively for
industrialization leading to rapid economic growth. The capital goods industry and
the services sector should be given priority in proposed policy. Further, an export- led
Industrial development strategy should be adopted.
Strategy 2: Creating Employment Opportunities through encouraging
SME Development
It is suggested that Pakistan should learn lessons fromSMEs-Driven Success Stories of
Japan, Taiwan, China and Singapore. Further, the government should extend support
to boost SMEs capabilities and give special priority to SME development. Moreover,
government should introduce measures to encourage SMEs to recruit newemployees
to resolve unemployment issue. A comprehensive SME Policy should be developed
and implemented.
Strategy 3: Stimulating Investment through promoting Savings and
Capital Formation
It is proposed that the government should provide maximumtax and other incentives
to promote domestic investment and attract foreign investors to Pakistan, especially
in mega projects. Further, investment projects on Public-Private Partnership
Initiatives should be encouraged. Further, the mutual fund and pension funds
industry be strengthened to mobilize funds for investment, and the corporate debt
market be expanded to channelize funds to private sector. It is recommended that all
money whitening schemes be abolished to divert money into investment schemes and
policy reforms be undertaken in public sector to accelerate investment.
10 |
Chapter 2 provides an assessment of the current major issues facing the national economy
which includes (1) severe energy crisis, (2) alarming Security situation, (3) depleting
foreign reserves, (4) declining investments, (5) spiraling inflation, (6) growing fiscal Budget
Deficit, (7) expanding foreign debts, (8) unbridled tax evasion, (9) rising unemployment,
(10) loss-making Public sector Enterprises (PSEs), (11) rampant corruption, and (12)
growing informal economy. The impact of each economic issue has been analyzed, in
addition to proposing some short and long-terms solutions for consideration by the
government to tackle these economic issues.
Chapter 3 provides detailed assessments of the important manufacturing industries as
well as services and financial sectors. The manufacturing industry includes (1) Textiles, (2)
Cement, (3) Sugar, (4) Automobile, (5) Leather, (6) Pharmaceuticals, (7) Fertilizer, (8)
Edible Oil, and (9) Oil and Gas. The Services sector covers (10) Information Technology,
(11) Telecommunication, (12) Housing & Construction, (13) Transport & Communication.
Banking and Insurance industries have been analyzed in the Financial Sector.
Chapter 4 comprises the taxations proposals for Federal Budget 2013-14, developed by
the Research Department of ICMAPakistan and already forwarded to the Federal Board of
Revenue (FBR), Government of Pakistan. The tax proposals cover Income Tax, Sales Tax,
Federal Excise and Customs Duty. Special efforts have been made by the Research
Department to mention the specific Section and Clause of the relevant Ordinance, Act
and Rules.
This is for the first time that the Institute has ventured to provide its professional input on
macro-economic issues and it is hoped that the government and the private sector would
appreciate this role of ICMA Pakistan and provide us with their valuable views and
suggestions. We intend to continue our advisory role to the government and private
sector on matters of economic importance and for developing economic policy
framework.
In the end, I must acknowledge the members of Research & Publications Committee for
their value cooperation and support. It would be unwise if I do not mention the intellectual
input and untiring efforts of the Research and Publications Department, comprising Ms.
Ghazala Yunus, Director, and Mr. Shahid Anwar, Deputy Director in conceiving the idea of
this book and collecting, analyzing and writing this splendid reference document.
Shahzad Ahmed Awan, FCMA
Chairman
Research & Publications Committee
Preface | 11
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12 |
Key Recommendations
Economic Growth Strategy Proposed by ICMA Pakistan
Strategy 1: Generating Economic Growththrough Accelerating Industrializationprocess
An Integrated Industrial Policy should be announced and implemented
Government and Private Sector should engage in mutually supportive relationship
An Export- led Industrial Development strategy should be adopted
Capital goods industry should be the core of Industrial policy
Services Sector should be given priority in Industrialization
Strategy 2: Creating Employment Opportunities through Encouraging SME Development
Pakistan should learn lessons from SMEs-Driven Success Stories
Government should extend support to boost SMEs capabilities
Special Priority be given to SME Development
Incentives for Increasing Employment through SMEs
A comprehensive SME Policy should be developed
Strategy 3: Stimulating Investment through Promoting Savings and Capital Formation
Lucrative tax Incentives should be provided to lure investments
Special Status and Incentives for mega investment projects
Investment Projects on Public-Private Partnership Initiatives be encouraged
Mutual and Pension Funds Industry be strengthened to mobilize funds for
investment
Corporate Debt Market should be expanded to channelize funds to private sector
All Money Whitening Schemes be abolished to divert money into investment
schemes
Tax Exemption Limit on National Savings Certificates should be enhanced to attract
savings
Policy Reforms in Public Sector should be undertaken to accelerate investment
Key Recommentations | 13
Tackling the Major Economic Issues
Severe Energy Crisis
Forming a special Task Force to take immediate crack down on electricity thefts' and
recover dues.
Importing cheaper clean coal, instead of expensive oil and gas, for use as fuel in
power generation.
Allowing business community to set up own solar, wind power projects without
NEPRA permission.
Generating electricity from waste materials of crops e.g. sugarcane bagasse, cotton
waste, rice husk etc
Curtailing reliance on rental power projects and apportioning funds in budget for
hydel power projects.
Building small dams on Public-Private Partnership (PPP) basis to generate hydel
power.
Exploring alternate energy resources (solar, wind, tidal, bio-mass, biodiesel and
waste energy).
Providing loans to public for installing small solar panels in their homes to generate
energy.
Providing electricity at cheaper rates to efficient industries to improve performance
and cost efficiency.
Merging Petroleum and Power Ministries into an Integrated Energy Board.
Energy conservation initiatives by Government leading by example.
Alarming Security Situation
Taking drastic action against crimes and starting de-weaponisation campaign on war-
footing basis.
Revamping law enforcement machinery to deal effectively with the terrorist and
criminal elements.
Giving more powers to CPLC to take actions against money extortions frombusiness
areas.
Banning Strike calls given by political and religious parties that leads to billions of
Rupees loss to economy.
Establishing an Independent Police Complaints Commission to investigate
complaints against police.
Developing national consensus on measures to be taken to tackle violence, crime,
arms and mafias.
14 | Key Recommentations
Depleting Foreign Reserves
Undertaking structural reforms to build stable foreign exchange reserves.
Restricting government borrowing from the State Bank of Pakistan to stabilize forex
reserves.
Seeking funding from friendly countries, like China and Saudi Arabia, instead of IMF
and World Bank.
Engaging economic experts to develop a comprehensive foreign exchange savings
policy.
Controlling oil consumption in the country to save foreign exchange spent on
importing oil.
Restricting imports of luxury items to stabilize forex reserves.
Offering lucrative incentives to exporters to enhance exports that would bring more
foreign exchange.
Declining Investments
Removing major hurdles to FDI inflows such as energy crisis and unstable security
situation.
Adopting long-term consistent economic policies to woo foreign investors
Improving economic governance and coordination in policies of different
government agencies
Taking existing investors in Pakistan into confidence to overcome their business
bottlenecks
Providing tax and other incentives to domestic investors to expand their business.
Assessing and removing regulatory impediments that are depriving foreign investors
to come to Pakistan.
Spiraling Inflation
Waiving all taxes and levies on essential commodities (flour, sugar, rice, ghee, oil,
vegetables and dairy).
Cracking down on hoarders of food items that lead to artificial inflation.
Forming nation-wide network of Consumer Societies to assert pressure on the
Retailers Associations.
Encouraging domestic production instead of relying on imports.
Giving a role to Cost Accountants to carry out cost-profit analyses of goods to
discourage profiteering.
Seeking services of Cost Accountants to evaluate production processes and effective
monitoring.
Improving supply chain of high value crops to control prices of essential commodities
in the market.
Restricting government borrowing to curtail excessive monetary growth leading to
inflationary pressure.
Developing a prudent monetary policy to ease governments funding requirement
and control inflation.
Strictly controlling money supply to bring down inflation. SBP may keep inflation
close to 5 percent.
Growing Fiscal Deficit
Promoting economic growth to get more tax revenues, without raising taxes.
Expanding tax net and taking strict action against tax evaders.
Reducing subsidies given to power sector and other Public Sector Enterprises (PSEs).
Doing away with all tax exemptions, especially to agriculture and services sector.
Curtailing public spending as well as domestic borrowing to reduce budget deficit.
Maintaining fiscal discipline and bringing consistency in monetary and fiscal policies.
Minimizing financial and fiscal constraints through reforms for generating more
revenue.
Keeping equilibrium in exports and imports to overcome fiscal deficit.
Expanding Foreign Debts
Using threat of default to persuade IMF, World Bank and other international donors
to write off debt and re-negotiate terms of remaining debt on a lower interest rate
and for a longer duration.
Constituting an independent Debt Audit Commission to undertake a comprehensive
debt audit.
Formulating a national strategy to increase industrial productivity and self-reliance
scheme.
Introducing progressive taxes on income and wealth to make rich class pay fair share
of their taxes.
Making strong fiscal adjustments, instead of further borrowing fromforeign lenders.
Taking measures to stabilize macro-imbalances and mobile domestic resources.
Keeping equilibrium in exports and imports to minimize the need for external
borrowing.
Ensuring proper monitoring and utilization of external borrowings for development
projects.
Unbridles Tax Evasion
Eliminating unholy alliance between tax evaders and corrupt tax collectors.
Introducing Tax Payer Cards to discourage tax evasion and bring more people into
the tax net.
Doing away with all amnesty schemes.
Expanding tax network to agriculture, textile, real Estate, retail and service sectors.
Simplifying taxation laws and re-orienting tax machinery to develop capability,
capacity and credibility.
Strengthening vigilance to identify businesses units running in losses but their
owners living comfortably.
Providing honest tax payers with level playing field.
Launching a national movement by FBR with the slogan Let us all pay income tax.
Detecting companies registered with SECP but not registered with FBR to bring them
into tax net.
Signing deal with Swiss government to recover lost revenue and stolen funds - badly
needed at home.
Rising Unemployment
Imposing limit on maximum number of per capita working hours to force industries
to hire more workers.
Introducing self-employment schemes in rural areas to discourage influx of rural
people to urban cities.
Setting up more technical and vocational training institute to enhance skills of
unemployed youth.
Establishing employment offices to provide information to jobless youth on
available opportunities.
Setting up of small industries in rural areas with subsidies and credit facilitates to
reduce un-employment.
Loss Making PSEs
Inducting independent board of directors in PSEs to transform them into profitable
units. Private sector should be given major representation on the board of these
PSEs.
Appointing private sector and professionals as heads of PSEs, especially in PIA, PSM,
PR, TCP, PEPC etc.
Non-interference by government in PSEs affairs in shape of political appointments.
Identifying PSEs for privatization in shortest time frame. Other PSEs be restructured.
Forming independent holding company to replace different administrative
ministries in controlling SOEs.
Appointing Auditor General of Pakistan as auditor for all the PSEs.
Rampant Corruption
Undertaking a nation-wide anti-corruption reform in public and civil services.
Giving NAB more powers and independency to check and take action against
corruption cases.
Associating business community and civil society in all anti-corruption reforms and
initiatives.
Passing a code of conduct Act for public servants and parliamentarians.
Conducting regular audit of personal bank accounts of politicians and bureaucrats.
Setting up independent Anti-Corruption Ombudsmen to deal with public
complaints against government.
Ensuring merit and professional standards in recruitment process of law
enforcement agencies.
Growing Informal Economy
Providing adequate financial services to SMEs to encourage them to register as
corporate entities.
Simplifying regulatory framework and registration process to attract informal and
unlisted businesses.
Rationalizing taxation structure to speed up corporatization.
Reducing gradually concept of presumptive taxation and taxing only real income.
Withdrawing generous unjustified tax exemptions given to privileged and protected
segments of society.
Reducing corporate tax to 25% or else introducing uniform tax rate of 30% for all
businesses.
Making it mandatory for profit-making listed companies to pay dividends to their
shareholders.
Launching Pay your Taxes campaign by local Chambers of Commerce to promote
corporate sector.
Resolving Problems faced by Industry, Services and Financial Sectors
Textile Industry
The government should take serious measures for the survival of and investments in
the textile industry.
The textile industry may be given preferential treatment by providing un-interrupted
electricity and gas supply.
The SME textile industry be allowed to avail the DTRE facility
Cement Industry
Zero-rated customduty on import of petroleumcoke for use as coal substitute which
will reduce input cost.
The government must seek trade concessions for cement industry from Gulf and
Middle Eastern countries.
Trade Development Authority of Pakistan may be advised to include cement in their
exhibitors profile.
Sugar Industry
Indian government should be asked to facilitate sugar exports from Pakistan on
bilateral basis.
Special incentives should be provided to those sugar mills which co-generate energy
from Bagasse during off-season. This would create additional revenue for sugar mills
and help us in meeting electricity shortfall.
The role of middlemen should be eliminated or reduced to control sugar hoarding
and artificial price hike.
Automobile Industry
A policy be developed for auto dealership/supply chain structure as they have no
significant role in industry.
Foreign auto-assemblers should be encouraged to transfer technology in a given time
frame for localization.
Auto assembles be made bound to offer safety measures to ensure standard safety
and quality standards.
Leather Industry
Acomplete ban should be imposed on export of wet blue leather to avoid its shortage
for local industry.
Duty free import of essential accessories may be allowed for value addition in leather
product.
A Leather Development Plan may be developed, as being done in India.
Pharmaceutical Industry
Pharma companies should produce atleast one essential raw material to reduce its
import dependence.
Pharma companies may be allowed price adjustments, subject to mandatory cost
audit of each product.
Drug Regulatory Authority (DRA) should be revamped to transform it into a dynamic
and professional body.
Fertilizer industry
ICMA Pakistan be included on Committee formed by ECC to develop modalities for
gas supply to fertilizer sector.
SNGPL be directed to resume full and immediate gas to deprived SNGPL based
fertilizer plants.
Gas supply should be resumed to all plants on permanent basis so that they remain
viable for longer run.
Strict quality control and monitoring be made to prevent import of sub-standard
fertilizer products.
Edible oil Industry
Olive oil cultivation should be undertaken in Potohar region and Balochistan jointly
with private sector.
Import duty on crude palm oil be abolished as done by India and Bangladesh to
promote local refining industry.
Incentives should be given for proper farming, production, processing and marketing
of oil seeds.
Oil and Gas Industry
Incentives should be given to petroleum companies to explore, develop and exploit
petroleum resources.
Abundant untapped reserves of oil and gas available in Sindh, Balochistan and other
parts should be explored.
Training should be imparted to geo-scientists and engineers in latest exploration and
production skills.
The government should take urgent measures to narrow down increasing gap
between supply and demand.
Information Technology Sector
IT businesses should be exempted from corporate income tax till 2020.
Tax relief be granted to business units on amounts spent on software applications
and related equipments.
Threshold level for floating IT companies on stock market should be lowered to
encourage listings.
All government departments should be directed to procure software only through
local IT companies.
Telecommunication Sector
A 10-years Integrated and focused ICT policy be announced, rather than segmented
policy frameworks.
No more licenses be granted/ allowed until maturity of present telecom sector.
Special subsidy/incentives may be given to telecom sector for providing services in
highloss war zone.
All regulatory bodies looking after telecom sector should be converged for one-
window facility.
Housing and Construction Sector
Banks and DFIs should extend credit for BMR of machinery used in housing and
construction industry.
State Bank should direct banks to allocate a certain percentage of the credit to
housing sector.
Zero-rated duty be allowed on import of tower cranes, batching plants, elevators,
solar panels etc
Annual HBFCL loans disbursement should be enhanced to Rs. 20 Billion to overcome
housing shortage.
Transport and Communication Sector
Private sector should be involved to improve air, sea, rail and road logistics and
supply chain system.
Indus River Systemshould be developed as a way for transporting goods fromKarachi
to rest of country
Restriction imposed by SSGC to construct high rise buildings should be removed
immediately.
HBFC should invest Rs. 10 billion annually in apartments below 1500 sq. ft. and 120
sq. yards bungalows.
Banking Industry
SBP should advise banks to introduce fee-based products and tap SMEs and
undocumented economy.
Banks should provide soft-term loans to SMEs to encourage expansion of small
business sector.
Banks should play role for economic growth and not as a source of financing
government activities.
A higher tax levy should be imposed on income derived by banks from investment in
T-bills.
Insurance Industry
More licenses be issued to newnon-life insurance firms to expand health and general
insurance business.
Insurance Institute and government should work jointly to improve insurance
penetration and density.
Conventional insurance companies should not be granted permission to operate
Takaful Operations.
Generate Economic
Growth
Stimulate Foreign and
Domestic Investments
Create Employment
Opportunities
Accelerate
Industrialization Process
Encourage SME
Development
Promote Savings and
Capital formation
Proposed Strategies Priority Objectives
Chapter 1 Proposed Strategies for Economic Growth
ICMA Pakistan feels that the government should focus on sustained, high, equitable
and inclusive economic growth model so that its benefits are reaped by the poor and less
privileged segments of society and they feel a sense of participation in the accruing
economic benefits. To this effect, ICMA Pakistan proposes that the government should
develop its economic growth strategy based on following priority objectives and
proposed strategies:
Strategy 1:
Generating Economic Growth through accelerating Industrialization Process
Professor Dani Rodrik, PhD, a world renowned economist, who is considered an expert in
international economics, economic development and political economy, maintains that:
All of the successful economies of the last six decades owe their growth to rapid
industrialization
The above observation by Professor Dani Rodrik is quite correct as during the period 1880s
to 1970s, Japan achieved sustained per capita growth through industrialization. Similarly,
almost all the Far Eastern countries like China, Malaysia, Singapore, Vietnam, Thailand,
Mauritius and the Philippines achieved export-oriented industrial development by
encouraging Foreign Direct Investment (FDI) into their economies during the period 1970s
to 1990s. Moreover, USA, Canada, Australia and the western European countries
succeeded in attaining high levels of per capita income by shifting from agrarian-based
production to manufacturing and services sectors activities.
Pakistan should learn from the experience of the above countries and follow economic
strategy of investment-led industrial growth. This should be achieved by creating
conducive environment to attract domestic and foreign private investments; diversifying
export base, and using natural resources to drive industrialization.
| 23
ICMA Pakistan presents following proposals to speed up industrialization process in the
country.
An Integrated Industrial Policy should be announced and implemented
in true spirit
The foremost priority of government should be to formulate and implement an
Integrated Industrial Policy to speed up industrialization in Pakistan. This is sine qua
non for us, if we need to overcome our problems associated with lack of
industrialization such as unemployment, poverty, low per capita income etc
ICMA Pakistans research reveals that a policy draft of an integrated industrial
policy was formulated and finalized way back in 1990s, but it remained in cold
storage. Instead of an integrated policy, the successive government followed the
practice of announcing sector-specific policies such as Textile Vision, Chemical Vision,
Sugar policy, Fertilizer policy etc. which proved not so successful.
In 2010, a national industrial policy was developed after consultations with all
stakeholders in government and private sector, which aimed at strengthening and
expanding the manufacturing base to achieve sustained economic growth. However,
this industrial policy is also yet to be finalized and implemented.
ICMA Pakistan strongly recommends that the government should immediately
announce an Integrated Industrial Policy and set up a Permanent Task Force to
implement the policies and strategies of the integrated policy to speed up
industrialization in the country.
Government and Private Sector should engage in mutually supportive
relationship
The role of government has always been quite significant and central to the
industrialization process in any country. ICMA Pakistan thinks that government and
private sector should engage into a mutually supportive relationship so as to work
collectively for industrialization leading to rapid economic growth.
The private sector should play a leading role in all economic activities whereas the
governments primary role should be to provide a regulatory and supportive role to
facilitate business and industry, and remove impediments to industrialization. Some
of the roles that the government could play in this regard are:
1. Providing physical and social infrastructure (transport, communication,
power and energy)
2. Establishing vocational training centers to impart modern labour skills
3. Advancing technology and industry- research
4. Intervening through regulations and fiscal incentives to guide
private investment in industry
5. Providing affordable social protection and safety net to the poor
24 | Chapter 1: Proposed Strategies for Economic Growth
The government should form a Joint Government- Business Forum (JGBF),
comprising Ministers of Finance, Commerce, Industry, and Investment (from
Government side) and Presidents/ Chairmen of Chambers of Commerce and industry
Associations (from private sector) that meet regularly on quarterly basis to resolve
problems faced by trade and industry as well as to seek their proposals in framing
economic policies. A permanent secretariat of this forum may also be set up.
A renowned business personality of each province may be nominated as Special
Advisor to the Chief Minister for advising him about the business concerns and to
identify areas for future business growth.
An Export- led Industrial Development strategy should be adopted
ICMA Pakistan is of the view that an export-led industrial development would give
impetus to the economic growth of the country. The proposed export strategy of
government should be to enhance Pakistans share in the global imports; expand the
export product-mix and diversify exports to new untapped markets.
Pakistan should take advantage of regional trade opportunities, including trade with
India. However, this should not be at the cost of the national integrity and interests of
the domestic industry. At the same time, the government should improve the quality
of Pakistans human resource to achieve competitiveness.
Pakistan should focus on UAE, China, Afghanistan, India, and Iran for trade. The
recent trading pattern shows that Pakistan trade (exports and imports) with this
group of five countries have enhanced gradually.
The Central Asian Republics, including Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan, and Uzbekistan, with a combined population of 61 million, also offer a
wide market for Pakistans exports.
The government should give priority focus on promoting exports of SME sector
whose share in Pakistans exports has increased steadily in recent years. The SME
units are operating in industrial clusters around Karachi, Lahore,
SialkotGujaratGujranwala triangle in central Punjab. The government should
provide special incentives to those SMEs which are already exporting and have
potential for exports such as sports goods, surgical instruments, electric fans,
automobile parts, garments, etc.
The government should also encourage exports of high-value nontraditional
agricultural exports such as fruits and vegetables, halal meat and meat preparations,
which have much potential for growth.
There exist large potential for expanding knowledge-based exports from Pakistan,
including information and communication technology, as well as entertainment and
health services. Pakistan has a better edge over India in some IT areas, such as
product development.
Chapter 1: ProposedStrategies for Economic Growth | 25
Capital goods industry should be the core of Industrial policy
Capital goods industry is a strategically important industry and a pre-requisite for
industrial advancement. Almost all the developed and industrialized countries have
given priority to the capital goods industry.
ICMA Pakistan is of the view that the heavy engineering and capital goods industry,
which offers immense growth potential, should be the central focus of the Integrated
Industrial policy that is to be announced by the government. This is also important as
in current global scenario of rising cost of doing business; almost all developed
economies are relocating their units and technologies to low cost countries.
The development and expansion of capital goods industry would help the country in
creating employment, especially for educated professionals; promoting
establishment of ancillary industries; enhancing exports and in making higher value
addition in manufacturing sector.
Pakistan has to spend huge foreign exchange for importing plants, machinery,
components and spares. The development of capital goods industry will help the
country to save this valuable foreign exchange.
The capital goods industry can also play a catalytic role in achieving import
substitution in many areas. For this purpose, the government should facilitate in
providing the requisite cutting-edge technology through technical collaboration and
foreign technology transfer agreements.
The capital goods industry in which the government should encourage investments is
machine tools, boilers, bulldozers, foundries, etc.
Services Sector should be given priority in Industrialization
The services sector has shown a satisfactory growth over the last several years and
this sector offers a much potential sector that could help the country in achieving
rapid economic growth.
ICMA Pakistan suggests that the government should remove impediments to the
growth of this sector and provide a special package of incentives for policy reform in
this sector, which can prove to be a key sector for growth, employment and poverty
alleviation.
The government support to services sector would open up new employment
opportunities, especially for our youth leading to poverty alleviation. An analysis
indicates that services sector has created more employment opportunities, as
compared to the commodity-producing sector, during the recent past.
Information technology is one of the key drivers in the services sector. The
government should consider extending support to IT sector in providing and
improving advance technical skills to workers to cope up with global requirements.
Similarly, government support is required to improve infrastructure, HR
development and technology upgradation in financial, trade, transport and
communication services.
Strategy 2:
Creating Employment Opportunities through encouraging SME Development
Mr. Jean-Philippe Courtois, President of Microsoft International, in one of the
conferences held in Europe said:
About 85 per cent of net new jobs in the EU between 2002 and 2010 were created by
SMEs.
The above statement is an ample proof of utmost significance of SME development for the
economic growth and prosperity of any nation, especially for a developing country like
Pakistan. Our policies should, therefore, focus on the development and expansion of small
and medium business (SMEs) so as to create more and more opportunities for new
employment that could eventually lead to poverty reduction and sustainable economic
growth.
ICMA Pakistan feels that SMEs can be instrumental in poverty reduction and job creation
as they make a significant contribution to the Pakistani economy in terms of 30% value-
addition and 80% employment in the industrial sector. The SMEs in Pakistan, however,
experience financial and other constraints which need to be removed. The government
should play a proactive role in providing an enabling environment for SME growth.
ICMA Pakistan presents following proposals to create employment opportunities in the
country.
Pakistan should learn lessons from SMEs-Driven Success Stories of
Japan, Taiwan and China
Pakistan can learn lessons from experiences of SMEs-driven success stories of Japan,
Taiwan, China and Singapore.
In Japan, over 99% of all business is SMEs, employing huge local work force and
accounting for major proportion of economic output. Though most of these SMEs are
not giants, but they formthe backbone of manufacturing, services and export supply
chain industry of Japan.
Taiwan is a small island but have around 98%SMEs, contributing 85%to the Taiwans
GDP and engaging over 80% of non-agricultural work force. Today, Taiwan is the 6
th
largest per capita earner in Asia and has 5
th
largest foreign exchange reserves of the
world. The Taiwanese government had a continued support to SMEs.
In China there is around 25 million registered small businesses, according to Chinas
own estimates for 2012, which contribute 75% share in GDP and engaging 85% non-
agricultural labour force. The Chinese government promoted research and
innovation in the SME sector.
In Singapore, SMEs constitutes an important pillar of national economy, contributing
over 50% of the economic output and around 70% of employment.
Pakistans SME Sector
During the period 1950s to 1980s, the Pakistan's economic policy remained focused on
large enterprise. Since late 1990s, the economic policy focuses on promotion of SMEs. A
Small and Medium Enterprises Development Authority (SMEDA) was established in 1998
and SME Banks were set up in 2002.
Today, Pakistan's SME sector constitutes 90% of total enterprises, contributing 38% to
GDP, 25%to exports and engaging 80%non-agricultural labour force. There are 3.9 Million
SMEs in Pakistan, majority of which are based in Punjab and Sindh. In Karachi alone over
16,000 industrial units are operating out of which majority are SMEs. Karachis industries
are providing employment to 1.5 million labour force.
Government should extend support to boost SMEs capabilities
Government through SMEDA should review the development strategies for SMEs to
help them strengthen their business competitiveness by upgrading skills and
adopting new technologies and innovative processes.
SMEDAshould enhance support for SMEs in the areas of productivity, innovation and
capability upgrading. This would help SMEs to boost their capabilities, restructure
their business and remain competitive.
Like Singapore, SMEDA may consider introducing a Productivity and Innovation
Credit (PIC) cash bonus for companies that invest some amount in productivity and
innovation activities in a year. This will help SMEs defray the cost of implementing
their productivity improvements.
SMEDA may consider incentive to those SMEs which leads in innovations and new
product development.
The government can help the SME sector in nurturing talent by initiating a Talent-
hunt program that targets polytechnic students. The selected youth may be
sponsored a study award, followed by a job opportunity upon graduation or
completion of the vocational training. This would help the SME build a strong pool of
local talents for sustainable business growth.
SMEDA may consider extending consultancy services for the SMEs in areas of export
market assessment, market entry and business restructuring through
internationalization. For this purpose, SMEDA may also offer facilities and financial
support to SMES under patronage of Trade Development Authority of Pakistan
(TDAP).
The government should play a catalytic role in establishing collaborations of SMEs
with large enterprises in areas of product development, technology sharing and
transfer and sharing of best operational practices.
Special Priority be given to SME Development
The government should give special priority to the SMEs sector in its economic
growth strategy, with a view to enhance industrial productivity and create
employment opportunities.
SMEs should be provided special incentives and tax concessions to set up industries
in the Special Economic Zones (SEZ) and other industrial estates of the country. One
window facility for SMEs should be provided.
The government should provide soft loans to SMEs through banks on preferential
basis with minimum conditions. SMEs should also be provided easy access to export
finance on easy and softer terms.
SMEs may be allowed duty free import of machinery, plant and equipment with BMR
facility.
Small industrial parks for SMEs should be developed in major cities with basic
infrastructure facilities.
SMEs may be exempted from lengthy audit procedures of different government
departments.
The regulatory procedures for registration of SMEs in formal sector should be
simplified. All major bottlenecks in way of SME growth should be done away with.
SMEs should be relieved from tax burden by providing as many exemptions as
possible. This would encourage more SMEs to get registered and play their role in
economic development of the country.
Incentives for Increasing Employment through SMEs
The government should introduce measures to encourage SMEs to recruit new
employees. This initiative will provide employment opportunities to those people
who are unemployment.
In USA, the HIRE Act provides financial incentive for small businesses to employ
previously unemployed workers. In UK, a Youth Contract Scheme has been launched
in 2012, which provides wage subsidies for SMEs which offers work placements to
unemployed in ages between 16 to 24 years.
A comprehensive SME Policy should be developed
The government should develop a comprehensive SME Policy that defines the role of
concerned public sector institutions. Such a Policy framework will provide the
required direction and focus for achieving SME led economic growth resulting in job
creation and reduction in poverty.
The proposed SME Policy should provide short term, medium-term and long-term
policy framework with an implementation mechanism to achieve economic growth,
based on SME-led private sector development.
The government may consider a proposal for setting-up an SME Exchange. In India,
such a proposal is under active consideration for which necessary changes and
amendments are being made in the rules and regulations of cash market for making a
provision for SME Platform.
Strategy 3:
Stimulating Investment through promoting savings and capital formation
John F. Kennedy, the 35
th
President of USA, while giving a message on economic recovery
in February 1961 stated:
Expansion and modernization of the nations productive plant is essential to
accelerate economic growth and to improve the international competitive
position of American industry An early stimulus to business investment will
promote recovery and increase employment.
The above message indicates that for achieving economic growth and recovery, it is
essential that a country should stimulate business investment. However, to accomplish
this task, there is a pre-requisite of promoting capital formation and long term savings in
the country. In the words of Rajen Devadason, a world renowned Certified Financial
Planner (CFP) and publisher of GET BETTER, The reason saving comes before investing is
that you need to have seed before you can sow it in anticipation of a harvest."
Reasons for low investment rate in Pakistan
ICMA Pakistan research reveals that the main reason for lowinvestment rate in Pakistan is
due to low rate of savings and capital formation. The growth in private corporate
investment in Pakistan has slowed down considerably during the last couple of years,
because of un-conducive business environment, resulting from security concerns; as well
as due to domestic inflationary pressures and uncertainties flowing out of the global crisis.
The lowper capita income and unequal distribution of wealth have added to this situation.
Though the government has introduced many saving schemes to increase savings rate
(e.g. Defence Savings Certificates, National Deposits Certificate, Khas Deposit Certificates,
Special Savings Accounts, Mahana Amdan Accounts, Prize Bonds, NIT Units etc), there
seems to be no significant improvement. Recently, the SECP has introduced the Draft
Bond Pricing Agency Regulations, 2013 for establishing a bond pricing agency to stimulate
activity in the primary and secondary markets and to induce foreign investment. ICMA
Pakistan feels that this is a very encouraging initiative by SECP that would help raise
savings and investments levels in the country.
To increase the level of savings and capital formation, it is important that the government
should develop and implement such polices that could help facilitate in liberalizing
financial markets, ensuring greater financial intermediation, controlling inflation,
channelizing resources from informal or unorganized sector and expanding bonds and
short term commercial papers for subscription in capital market.
ICMA Pakistan presents following proposals to promote savings and investments in the
country:
Lucrative tax Incentives should be provided to lure investments
Pakistan has of late witnessed capital flight, industry closures and recession in trade
market due to deteriorating law and order situation. The security concerns, coupled
with inconsistency in tax policies, have forced the businesses to move towards safer
havens, like Bangladesh, Sri Lanka, Dubai, Malaysia, depriving the country of
invaluable capital. The foreign investors are also reluctant to invest in Pakistan in this
situation.
The government should consider providing lucrative incentives and benefits to the
international investors to bring their capital into Pakistan for better returns. At the
same time, the domestic investors may also be given a package of tax benefits and
concessions to encourage them to continue their businesses in Pakistan.
The government should provide tax incentives to those investment units which bring
huge capital investment; are energy efficient; environment-friendly; involved in CSR
activities and operate at maximum capacity.
The government, with the help of experts, should make Industry Specific Standards
(ISS) for cost of goods manufactured and sold. Tolerance limits for acceptable
variance, if any, be made from the ISS. Any breach of ISS after the tolerance limit
should attract Audit, Cost Audit and detailed scrutiny.
The government should also discourage and penalize speculative investments in real
estate and stock markets, so as to improve the efficiency of financial sector to lower
intermediation costs and provide long term financing options through an efficiently
managed stocks and bonds markets.
Special Status and Incentives for mega investment projects
Any project which has potential for developing ancillary industries, based on their
products, and providing employment opportunities to large number of local skilled
and unskilled population; should be granted the status of mega project and they
should be given special incentives, including tax concessions and infrastructural
facilities. A minimum capital investment ceiling may be fixed by the government in
this regard.
Government may announce a special package of incentives for the overseas
Pakistanis who wish to invest in Pakistan in feasible projects. They may also be
allowed incentives for setting up mega projects or SMEs in the Special Economic
Zones in Pakistan. The increased flowof remittances will not only improve balance of
payment position, but also give impetus to industrial and economic growth.
Investment Projects on Public-Private Partnership Initiatives be
encouraged
The government should associate the private sector in Public Private Partnership
(PPP) infrastructure and other development projects by developing a transparent,
hassle-free investment and approval criteria and procedures to attract the private
sector capital.
The Public-Private Projects would play a catalytic role in raising total investment rate
to required levels and restoring investors confidence (both local and foreign). Some
key areas where such joint projects could be undertaken are energy,
telecommunication, transportation, construction of road, highways, etc
There is good prospect for promoting foreign investment through joint public and
private sector initiatives in textiles, clothing, and other promising export sectors from
China, Korea, Malaysia, and Taiwan.
Mutual Funds and Pension Funds Industry be strengthened to mobilize
funds for investment
The government should facilitate the mutual and pension funds industry to play a
catalytic role in mobilizing funds from private sector for productive investments.
Around two-thirds of investment in the country is in hand of the private sector, which
includes households and corporate sectors. The existing savings instruments, such as
bank deposits, mutual funds, pension funds and insurance, are still not capable of
generating sufficient resources to meet domestic investment needs.
There is need to strengthen and improve the efficiency of banks, NBFIs, mutual funds,
insurance companies, pension funds, venture capital funds etc; so as to make them
capable to mobilize household savings for meeting equity and debt needs of the
private corporate sector. The fact is that assets under the management of mutual
funds industry is about 5 percent of total banks deposits whereas in India this is more
than double.
Corporate Debt Market should be expanded to channelize funds to
private sector
The government should formulate policies to expand the corporate debt market to
help improve savings and diversify investment avenues. This would enable the
borrowers, especially the government, to raise priced financing from non-banking
source for long-term capital developments and infrastructure projects.
At present, only few companies have issued Term Finance Certificates (TFCs) at the
stock market and most of them are hugely discounted, which discourages more
companies to enter the debt market.
In present uncertain macro-economic condition, the banks are also reluctant to
advance long term loads to the private sector. As such, the government should
reduce the dependency of corporate sector and industries on traditional banking
sector for their financing requirements and encourage them to develop alternative
sources of financing in their own interest.
The government should focus on developing the corporate debt market to allow
channelizing funds directly from savers (households) to the private sector.
The government should also formulate policies to expand and strengthen the
mortgage market in order to help the corporate sector to leverage their assets for
investing in the bond market.
All Money Whitening Schemes be abolished to divert money into
investment schemes
SECP may consider removing all direct and indirect whitening schemes including
Section 111 (4) of Income Tax Ordinance, 2001 which provides tax exemption under
unexplained income and assets on foreign exchange remittances through normal
banking channels. This would bring additional revenue to the government and divert
this money into saving or investment schemes.
Tax Exemption Limit on National Savings Certificates should be
enhanced to attract savings
The government should enhance the tax exemption limit on profit of National Savings
Schemes (NSS) fromRs. 150,000/- to Rs. 500,000/- to attract more household savings
and increase savings rate in the country.
The government should transform the Central Directorate of National Savings into
an autonomous body and expand its outreach to far flung areas of the country. This
would improve the performance of savings centers, and also enhance savings rate
that could be channelized into productive investments.
As a motivational factor, some sort of commission may be also provided to those
saving centers which mobilize more savings from their respective areas. At the same
time, the household sector (general public) be also provided incentives on investing
their savings in National Savings Schemes.
Policy Reforms in Public Sector should be undertaken to accelerate
investment
The government should strengthen policy reform efforts to accelerate the
investment rate in public sector in order to foster an economic environment more
conductive for higher private sector production, investment, consumption and
savings.
The major policy reforms that the government may consider are as under:
Reforming the state-owned enterprises to cut losses and improve efficiency
Making tax system more equitable and improving the tax administration
Undertaking expenditure programs to improve quality of living of less privileged
people
Prudent utilization of public resources for public consumption
Improved efficiency of public sector enterprises.
34 |
Chapter 2Assessment of Major Economic Issues
Severe Energy Crisis
The Crisis of today is the joke of tomorrow H.G.Wells, a Renowned Writer
Facts and Figures
Share of Electricity Generation Sources 36% from Gas; 32% from Oil; 29% Hydel
and 3% from Nuclear. Total generation of electricity from hydel source is 6481 MW
which is only 29% of installed capacity.
Share of Electricity Distributors 51% by WAPDA, 9% each by KESC, HUBCO and
other IPPs; 8% by KAPCO, 5% by UCH; 4% by ROUSCH and 2% each by Liberty and
Pakistan Atomic Energy Commission (PAEC).
Share of Electricity Consumers: household, industry, services, transport,
government. The largest consumer is industry, accounting for about 60% of total
consumption. Pakistans per capita electricity consumption of 451kwh is almost one-
sixth of world average of 2730kwh (world energy statistics 2011).
Problem and its Economic Impact
The persistent acute power shortages and load shedding in the country have led to
massive closure of industries, layoffs and un-employment, poverty and public unrest.
The negative impact of energy crisis on the national economy is evident in shape of
low productivity, decline in GDP growth, rising inflation and flight of capital. Most of
the textile units are now moving to Bangladesh.
The problem of energy crisis is two-foldi.e. demand explosion and supply shortage.
There is lack of integrated and proactive planning for growth of energy generation.
Demand for energy is rising with the growth in population and industry requirement.
The demand is around 20,000 MW whereas electricity of only 11,500 MW is being
generated in the country.
The cost of electricity generation in very high due mainly to faulty fuel mix. This has
led to massive load-shedding and power shortages throughout the country.
Furnace oil is the main fuel to produce thermal energy. The government is
responsible to provide furnace oil to power generating companies but it is unable to
pay fuel cost to them. Resultantly, the generating units are either closed down or run
on low capacity. Eventually, they are unable to pay to oil companies, leading to high
circular debt of around Rs. 872 billion.
Independent Power Producers (IPPs) have not been able to share its burden by
meeting the energy shortfall but rather they have become an object of controversy.
| 35
Proposed Short and Long Term Solutions
A Special Task Force may be formed to take immediate crack down on energy thefts'
throughout the country to reduce losses in electricity transmission and distribution.
Similarly, serious efforts should be made to recover and collect due from the
government departments and private sector. Billions of Rupees can be saved by
reducing lines losses with addition funding available to government after collection
of dues.
In those parts of country where national grid do not exist, business community may
be allowed to set up their own power projects (solar, wind based) without the prior
permission of NEPRA.
A Committee may be formed immediately to finalize a national plan to generate
electricity through use of waste materials of crops like sugarcane bagasse, cotton
waste, rice husk and organic materials
Instead of importing expensive oil and gas, we can move to import cheaper clean coal
for use as fuel in power generation. The price of coal is stable in international market,
which will help bring stability in electricity price.
Reliance on Rental Power Projects should be curtailed to reduce prices. A sizeable
portion of budget should be earmarked for hydel power generation projects.
Special focus should be given on building large number of small dams on Public-
Private Partnership (PPP) basis to generate hydel power and to boost agriculture
productivity.
Alternate energy resources should be an important part of the energy policy of the
government (such as solar, wind, tidal, bio-mass, biodiesel and waste energy).
Government may provide interest-free loans (to be paid in easy installments) to
public in urban areas (initially in Karachi, Lahore and Islamabad) to install small solar
panels in their homes to generate energy. For this purpose, funding can be obtained
from international donor agencies.
The energy pricing for the industrial units should be based on their efficiency and
performance. An efficient unit may be given more electricity at cheaper rates. For this
purpose the local chambers of commerce be involved. This would encourage the
industrial units to improve performance and cost efficiency.
The Ministry of Petroleumand Ministry of Power should be merged to make it into an
Integrated Energy Board. Along termplan for this purpose may be chalked out by the
government.
The government and public servants should lead by example in power conservation
e.g. minimum use of air conditioners, curtailing fuel by avoiding irrelevant official
transport, using energy save bulbs etc. This would motive the general public to follow
the example.
36 | Chapter 2: Assessment of major Economic Issues
Alarming Security Situation
In any country there must be people who have to die.
They are the sacrifices any nation has to make to
achieve law and order Idi Amin Dada, Late President of Uganda
Fish die when they are out of water, and people die
without law and order The Talmud quote
Facts and Figures
The law and order situation has been alarming since long, marked by increased
number of organized crimes, terrorist incidents, target killings, kidnapping for
ransom, especially in Karachi the financial hub.
According to partial data compiled by the South Asia Terrorism Portal (SATP),
Pakistan recorded a total of at least 6,211 terrorism-related fatalities, including 3,007
civilians, 2,472 militants and 732 Security Forces (SF) personnel in 2012 as against
6,303 fatalities, including 2,738 civilians, 2,800 militants and 765 SF personnel in
2011. The first 69 days of 2013, have already witnessed 1,537 fatalities.
According to SATP, in 2012 there were 39 suicide attacks in Pakistan, resulting into
365 deaths, as against 41 such attacks in 2011, though fatalities were at a much
higher 628. The number of explosions increased from 639 in 2011 to 652 in 2012.
According to the South Asia Media Commissions (SAMC) Media Monitor 2012
report, Pakistan remained the most dangerous country for journalists in South Asia.
25 journalists were killed in South Asia in line of duty in 2012, with Pakistan
registering killing of 13 journalists, followed by India (5), Bangladesh (3) and Nepal
and Afghanistan (two each).
The government spends huge sumof money fromnational exchequer to improve the
deteriorated law and order situation even much more than that spent on health,
education and infrastructure sectors. During 2011-2012, an amount of Rs. 194.33
billion were spent on improving security situation, as compared to Rs. 139.47 billion
on health and 113.33 billion on infrastructure sectors during the same period.
According to the Ministry of Finance, Government of Pakistan, during 2010-2011 the
government spent Rs. 169.79 billion on security situation, which enhanced to Rs.
194.33 billion in 2011-2012, showing an increase of 15 percent in one year. The
break-up of Rs 194.329 billion spent in 2011-2012 reveals that the federal
government spent Rs 63.089 billion; Punjab spent Rs 58.690 billion, Sindh Rs 38.836
billion, Khyber Pakhtunkhwa, Rs 21.819 billion and Balochistan spent Rs 11.895
billion on law and order situation.
Chapter 2: Assessment of major Economic Issues | 37
The current state of law and order is having a negative impact on the Pakistan
economy and hampering inflowof Foreign Direct Investment (FDI). Foreign and local
investors are shying from operating in Pakistan and a number of industrial units had
already shifted their operation to other countries.
The unstable law and order situation has led to huge economic loss, which has
affected the countrys stock market as well. In addition, all main resources of revenue
in affected areas have been hurt, including agriculture, manufacturing and small
scale industry, and tourism.
The terrorism threat has diverted resources of government to security spending,
increased the cost of doing business and created instability about business prospects
in the country. As a result, the businesses find it difficult to obtain bank loans and get
into long-term contractual obligations.
The government should develop national consensus on measures to be taken to
extricate the country from shackles of violence, crime, arms and various mafias.
Political patronage of mafias should be dealt prudently.
Drastic action need to be taken across the board without consideration of political,
ethnic or affiliation with any school of thought. A major de-weaponisation campaign
needs to be commenced on war-footing basis.
Sizeable funds must be allocated for improving law and order situation. The law
enforcement machinery need to be completely revamped by inducting educated
youth as city and province levels. They may be equipped with modern technology to
deal effectively with the terrorist and criminal elements of the society.
The Citizens-Police Liaison Committee (CPLC) may be allowed to play an active and
effective role with additional powers to take actions against money extortions from
business areas, especially in Karachi, the trading and financial hub of the country.
The country has to suffer business loss of billions of Rupees due to strike calls given
by political and religious parties. As such, new government may consider imposition
of complete ban on such strike calls. A huge sumof penalty may be asked fromthose
parties which violates this ban.
An Independent Police Complaints Commission (IPCC) be established (as existing in
UK as per Police Reform Act) to investigate serious complaints and allegations of
misconduct against police, as well as to handle appeals frompeople not satisfied with
the way police have dealt with their complaint. The proposed IPCC should be self-
governing, making decisions entirely independently of police, government and
complainants. It will provide a powerful legal regulatory framework making the
police accountable for their actions.
Depleting Foreign Reserves
When a government is dependent upon bankers for money; they and not the
leaders of the government control the situation, since the hand that gives is
above the hand that takes Napoleon Bonaparte, Emperor of France
Facts and Figures
The forex reserves are depleting fast. The total liquid foreign exchange reserves of
Pakistan has declined sharply from USD 18.24 billion in 2010-2011 to USD 15.29
billion in 2011-2012. Out of this amount, USD10.81 billion are net reserves with State
Bank and USD 4.48 billion are net reserves with the banks (see Table).
The SBPs foreign exchange reserves have been declining consistently from USD
14.78 billion in 2010-2011 to USD 10.80 billion in 2011-2012. The SBP forex reserves
continued to decline in 2013 i.e. from USD 8.7 billion at end -January 2013 to US$6.7
billion as of 5th April 2013, mainly due to debt payments.
The SBP reserves has fallen by US$4.163 billion in the nine and half months of the
current fiscal year 2012-13, which is the fastest-ever decline in a decade. The current
account deficit of nine months is over US$ 1 billion which is expected to further
expand in next few months.
The private banks have reserves of over US$ 5 billion by as per existing law; the State
Bank has no right to utilize the deposited amount of reserves in the private accounts.
Pakistan has recently paid four installments of over US$650 million to IMF as principal
amount of Stand-By Arrangement (SBA) and Extended Credit Facility (SCF) which
resulted in massive decline in forex reserves. On February 26, 2013 Pakistan paid
US$391 million to the IMF on account of 10th SBA installment, while 11th and 12th
SBA installments worth US$250 million was repaid on March 28, and April 1, this year
respectively.
The rupee fell to an all-time low level of Rs 100 against the dollar in the open market
in February 2013 due to debt repayment to the IMF under SBA loan facility.
(Value: In Million US Dollars)
END PERIOD NET RESERVES WITH
SBP
NET RESERVES WITH
BANKS
TOTAL LIQUID FX
RESERVES
2004-05 9,804.7 2,792.9 12,597.6
2005-06 10,765.2 2,357.2 13,122.4
2006-07 13,345.4 2,301.8 15,647.2
2007-08 8,577.0 2,821.7 11,398.7
2008-09 9,117.9 3,307.3 12,425.2
2009-10 12,958.2 3,792.2 16,750.4
2010-11 14,783.6 3,460.2 18,243.8
2011-12 10,803.3 4,485.3 15,288.6
By 11 October 2013 4,075.4 5,131,9 9,207.3
(Source: State Bank of Pakistan)
The country is in serious trouble to make repayments to IMF and meet the widening
current account deficit. Experts say that mismanagement and lack of strategy have
pushed the country closer to default.
The country is presently in a vicious circular flow of borrowing and repaying foreign
exchange to the IMF in order to stabilize the forex account. Though Pakistan had
opted for IMF bailout program in 2008, it is being forced again to approach the IMF
due to instability in foreign exchange account after repayment of loan.
Pakistan has to pay US$4.8 billion to IMF under Stand-by Arrangement (SBA) loan
facility till June 30, 2014. Similarly, by 2015, Pakistan has to pay 3.497 billion SDR
(Special Drawing Rights) to IMF amounting to US$5.3 billion, which is likely to put
more pressure forex reserves of the country and may lead to payment default.
The declining trend in forex reserves is having a negative impact on local currency and
encouraging rupee holders to buy dollars or gold to save their reserves from melting
on a day-to-day basis. This situation is a threat to the economy and requires
immediate remedy.
The unstable foreign reserves will push the rupee further lower against the dollar,
which will lead to an increase in the import bill as well as create more challenges on
external and internal economic fronts.
The new government would have to take tougher steps and undertake deep
structural reforms to put the economic conditions in shape, especially for building
stable foreign exchange reserves of the country.
The government needs to restrict borrowing from the State Bank of Pakistan to
stabilize the forex reserves.
The government should stop its policy of knocking at the door of IMF and other
international donor agencies and instead seek help from its friendly countries, like
China and Saudi Arabia, to obtain external funding.
Acomprehensive foreign exchange savings policy needs to be developed by engaging
economic experts.
A huge portion of foreign exchange is spent on importing oil. It is imperative that oil
consumption in the country be controlled to reduce import bill. This could be done by
importing clean coal, instead of furnace oil, for electric generation; use of railways for
goods transportation; switching to cheaper modes of electricity production e.g.
hydro-electric, wind and solar power. These measures will ease pressure on reserves.
Imports of luxury items should be restricted to stabilize the forex reserves. Moreover,
lucrative incentives should be given to exporters to enhance exports which would
bring foreign exchange to the country.
Declining Investments
Investors are like birds; they settle wherever there are good trees and
an appropriate environment.- Anonymous
Facts and Figures
The Foreign Direct Investment (FDI) into Pakistan has been continuously falling since
last five years, which is a matter of concern. The FDI inflow into Pakistan is less than
1% of total FDI made globally.
The total FDI which stood at US$5.41 billion in 2007-08, declined to US$3.72 billion in
2008-09; US$2.15 billion in 2009-10; US$ 1.64 billion in 2010-11 and drastically falling
to US$0.81 billion in 2011-12. In the first nine months (July-March) of 2012-13, the
FDI fell further to US$0.62 billion.
As per BOI data, in 2012-13 (July-March), countries which made major direct
investment into Pakistan include Hong Kong ($182.5 million), USA ($150.5 million),
UK ($143.5 million) and Switzerland ($112.9 million).
During 2012-13 (July-March) few countries transferred their FDI out of Pakistan
which includes Norway, Netherlands, Singapore and UAE. It means their FDI inflow
was limited than their outflow during this period.
The major investing countries in Pakistan include USA, UK, U.A.E., Japan, Hong Kong
and Switzerland.
The major sectors which have attracted FDI inflows are oil and gas, financial business,
construction, trade, power and communication sectors.
FDI flow from USA has been on a decline since 2008-09. In 2007-08, total FDI inflow
from USA was $1309 million which reduced gradually to $870 million in 2008-09;
$468 million in 2009-10; $238 million in 2010-11 and $233 million in 2011-12. During
July-March 2012-13, FDI inflow from USA stood at only $ 151.
FDI flow from United Kingdom has also shown a declining trend from $860 million in
2006-07 to $295 million in 2009-10 and $207 million in 2011-12. During July-March
2012-13, FDI inflow from UK stood at $144 million.
(Value: In Billion US Dollars)
Year Total FDI
2007-2008 5.41
2008-2009 3.72
2009-2010 2.15
2010-2011 1.64
2011-2012 0.81
2012-2013 (July-March) 0.62
(Source: Board of Investment -Pakistan)
The negative growth in Foreign Direct Investment has and continues to adversely
affect countrys economic growth as FDI plays a vital role in the development of any
country.
The falling FDI will also result in limited technology transfer and creation of new
employment opportunities.
Research suggests that a country which attracts higher FDI inflows can boost its
exports and thus achieve higher level of economic growth. Thus, exports are likely to
suffer due to declining investment in Pakistan.
The declining FDI trend will also give a negative signal to the new global investors to
come to Pakistan.
The major hurdles which are hindering FDI inflows into Pakistan viz. energy crisis and
unstable security situation need to be tacked by the government on war-footing
basis.
The government should adopt long-term consistent economic policies to woo
investors, as frequent changes in policies distract foreign investors. Similarly, it
should ensure providing an investor-friendly climate.
The economic governance need to be improved to attract foreign and domestic
investment. There should also be coordination in policies of different government
agencies, accountability and transparency.
The government should hold consultation with the existing investors in Pakistan to
overcome their business bottlenecks. If they are satisfied, other international
investors will follow suit.
The government should provide some kind of tax and other incentives to the
domestic investors to expand their business. This would encourage the foreign
investors to bring their capital into Pakistan.
The government should make an assessment of regulatory impediments that are
depriving foreign investors to come to Pakistan and remove themon an urgent basis.
Spiraling Inflation
Inflation is like sin; every government denounces it and every
government practices it Sir Frederick Leith Ross, Renowned UK Economist
Inflation is one form of taxation that can be imposed
without legislation Friedman Milton, American Economist
Facts and Figures
The skyrocketing Inflation has become a major economic ailment for Pakistan and
has made it difficult for the common man to survive and make their both ends meet.
Historically, from 1957 to 2013, the inflation rate in Pakistan averaged 8.03%,
reaching an all time high of 37.81%in December, 1973 and a record lowof -10.32%in
February, 1959. From 2003 to 2012, inflation rate averaged 10.60%, reaching an all
time high of 25.33% in August, 2008 and record low of 1.41% in July, 2003.
Inflation rate refers to general rise in prices measured against a standard level of
purchasing power. The most well known measures of Inflation are the CPI which
measures consumer prices, and the GDP deflator, which measures inflation in the
whole of the domestic economy.
Inflation rate in Pakistan is reported by the Pakistan Bureau of Statistics (PBS).There
are four Price Indices viz. Consumer Price Index (CPI); Wholesale Price Index (WPI);
Sensitive Price Index (SPI) and GDP deflator. CPI covers retail prices of 374 items in 35
major cities and reflects changes in living cost of urban areas.
According to PBS data, the average inflation in Pakistan during July-January of FY
2012-13, climbed to 8.3%. In April 2013, the inflation rate stood at 5.80%.
Major categories in CPI include food and non-alcoholic beverages (35%); housing,
water, electricity, gas and fuels (29%); clothing and footwear (8%); transport (7%);
furnishings and household equipment (4%); education (4%); communication (3%);
health (2%) and recreation and culture, restaurants and hotels, alcoholic beverages
and tobacco and other goods and services (8%).
Deficit budgeting is a one of the major causes of inflation in Pakistan as printing and
circulation of more paper currency in the market gives rise to inflationary pressure.
The government resorts to currency printing in view of the fact that it is unable to
cover the budget deficit from tax collections and foreign aid.
The government has constituted a National Price Monitoring Committee under the
chairmanship of Secretary Finance, which is mandated to reviewthe price and supply
position of essential items in consultation with provincial governments and
concerned Federal Ministries and Divisions.
Inflation growth is much higher than the income, which is declining the standard of
living of people.
Inflation is having a negative impact on distribution of wealth and balance of
payment position of Pakistan.
Inflation is eroding the viability of all segments of the economy and lowering the
economic growth rate.
Inflation is reducing the money value, leading to uncertainty of value of gains and
losses of borrowers, lenders, buyers and sellers. This in turn discourages saving and
investment.
Inflation is discouraging inflow of foreign investments into the country.
Inflation is increasing rate of poverty and unemployment. The poor families are
forced to promote child labour so that they can at least survive and satisfy their
hunger.
Strategic planning is required to combat inflation. Aprudent monetary policy need to
be developed, backed by substantial fiscal adjustments, to ease governments
funding requirement and control inflation.
The government should immediately waive of all kinds of taxes and levies on
essential commodities like flour, sugar, rice, ghee, oil, vegetables and dairy products
to bring some relief to the general public.
The government should make immediate crack down on hoarders of food items,
(irrespective of their political affiliations) that result in artificial inflation.
Cost and Management Accountants may be given a role to carry out cost-profit
analyses of goods available in market to discourage profiteering by producers or
middlemen or retailers.
Government may consider forming nation-wide network of Consumer Societies or
Associations to assert pressure on the Retailers Associations not to charge excessive
profits on essential items. The provincial government may be asked to support these
Societies.
The government needs to encourage domestic production instead of relying on
imports and give preference to investment in consumer goods instead of luxury
items.
The government should put in place a strong monitoring systemat different levels to
have a sound evaluation of the process at every stage. The professional services of
cost accountants can be hired for this purpose.
The government should strictly control the money supply in order to bring down
inflation. The State Bank may be asked to focus its attention to keep inflation close to
the target of five percent.
The government should give priority to agricultural growth and improve the supply
chain of high value crops to control prices of essential commodities in the market.
There is an urgent need to restrict government borrowing to curtail excessive
monetary growth leading to inflationary pressure. A ceiling may be imposed by the
government itself.
Growing Fiscal Budget Deficit
Deficits mean future tax increases, pure and simple. Deficit spending should
be viewed as a tax on future generations, and politicians who create deficits
should be exposed as tax hikers - Ron Paul, a Renowned US Author and Politician
Facts and Figures
A fiscal budget deficit occurs when a government spending is much greater than tax
revenues.
The budgetary estimate of fiscal budget deficit for FY 2012-13 was fixed at 4.7% of
GDP by the Finance Ministry of Pakistan. This target has nowbeen revised upward to
6.5 percent (see Table)
The Planning Commission, however, estimates that fiscal deficit would be over 8%of
GDP during current fiscal year, in view of massive revenue shortfall, surge in power
subsidies and high interest payments.
The fiscal budget deficit has increased to Rs 1.286 trillion in 10 months (July-April) of
current FY 2012-13. Lets analyze the Revenue and Expenditure sides of the
budgetary targets:
Revenue Side Tax Revenue Collections
FBR had set a target for tax revenue collection at Rs. 2.381 trillion for current FY 2012-
13. However, during the first 10 months (July-April) of FY 2012-13, FBR was able to
collect only Rs. 1.485 trillion (Rs. 896 trillion left to be collected in May and June) .
Accordingly, FBR revised downwards thrice which is now Rs. 2.050 trillion.
Expenditure Side Power Subsidies
The budgetary target for power subsidies was set at Rs. 185 billion for FY 2012-13.
However, during the first 10 months (July April) of FY 2012-13, over Rs. 320
billion have already been doled out to the power sector under this head. It is now
estimated that actual power subsidies would go further to Rs. 320 billion. The
expenditure on interest payment stood Rs 844.52 billion during July-March
period of current FY 2012-13
The factors that are contributing to higher budget deficit in FY 2012-13 are as under.
The cumulative impact of these risks is being estimated at one to two percent of GDP:
(a) Non-realization of FBR tax revenue target
(b) Less than budgeted realization of non-tax receipts
(e.g. Interests and Dividends from PSEs)
(c) Non-realization of external inflows impacting the budget
(e.g. License fee from sale of 3G licenses)
(d) Partial realization of programmed loans from the World Bank
and Asian Development Bank
(e) Increase in electricity subsidy due to delays in reforming
the power sector; and
(f) Non-generation of surpluses by the Provinces
The growing fiscal budget deficit has led to gradual expansion in the revenues and
expenditures of the government, marked by belowtarget tax revenue collections and
increased expenditures on power subsidies.
Huge fiscal deficit has caused significant impact on inflation due to excessive growth
of domestic credit.
Fiscal deficit has also impacted the balance of trade and foreign reserves. The trade
balance is affected indirectly through relative prices and money depreciation/
appreciation.
Fiscal deficit has also led to increase in interest rates and crowded out private
investment.
Fiscal deficit has reduced / squeezed the credit for the private sector.
Trend in Budget Deficit
Year
(Rs. in Billion) (As percent of GDP)
Budget
Deficit
Primary
Deficit
Interest
Payments
Budget
Deficit
Primary
Deficit
Interest
Payments
1983-84 27.7 13.6 14.1 5.5 2.7 2.8
1984-85 39.4 22.9 16.5 6.9 4.0 2.9
1985-86 44.6 24.9 19.7 6.8 3.8 3.0
1986-87 48.5 24.6 24.0 6.7 3.4 3.3
1987-88 63.4 30.1 33.2 7.7 3.7 4.1
1988-89 62.1 23.9 38.1 6.8 2.6 4.2
1989-90 59.9 14.6 45.3 5.9 1.4 4.4
1990-91 97.1 47.1 50.0 8.0 3.9 4.1
1991-92 104.9 42.5 62.4 7.3 2.9 4.3
1992-93 109.1 30.3 78.8 6.8 1.9 4.9
1993-94 94.2 3.3 90.9 5.0 0.2 4.8
1994-95 110.4 13.1 97.2 4.9 0.6 4.3
1995-96 149.8 17.3 132.5 5.9 0.7 5.2
1996-97 152.7 -8.5 161.2 5.2 -0.3 5.5
1997-98 204.6 2.2 202.4 6.4 0.1 6.3
1998-99 179.2 -40.9 220.1 5.1 -1.2 6.3
1999-00 172.3 -90.0 262.2 4.5 -2.4 6.9
2000-01 164.9 -84.4 249.3 4.0 -2.0 6.0
2001-02 201.9 -73.4 275.3 4.6 -1.7 6.3
2002-03 177.4 -50.4 227.8 3.6 -1.0 4.7
2003-04 162.0 -60.4 222.4 2.9 -1.1 3.9
2004-05 217.0 -17.8 234.8 3.3 -0.3 3.6
2005-06 325.3 65.3 260.0 4.3 0.9 3.4
2006-07 502.0 115.1 386.9 5.8 1.3 4.5
2007-08 777.2 267.6 509.6 7.6 2.6 5.0
2008-09 680.4 24.1 656.3 5.3 0.2 5.2
2009-10 929.1 286.8 642.3 6.3 1.9 4.3
2010-11 1194.4 496.3 698.1 6.6 2.7 3.9
Source: Pakistan Economic Survey, State Bank of Pakistan, Fiscal Operations, Ministry of Finance
To bring down the fiscal budget deficit, the best option is to promote economic
growth. If economy grows, the government will get more tax revenues, without
raising taxes.
The tax net should be expanded and strict measures be taken against tax evaders. All
income should be under tax net and all exemptions should be done away with,
especially to agriculture and services sector.
The government should cut is public spending as well as domestic borrowing to
reduce budget deficit.
There is need to maintain fiscal discipline and bring consistency in monetary and
fiscal policies.
The subsidies given to power sector and other Public Sector Enterprises (PSEs) need
to be reduced.
The financial and fiscal constraints should be minimized through reforms for
generating more revenue.
There must be equilibrium in exports and imports to overcome fiscal deficit.
Expanding Foreign Debts
Foreign aid might be defined as a transfer of money from poor people in rich countries to rich
people in poor countries - Doug Casey, Investment guru; author of Crisis Investing
Think what you do when you run into debt you give another
power over your liberty - Benjamin Franklin, USA
Facts and Figures
Pakistan is the 3
rd
largest debt-recipient country in the region. Its external debts have
reached almost 33% of GDP as compared to 15% of India and 7% of China.
Pakistan is currently caught in a debt trap with ratio of total loans reaching 72% of
GDP which is alarming.
Pakistan external loans have doubled during the last five years and now stand at the
level of US$65 billion.
Pakistans debt-to-GDP ratio is around 65 percent which is exceedingly high. The
main reason of this high ratio is declining tax-to-GDP ratio, as out of 190 million
people, only 1.8 million pay taxes.
Pakistans annual repayments are set to increase to around US$ 6 billion over 20%
of export earnings and more than half what Pakistan currently spends on health and
education collectively.
Pakistans Debt and Liabilities Profile
(Value in Billion Rupees)
FY 2009 FY 2010 FY 2011 FY 2012 Q3 FY
2012
Q3 FY
2013
Pakistans Debt and Liabilities 8,746.1 10,702.2 12,530.0 14,553.4 13,733.5 15445.7
YoY Growth (In %) 30.7 22.4 17.1 16.1 16.8 12.5
As a percent of GDP 66.3 72.0 68.5 72.4 68.4 67.4
Pakistans Total Debt (A+B+C) 8,306.2 10,066.6 11,908.4 13,888.0 13,197.2 14,885.4
YoY Growth (In %) 28.3 21.2 18.3 16.6 17.4 12.8
As a percent of GDP 62.9 67.7 65.1 69.1 65.7 65.0
Summary of Pakistans External Debt Servicing
(Value in Million US Dollars)
Description FY 2011 FY 2012 FY 2013
(July March)
Public debt (1+2+3) 3,152 3,693 4,009
Government debt 2,573 2,263 1,942
From IMF 442 1,318 2,058
Foreign exchange liabilities 137 112 10
Public sector enterprises (PSEs) 450 398 310
Guaranteed debt 160 40 35
Non guaranteed debt 290 358 274
Bank Borrowings 25 22 15
Private Sector 321 395 268
Guaranteed debt 0 0 0
Non guaranteed debt 321 395 268
Total Debt Servicing (A+B+C+D) 3,948 4,507 4,602
Note: Debt servicing exclude repayments of short term borrowings by scheduled banks.
The people of Pakistan, especially those who are already under tax net, are over
loaded with more taxes by the government in order to repay the borrowed foreign
loans.
High external debt borrowing has had a severe long termdirect and indirect negative
impact on economy.
Increase dependence on foreign debts has become a source of rising unemployment
and poverty, high inflationary pressure and slowness in economic growth of the
country.
It has also discouraged both domestic and foreign private investment and pressure
on exchange rate.
Pakistan has still not become in a position to formulate an independent fiscal policy
due to external debts.
The government, with the consensus of all political parties, should use the threat of
default, like other countries to persuade the IMF, World Bank and other external
donors, to write off some of the debt and re-negotiate terms of the remaining debt
on a lower interest rate and for a longer duration. There are several international
laws which support the notion of writing off debts. Article 25 of International Law
Commission stipulates that in case of an actual threat or a prospective peril to a
states essential interests, the state is excused for not performing an international
obligation. Anumber of democratically elected governments like Argentina, Burkina
Faso, Peru, Mexico, Paraguay, and Ecuador had refused debt payments on the basis
of this rule. Pakistan can also decline to pay back its loans under this principle.
The government should immediately constitute an independent Debt Audit
Commission to undertake a comprehensive debt audit of the country and
recommend cancellation of unjust debts. The proposed Commission may include
economic experts as well as Cost and Management Accountants.
The government should formulate a national strategy for increasing industrial
productivity and also initiate a national self-reliance scheme for self-sufficiency and
reduce its dependence on external loans.
The tax administration need to be improved and progressive taxes on income and
wealth be introduced so that the elite and rich class of the society pays more and a
fair share of their taxes.
The government should make strong fiscal adjustments instead of further borrowing
from foreign lenders.
The government should take measures to stabilize macro-imbalances and mobile
domestic resources.
There must be equilibrium in exports and imports to minimize the need for external
borrowing.
A viable monitoring system need to be put in place to ensure proper and systematic
utilization of external borrowings for the development projects and to check mis-
management and manipulation of funds.
Unbridled Tax Evasion
The difference between tax avoidance and tax evasion is the thickness of a prison wall
- Denis Winston Healey, former Secretary of State for Defence, UK
Government lasts as long as the under-taxed can defend themselves
against the over-taxed Bernard Berenson, a Renowned Art Historian, USA
Facts and Figures
According to Chairman NAB, estimated tax evasion per day is Rs. 7 billion which
comes to around Rs. 2.52 trillion annually. If this huge amount of tax evaded money is
collected, this could raise the tax-to-GDP ratio of Pakistan from present 9 percent,
which is lowest in region, to 20 percent.
An estimated Rs. 12 billion is siphoned off on daily basis due to corrupt practices in
the country. This means annual loss is Rs. 4.32 trillion due to corruption which is
growing at an unchecked pace.
According to an estimate, the influential class generates around US$15 billion of
black money every year while the unrevealed cash is estimated to be around US$200
billion. This money evasion, if collected and channeled properly into productive
sources.
Pakistan has one of the smallest tax bases in world with only 0.5%(1.8 million) of 190
million population paying income tax. A large segment of the population, including
rich and elite class, is outside the tax net.
During 2012, according to news, around two thirds of the countrys Parliamentarians
did not file return. It is a pity that not a single offender has been prosecuted for tax
evasion during 25 years in the country.
State-Owned Enterprises (PSEs) like PIA, Pakistan Railways and Pakistan Steel Mills
have caused loss to the national exchequer by tune of Rs. 625 billion. The taxation
system is unjust as it is regressive and indirect.
Agriculture sector, accounting for more than 21% of GDP, is exempt from taxation
due to political reasons. If this sector is taxed, it could generate sufficient revenue for
the government.
Tax evasion is discouraging the honest tax payers, especially the salaried of working
class. The government is also restoring to further squeezing this class, instead of
bringing the rich and ruling class in tax net.
Tax evasion is leading to widening gap between rich and the poor. Around 40 per cent
of the people are living below the poverty line of US$1 a day. There are frequent
cases of people committing suicide due to poverty.
Poverty and unemployment, as a result of massive tax evasion, has led to general
frustration and worsening socioeconomic situation, which is creating a breeding
ground for social unrest and militancy in this country.
Tax evasion is also having a negative impact on the Gross Domestic Product (GDP) of
the country.
Tax evasion encourages the expansion in the informal or underground economy.
Atarget-oriented programfor tackling tax evasion should be on top priority list of the
government.
The government should take measures to eliminate the unholy alliance between the
tax evaders and corrupt tax collectors in order to bring meaningful change in the
existing tax system.
The government should consider introducing Tax Payer Cards initially to those
individual tax payers who have filed income tax returns for the last three fiscal years.
This initiative will help discourage tax evasion and bring more people into the tax net.
The holder of tax payers card should be entitled to enjoy benefits such as discounts
and concessions in government fees (such as NIC, Passport fee etc); reduced mark-up
rates on bank loans; CVT waiver on ticket purchase quick processing in new utility
connections etc.
All amnesty schemes should be done away with. It is making mockery of those who
are paying their taxes honestly at much higher rates than offered to those who evade
tax through different amnesty schemes.
The government should make it a point to tax all income exceeding threshold. A
country with huge budget deficit and burdened with huge debts cannot have people
making billions in profits without paying tax.
The tax network should be expanded, with particular focus on agriculture, textile,
real Estate, retail and service sectors. The taxation laws also need to be simplified.
Tax machinery should be re-oriented for developing capability, capacity and
credibility.
The government should strengthen its vigilance system to identify business units
which are running in losses for years but their owners are living comfortable
luxurious lives. Their living standards should be reconciled vis--vis their source of
income. At the same time honest tax payers should be provided level playing field.
The FBR should educate the people in Pakistan for developing tax culture. This could
be accomplished by launching a national movement with the slogan Let us all pay
income tax.
There should be better coordination with SECP and FBR so as to detect companies
which are registered with SECP but are not registered with FBR and thus are outside
the tax net.
Individuals and companies making payments for their utility bills (electricity, gas,
water), communication bills (cell phones, PTCL) and for international travel (business
or pleasure) need to be checked whether they are in the tax net. If spending is above
a certain level then these entities should be made to pay taxes.
The government should deal with corrupt elements in the public service with iron
hand.
The government should take courage to sign a deal with the Swiss government to
recover the lost revenue and stolen funds which are badly needed at home.
Rising Unemployment
A man who has no office to go to I don't care who he is is a trial of which
you can have no conception George Bernard Shaw,
a Renowned Irish Playwright and Noble Prize Winner
I do not believe we can repair the basic fabric of society until people who
are willing to work have work. Work organizes life. It gives structure and
discipline to life Bill Clinton, Former US President
Facts and Figures
In Pakistan, un-employment rate measures the number of people actively looking for
a job as a percentage of labour force. The unemployment rate has shown an increase
to 6.50%in the fourth quarter (Oct-Dec) of 2012 from6.10%in third quarter of 2012.
By adding number of contributing workers, the unemployment rate comes close to
15% (A person who works without payment in cash or in kind on an enterprise
operated by a member of his household or other related persons is termed as a
contributing family worker)
Historically, from 1985 to 2012, Pakistan unemployment rate averaged 5.38%,
reaching an all time high of 8.3% in 2005 and a record low of 3.10% in December of
1987.
High population growth rate is the major cause of unemployment in Pakistan. The
annual population growth rate stands at 2.6%, whereas unemployment is growing
rapidly and every year 3 million people need jobs. According to a Labour Force
Survey, one out of every 10 people of countrys population is unemployed.
According to Pakistan Economy Watch, almost half of Pakistani workforce is
unemployed and employment to population ratio has registered a nominal rise to
50.4% from 46.8% over the past ten years. The employment rate is almost 80% for
men. Pakistan has seen very low labour productivity due to rising labour force.
According to Labour Force Survey, unemployment rate in urban areas has increased
slightly by only 2% this year (now it is 10.1%) whereas in rural areas it has increased
much by 16.3% (now it is 5%). This shows that in rural areas the jobless rate has
increased to a great extent.
Rising un-employment has negatively affected the economy and industrial
productivity of the country. The jobless people, if employed, could contribute
immensely in raising production.
Unemployment has created huge economic costs on society and put a significant
burden on public budget.
Unemployment has also adversely affected social circumstances. It has brought
depression and frustration among the youth, which compels them to resort to
criminal activities. The youth are being exploited to become part of street-crimes,
terrorism, drug-trafficking and other social evils.
Unemployment has resulted in a number of other societal disorders such as
corruption, dishonesty, increase suicide rates, disturbed family relationship etc.
Growing rural jobless rate and unemployment has forced the rural population to
come to the urban areas which eventually creates other problems for the city
administration.
The government should impose a limit on maximum number of per capita working
hours, which would force industries to hire more workers. In almost every
government office in Pakistan, workers are wasting time and not performing their
jobs, and also claiming overtimes. By this initiative, this practice would be
discouraged.
The government should take measures to speed up industrialization and economic
growth by removing all hurdles towards creating conducive investment-friendly
environment in the country.
The government should introduce self-employment schemes in the rural and less
developed areas with a two-pronged strategy to reduce the alarming rise in rural
jobless rate and to discourage influx of rural people to the urban cities of the country
to seek employment.
Government should establish network of technical and vocational training institute in
the country to enhance the skill of unemployed youth so that they are able to get jobs
or start their own small businesses.
The government should establish employment offices to provide information to the
jobless youth on the employment opportunities available in the government and
private sector.
The government should encourage setting-up of small industries, particularly in rural
areas and also provide infrastructure and subsidies and credit facilitates to the
people for this purpose to reduce un-employment.
Loss Making Public Sector Enterprises (PSEs)
Public Sector Organizations have become white elephants.
With political will, they can be transformed into Golden Fish Anonymous
Facts and Figures
According to Ministry of Finance, the following eight PSEs are causing huge losses of
Rs 400 billion to national exchequer and draining fiscal resources. This amounts to
around 15% of governments total annual revenues:
1. Pakistan Railways (PR)
2. Pakistan Electric Power Company (PEPC)
3. Pakistan International Airline (PIA)
4. Pakistan Steel Mill (PSM)
5. National Highway Authority (NHA)
6. Utility Stores Corporation (USC)
7. Trading Corporation of Pakistan (TCP)
8. Pakistan Agricultural Storage Corporation (PASC)
These 8 PSEs received more than US$ 3.5 billion in support from the federal
government during the year 2012, which is higher than the federal component of
Pakistans development budget.
PIA is on top of huge loss making organizations and sustaining losses of Rs. 70 million
on daily basis whereas Pakistan Steel Mill is making losses to the tune of Rs. 50 million
every day of the year.
The government has provided bail-out packages to PIA and PR recently. In February
2013, Rs. 100 billion bailout package for PIA was approved by the ECC of Federal
Cabinet. Similarly, Rs. 6 billion bail-out package for Pakistan Railways has been
announced by Cabinet Committee on Restructuring (CCoR).
According to State Bank of Pakistan, the PSEs have reportedly borrowed a total
amount of Rs. 42.7 billion during the first 9 months (July-March) of FY 2012-13.
Pakistan Railways (PR) have almost come to a standstill, still government has not laid
off a single employee out of its 110,000 staff, although it admits that PR can be
operated with only 40,000 staff. The Pakistan Steel Mills (PSM) also has surplus
workforce but none have been removed by the government.
The government has promulgated the Public Sector Companies (Corporate
Governance) Rules, 2013 which is expected to bring about more transparency in
PSEs operations and plug their huge losses. The rules will improve the governance
framework of public sector companies and minimize political interference in them.
The state owned or public sector enterprises are the white elephants of the national
economy and are causing loss of billions of Rupees to national exchequer. These are
serious drain on government resources.
According to an estimate, Pakistan is losing around 2%of GDP every year due to huge
losses by these PSEs.
The bailout packages offered by the government to loss making PSEs is nothing but
subsidizing their poor management and corruption. The consumers have to pay for
the high price of inefficiency of these PSEs.
The workers lose millions as a result of lowwages and poor prospects in these PSEs.
The inefficiency of these losses making public sector organizations are one of the
reasons for lack of funds required for budget purpose by the government and thus
contributing to expansion in fiscal deficit.
The government should make major reshuffles in eight loss making state-owned
entities, including induction of independent and professional board of directors so
as to transform them into profitable units. Private sector should be given major
representation on the board of these PSEs.
The government should make it mandatory upon itself not to interfere in the affairs
of these PSEs in shape of political appointments, and let themoperate independently
with complete autonomy under supervision of independent board of directors. They
should not be answerable to the government, but only to legislature.
The government should identify those PSEs which may be privatized and assign this
task to the Privatization Commission to complete the privatization process with the
given time frame.
A committee may be formed by the government to finalize a Restructuring Plan for
the remaining PSEs. Pakistan Railways and Pakistan Steel Mill should be given priority
in restructuring process.
Private Sector representatives with good track record of management, organization
and administrative skills, should be appointed as heads of PSEs, especially in PIA,
PSM, PR, TCP, PEPC etc.
An independent holding company may be formed to replace and take up the role of
different administrative ministries in controlling PSEs. They should be separated from
operational interference by the government.
The Auditor General of Pakistan should be appointed auditor for all the State owned
Enterprises.
Rampant Corruption
Corruption is like a snow which melts from the top Mohtarma Fatima Jinnah
Corruption cannot exist without the connivance of political leadership,
even if passive Kimberly Ann Elliot, a renowned American Economist
Facts and Figures
As per the Corruption Perception Index 2012 (CPI) of Transparency International (TI),
Pakistan ranks at 139
th
position, out of total 174 countries. It further reveals that
police continue to be considered as most corrupt sector in Pakistan. In fact, the police
have been ranked the most corrupt institution in Pakistan for the fourth time in
surveys conducted by Transparency International in 2002, 2006, 2009 and 2010.
Transparency International (TI) has revealed that during last three years, corruption
has cost the nation more than Rs. 3 trillion per annum in selected areas. This figure
does not include the loot and plunder of national wealth in mega scandals like Steel
Mill scam, rental power plants frauds, NICL, Hajj scandals etc.
TI further reveals that corruption is steadily rising at the pace of 15 to 20 percent
annually in Pakistan. It further says that the country lost Rs. 1,100 billion to
corruption in 2011 compared to Rs. 825 billion in 2010 and Rs.450 billion in 2009.
According to TI, there has been no check on corruption in Pakistan as anti-corruption
institutions i.e. NAB and FIA have sometimes been siding with the corrupt elements
by distorting and manipulating evidences.
Former Pakistani Finance Minister, Mr. Shaukat Tareen, in a statement, had said that
corruption in Federal Board of Revenue (FBR) alone stood at Rs. 500 billion, whereas
state enterprises like PIA, WAPDA, Pakistan Steel Mills and Railways eat up Rs. 300
billion of tax payers money.
In 2007, World Bank & IFC conducted Enterprise Surveys, in which 59% companies
identified corruption as a major constraint to doing business, and 48% companies in
Pakistan expect to give gifts to public officials 'to get things done'. This observation is
also shared by World Economic ForumGlobal Competitiveness Report 2012-2013, in
which companies indicated corruption as most problematic factor for doing business.
Rampant corruption has eroded the efficiency in public sector enterprises, which
have become a perpetual drain on the national budget.
Top-to-down corruption in the government has discouraged people to pay taxes, as
they expect no return in terms of social welfare, social security and better health and
education facilities.
Corrupt environment has created injustice in the society, which has lead to violence
and criminal activities.
Pakistans image as a corrupt country internationally, has deterred foreign capital
and investment inflows.
Corruption by the police has resulted in lack of confidence in authorities and a culture
of lawlessness.
Corruption has hindered good governance and weakened the democratic institutions
in the country.
Corruption has hampered economic growth as well as the ability of the government
to raise taxes. This has led to promotion of informal businesses. It is a fact that due to
corruption in tax machinery and complex tax collection procedures, the businesses
avoid getting registered for tax purposes.
Political will is the key driver of systematic change in corruption environment. A
nation-wide anti-corruption reformshould be undertaken by the newgovernment in
public and civil services.
NAB should be given more powers and independency to check and take action
against corruption cases. It should be truly independent of any executive or political
control to investigate into allegations of corruption against politicians, bureaucrats
etc.
A code of conduct should be framed for public servants and parliamentarians.
Through an act of parliament, it should be made obligatory for them to follow the
code.
A fool-proof accountability systemshould be implemented. The business community
and the civil society should be associated in anti-corruption reforms and initiatives, to
keep a check and balance on NAB.
There should be regular effective audit of personal bank accounts of politicians and
bureaucrats.
The recruitment process in the lawenforcement agencies should be strictly based on
merit and professional standards, without political interference. The pay structure
should be reasonable to discourage corruption.
The civil society and NGOs should be associated with government agencies and
committees, in advisory and oversight roles so that they can act as watchdogs in
fighting against corruption.
The government should seriously consider setting up of an independent Anti-
Corruption Ombudsmen at federal, provincial and local levels, to deal with
complaints against the conduct of government officials and agencies dealing with
public. The proposed Ombudsmen should dispose of corruption cases, involving
abuse of power, illegal gratification and misappropriation of property, kickbacks and
commissions, expeditiously.
Growing Informal Economy
Black money is so much a part of our white economy; a tumor
in the centre of the brain try to remove it and you
kill the patient. - Rohinton Mistry, an Indian-born Canadian Writer
Facts and Figures
The unaccounted economic activity, not reflected in national statistics, is termed as
informal or unofficial, or undocumented or black economy. According to estimates,
Pakistans informal economy is larger than previously approximated and expanding
at rapid pace; whereas formal sector appears to be on retreat.
A research conducted in 2012 by PIDE (Mr. Ali Kemal and Mr. Ahmed Waqar Qasim)
reveals that the size of informal economy in 2008 ranged 74% to 91% of formal
reported economy. They concluded that Pakistans GDP is understated by 91.44%
due to non-inclusion of informal business.
According to a research study (Iqbal, Qureshi and Mahmood) the informal economy
in Pakistan grewannually at the rate of 27%in 1970s; 14%in 1980s and 26%in 1990s.
This means that the real GDP growth rate is usually much higher than the rates
quoted on official documents.
A study conducted by LUMS in 2003, concluded that out of Rs100, the government
collected only Rs. 38 and Rs. 62 went to pockets of taxpayers, tax collectors and
practitioners.
A research report prepared by Federal Board of Revenue (FBR) reveals that the
informal or underground economy in Pakistan expanded at the rate of 9%from1977
to 2000.
According to State Banks study, the size of Pakistans black economy presently
stands at around 30% of GDP or around US$70 billion a year. This figure might be
even more, considering low tax-to-GDP ratio.
Dr Aqdas Ali Kazmi in his paper Tax Policy and Resource Mobilization in Pakistan
estimates that 70% part of the economy consists of 36% pure black economy; 18%
exempted economy; 9% illegal economy; 4.5% unrecorded economy and 2.5%
informal economy (unreported economy).
Economic experts believe that cumbersome tax structure and regulatory burden is
not only preventing informal sector to formalize but also driving existing documented
firms to move to informal sector. According to tax experts, number of firms on tax
register (income tax and sales tax) has declined during last five years.
Rampant high level of corruption in the government is considered another major
factor due to which the people and businesses are reluctant to pay taxes and avoid
documentation. Those who are in the tax net are exploited and harassed by the
authorities, even if they are honest taxpayers.
58 |
There is a growing trend that many existing businesses in formal sector are either
completely or partially shifting production to the underground economy. This trend
was even noticed by the FBR in cigarette making sector where a sharp decline in
federal excise occurred during the year 2009-10. The same trend was also observed
in vegetable ghee and cooking oil units.
The growing informal sector has brought up serious structural constraints in
Pakistans formal sector and for its overall, long term growth prospects.
The unorganized sector expansion has caused distortions in the formulation of public
policies and investment in infrastructure such as witnessed in energy and power
sector.
The informal economy growth has induced higher consumption, leading to more
production of goods and services in the economy that is not reflected in the national
accounts.
The SECP should carry out a candid survey of the underlying reasons which restricts
the informal or unlisted sector, especially the SMEs, to come under the ambit of
corporate structure. The SMEs should be provided adequate financial services to
encourage them to register as corporate entities.
The regulatory framework should be simplified to attract the informal and unlisted
businesses. Extensive awareness campaign should be initiated to promote the
benefits of corporatization.
The taxation structure is quite distorted and leads to tax evasion. This should be
rationalized and the registration process be made simpler and user-friendly to speed
up corporatization.
The concept of presumptive taxation be gradually reduced and only real income
should be taxed. The tax and corporate laws should also be made investor-friendly to
promote corporatization in the country
The generous unjustified tax exemptions given to privileged and protected segments
of the society should be withdrawn forthwith.
The tax rate on listed corporate sector should be brought down to 25 percent or else
a uniformtax rate of 30 percent be introduced for all businesses, irrespective of their
legal status to encourage corporatization.
The government should make it mandatory for the profit-making listed companies to
pay dividends to their shareholders. This initiative would improve market liquidity
and enable the small investors to share in the earnings of listed companies. This will
also generate additional revenue for the government.
The local Chambers of Commerce and Industry be asked to launch Pay your Taxes
campaign, in order to supplement the efforts of the government to promote the
corporate sector.
Chapter 3: Assessment of major issues of Industry, Services andFinancial Sectors | 59
60 | Chapter 3: Assessment of major issues of Industry, Services and Financial Sectors
Assessment of major issues of Industry,
Services and Financial Sectors
Chapter 3
Industry / Manufacturing Sector
Textile Industry
Facts and Figures
Pakistan is 8th largest exporter of textile products in Asia, having share of less than
1% in global textile trade.
Textile sector contributes 9.5% to the GDP and provides employment to about 15
million people or roughly 30% of the 49 million workforce of the country.
Pakistan is the 4th largest producer of cotton. There are 1221 ginning units, 442
spinning units, 124 spinning units and 425 small units which produce textile products.
Pakistan contributes 5% to global spinning capacity, with 3
rd
largest capacity in Asia
after China and India.
Major Specific Issues
Precarious Energy situation power shortage and load shedding
Reduced gas supply
High input cost (e.g. raw materials and utilities)
Unavailability of Yarn mostly exported
Low value addition
High mark-up rates
| 61
Proposed Measures
The duty free market access to Pakistani exports granted by EUunder its Generalized
System of Preferences (GSP) Plus status w.e.f. 1st January 2014, would greatly
benefit our textile and clothing industry to enhance exports to EU countries. The
government should immediately resolve the power and gas shortage faced by textile
sector otherwise GSP Plus status would prove futile.
The government should consider giving preferential treatment to the textile sector
by providing it un-interrupted electricity and gas supply. The present situation is that
around 800 units have been closed down in Punjab, causing massive unemployment
of approx. 15, 00,000 workers.
The government should consider installation of new electricity and gas plants in
Faisalabad which is the textile hub of Pakistan, surrounded by biggest cotton belt and
attracting workers from across Punjab province in the weaving mill, spinning units
and garment factories.
The government should encourage and incentivize the export of value added textile
products to earn maximum foreign exchange earnings, instead of relying on exports
of cotton and fabrics.
The Trade Development Authority of Pakistan (TDAP) should be advised to support
the textile exporting companies in creating and promoting their brand names in
international market, as well as in arranging their joint ventures with world
renowned brand names in textiles.
The textile industry may be offered zero-rated duty for import of latest equipment
and machinery to replace and upgrade their obsolete machineries in order to achieve
product competitiveness.
The sub-rule (6) under SRO 801(I)/2002 dated 15/11/2002 should be re-enacted in
letter and spirit, enabling the SME textile industry to avail the DTRE facility.
Under DTRE, the requirements of post dated cheques/ bank guarantee, amounting to
value of import duty and taxes as well as requirement of indemnity bond, customs
audit/ inspections should be done away with. Currently five different departments
are involved in DTRE inspections and verifications. It should be delegated to a single
authority to reduce the bureaucratic hassle.
Cement Industry
Facts and Figures
Pakistan is the 5
th
largest cement exporter country in the world.
Cement industry is a capital intensive industry, employing around 3% of the total
workforce.
Cement industry is contributing taxes of about Rs. 30 billion to the national
exchequer.
Pakistan is perhaps only country in the region having surplus cement with lowest per
capita cement consumption. During 2011-12 Pakistan had surplus capacity of 12.25
million tons.
Cement exports constitutes one third of overall cement production in the country. In
2011-12, Pakistan exported 8.57 million tons of cement to Afghanistan, India and
other countries.
The current installed cement production capacity of 24 units in Pakistan is 44.77
million tons, whereas the production capacity of clinker is 42.64 million tons. The
existing capacity utilization of cement is 70% to 75%.
High production cost
Huge transportation cost
High incidence of taxes
Cartelization
Declining exports to India due to non-tariff barriers
Proposed Measures
The government should exploit the coal reserves in the country for making it
available to the cement industry, which could provide them a cheap and constant
source of energy for production.
Petroleumcoke is a fuel, commonly used universally, as a substitute of coal in cement
industry. The Government should reduce the custom duty on import of Petroleum
coke from 5% to zero percent, as given on coal, in order to reduce the input cost of
the cement industry.
Import of Pet coke (HS Code 2713.1100) be freely allowed fromIndia via sea and land
routes at Attari and Wagah entry points, as is being done in case of cement export
from Pakistan to India.
Import of cement machinery should be exempted from the levy of sales tax.
Federal Excise Duty (FED) on cement may be reduced to Rs. 200 per ton frompresent
Rs. 500 per ton. Similarly, the withholding tax on power bills of cement units may also
be abolished to help the cement industry bring down its huge cost of production.
The government must seek trade concession for the cement industry by using its
favourable diplomatic relations with the Middle Eastern and Gulf countries. Trade
Development Authority of Pakistan (TDAP) should be advised to include cement in
their exhibitors profile.
Sugar Industry
Facts and Figures
Pakistan is the 5
th
and 8
th
largest country in the world by cane cultivation and sugar
production.
Sugar industry is the second agro-based industry of Pakistan, employing 1.2 million
work force.
Sugar industry contributes around 22 billion to the government in shape of taxes.
The annual sugar consumption of Pakistan is around 4.34 million tons i.e. 24 kg per
capita.
The current installed sugar crushing capacity of around 88 sugar factories in the
country is 43.91 million tons. The average capacity utilization stands at 53.21
percent.
During 2011-2012, total sugarcane production stood at 58 million tons, whereas
sugar production was around 4.71 million tons.
Pakistan exported 109,000 tons of sugar by 30
th
September 2012, as reported by
State Bank.
Delay in payment to growers by Millers
Liquidity problems faced by Millers
Low yield due to unscientific agricultural practices
Low sugar recovery
Late crushing by farmers
Late transportation of sugarcane to mills
Late fixation of support price
Sugar hoarding
Proposed Measures
The Ministry of Commerce, Government of Pakistan, has allowed export of sugar vide
public notice dated December 14, 2012. Accordingly, the State Bank of Pakistan (SBP)
vide its Circular # 11 dated December 18, 2012 has notified the mechanism for
processing of such cases, whereby contracts for sugar export shall have to be
registered against irrevocable letters of credit and advance payments. However, it
has been observed by the Pakistan Sugar Mills Association (PSMA) that SBP also
entertained paper contracts which resulted in early exhaust of quota. It is therefore
suggested that the above SBP circular may be complied with strictly and contracts,
which are to be registered with SBP should only be made contingent with irrevocable
letters of credit and advance payment.
The Government as well as sugar mills should make combined efforts to assist the
farmers, through Agricultural Research Institutes, in planting high sucrose recovery
varieties of sugar cane and in combating plant diseases through use of better
pesticides. This would improve yield per hectare.
The government should encourage formation of Supervisory Committees,
consisting of representatives of growers, sugar mills, agricultural department and
local administration, to deal with price, supply and other related issues between the
growers and the sugar mill management.
The government should determine the support price of sugarcane crop on the basis
of economic factors like increase in prices of inputs and sucrose recovery, etc. to
equally protect the interest of all stakeholders.
The government should seriously resolve the key issue of marketing of sugarcane
from grower to mill owners and of refined sugar from mill to the market. It should
strictly reduce or eliminate the role of middlemen in order to control hoarding and
artificial hike in price of sugar in the market.
The government should provide special incentives to those sugar mills which co-
generate energy from Bagasse during off-season. This would not only create
additional revenue for the sugar mills but will also help the country in meeting the
electricity shortfall.
The Pakistan exporters are facing great hardships in exporting sugar through land
routes to India, which is the biggest importer of our sugar. The government must take
up this issue with the Indian government to facilitate exports of sugar from Pakistan
on bilateral basis.
Automobile Industry
Facts and Figures
Auto Industry in Pakistan contributes around US$ 3.6 billion to the GDP and earns
revenue of around US$ 0.82 billion for the country.
Auto industry is saving around US$ 2.4 billion foreign exchange annually through
localization.
Auto Industry has total investment of US$ 1.09 billion and provides direct
employment to around 1.4 million people. It is the second largest payer of indirect
taxes after the petroleum sector.
There are 3200 units of automobile industry in Pakistan which are producing 200,000
vehicles and 1.8 million motorcycles annually.
Auto industry is making exports of Rs. 128 million annually with huge potential for
further growth.
Competition from used imported cars
Rising interest rate
Depreciating Pak Rupee
High rate of duty and taxes
High Input Cost of Raw materials (Iron and Steel)
Lack of Skilled manpower
Lack of auto-financing
Proposed Measures
The government should persuade the car-assemblers to produce cheaper quality
cars in accordance with the purchasing powers of the consumers in Pakistan.
The government must encourage the foreign auto-assemblers in Pakistan to transfer
technology in a given time frame for localization and strengthening the auto industry.
The government should frame regulation to make it a binding on the automobile
manufacturers to offer safety measures such as anti-lock breaking system (ABS),
lower CO emissions, etc along with quality specifications in order to ensure standard
safety and quality standards in the auto industry.
The government should develop a policy for the dealership/supply chain structure in
auto industry as these do not have any significant role and are merely acting as
agents of car manufacturers. Due to delay in deliveries, premiums are charged in
secondary markets. There is need to create a meaningful competition for the car
dealers to put in place perfect competition for the industry.
Due to rising fuel prices globally, the government should encourage switching over to
ethanol fuel as used in Brazil and other countries. Ethanol Fuel is produced by
Molasses, which is produced in good quantity by the sugar mills in Pakistan. Since the
engines of locally assembled cars do not support ethanol, as such the government
should facilitate the industry in acquiring the technology to produce ethanol
compatible cars. In Brazil they use 90% Ethanol and 10% petroleum whereas
Pakistani cars with default engines can afford only 3% Ethanol.
Leather Industry
Facts and Figures
Pakistan ranks 15
th
in the world production of leather and the 5
th
largest exporter in
the world with 3 percent share in global market of leather sector.
Pakistan stands at 2nd position in terms of production of quality leather in the world
after Italy.
Leather industry is the 3
rd
largest export-oriented sector of Pakistan with annual
exports of around US$ 1 billion.
Leather industry is the 2
nd
largest foreign exchange earner with contribution of 4.42
percent.
Leather industry contributes around 5% to the GDP and provides employment to
more than one million people in around 800 tanneries in the country.
Electricity and Gas shortages
Declining exports
Lack of trained manpower
Smuggling and unlawful export of live animals
Export of wet blue leather under mis-declaration
Proposed Measures
The government should consider realistic increase in duty drawback rates on export
of finished leather for goat/ sheep skins and cow/buffalo hides and leather as the
existing rates on these items are very low (ranging between 0.80% to 2.12%).
Similarly, the withholding tax on leather exports should also be reduced from 1% to
0.5 percent.
The government should impose a complete ban on export of wet blue leather of all
kinds of raw hide/skin and pickled leather, in order to avoid shortage of these
essential raw materials for the local leather industry. Moreover, stringent measures
should be taken to discourage massive smuggling of live animals from the borders to
avoid shortage of hides and skins.
The government should consider allowing duty free import of essential accessories to
the leather industry for value addition in leather products such as leather shoes,
bags, garments etc.
The government should study incentives provided to the leather industry in India,
Bangladesh and China by their respective governments such as support for
technology upgradation, setting up of Leather Development Centers, leather and
footwear parks, combined treatment plants etc. It should also consider framing a
leather development plan like in India.
Pharmaceutical Industry
Facts and Figures
Pakistan has the 8
th
largest pharmaceutical manufacturing industry in the world with
40 biotechnology companies, involved in development and manufacturing of various
drugs.
Pharmaceutical industry contributes around US$ 1.6 billion towards GDP of Pakistan
and provides employment to around 4 million people.
Pakistan has about 400 pharmaceutical manufacturing units with about 70,000
registered drugs. The share market of local pharma is almost 70%while remaining are
multinational companies.
Pharmaceutical Industry meets around 90% of country's demand of finished
medicine. Locally manufactured medicines are up to international standards.
Pakistan is exporting pharmaceutical products worth around US@ 200 million
annually.
Unreasonable price control strategy by Drug Regulatory Authority
Inflation
Rupee Devaluation against Dollar
High Cost of Utilities
Power shortages
Proposed Measures
The pharmaceutical industry has a long standing demand for allowing a reasonable
price increase against inflation and heavy increase in input costs. The government
must consider their legitimate demand after carrying out mandatory cost audit of
each product through cost auditors so that the increase in prices and profits are not
so excessive that put additional burden on the common man.
The Drug Regulatory Authority (DRA) need to be revamped and restructure to
transformit into a dynamic and professional body that may develop effective policies
for the pharma industry.
The government should offer tax incentives to attract investments from foreign
pharmaceutical companies and also to encourage the local pharma industry to
produce quality medicine.
The government should support research and development initiatives in the
pharmaceutical sector, like in other countries, to ensure availability of quality drugs
in the country. In this connection, the government may also consider release of
grants to pharma companies on meeting set criteria.
The government should make it mandatory through legislation for every
pharmaceutical company to produce atleast on essential raw material in Pakistan so
as to reduce heavy dependence on imports of costly raw material from other
countries. This would not only save foreign exchange but also help bring down prices
of medicines in Pakistan which would ultimately benefit the people.
The government must take strict measures to prevent sale of fake, sub-standard and
non-registered drugs as well as hoarding of medicines, by imposing penalties and
making legislation.
Fertilizer Industry
Facts and Figures
Fertilizer industry constitutes around 3.4% of manufacturing of Pakistan.
Pakistan ranks 46
th
in the world in terms of fertilizer consumption.
Fertilizer consumption in five major crops production (wheat, cotton, sugarcane, rice
and maize) in Pakistan is about 87 percent.
Fertilizer industry in Pakistan has overall production capacity of around 7.5 million
tons annually.
Pakistan is one of the leading exporters of urea which is trusted as high grade
fertilizer.
Fertilizer sector in second largest consumer of gas after the power sector.
Shortage / Shutdown of gas supply
Low Production Capacity
Hike in Fuel Prices
Energy crisis
Proposed Measures
Natural gas is an essential input in fertilizer which contributes about 80% to total
production cost as fuel and feedstock. However, continuous shortage in gas supply by
SSGC/SNGC has resulted in deep crisis for this industry. The fertilizer sector is
receiving less than 20% gas on 75% load basis whereas other industries are receiving
50% gas on full load basis, which is unjustified for this industry. The government
should direct the SNGPL to resume full and immediate gas to the deprived SNGPL
based fertilizer plants. The government should also resume gas supply to all plants on
permanent basis so that they remain viable for longer run.
The Economic Coordination Committee (ECC) has approved a long term plan for the
fertilizer industry in 2013 under which gas supply will be made to fertilizer plants
from dedicated gas supply sources. A Committee has also been established to
develop modalities, including legal and financing arrangement for the project and to
determine better cost effective structure. Since Chemical Fertilizer industry has come
under the purview of cost audit, as such it is suggested that the government should
include the representative of ICMA Pakistan in the said Committee.
The government should ensure strict quality control and monitoring in order to
prevent import of sub-standard fertilizer products and also to curb adulteration and
other malpractices in this sector.
The government should make suitable arrangement for education of farmers on use
of balanced fertilizer so as to neutralize the adverse impact of constant use of
nitrogenous fertilizers.
Edible Oil Industry
Facts and Figures
Pakistan is the 3
rd
largest importer of Palm Oil and other soft oils in the world. It
imports around 2 million tons of palm oil and 1 million tons of oil seeds annually to
cater to domestic demand.
Edible oil is the second largest import of Pakistan after Petroleum products.
Pakistan edible oil imports stood at US$ 2.43 billion out of total import value of US$
4.49 billion during 2011-2012. The annual increase in edible oil consumption in
Pakistan is around 7.7 percent
Edible Oil industry in Pakistan constitute 10 refining units, 160 small and medium
sized vegetable oil and ghee units with installed capacity of more than 2.7 million
tons.
Edible oil sector has about 64 solvent extraction units which are producing 0.63
million tons by using locally planted cotton seed, rape seed, mustard seed, canola
and sun flower.
Edible oil sector is contributing over Rs. 50 billion to government in shape of duties
and taxes.
Dependency on Imports Limited local production
Rise in international prices of edible oil
Dollar-Rupee parity
High Import duty and taxes
Wide gap between demand and production
Proposed Measures
Import of edible oil is a heavy drain on our foreign exchange. Pakistan can save about
US$2 billion annually by encouraging the domestic edible oil sector. To achieve this,
the government should provide incentives for proper farming, production,
processing and marketing of oil seeds.
The price of locally produced edible oil is fixed on the basis of cost of imported oil due
to which the farmers have to suffer as they are on mercy of industry and middlemen,
who procure their produce on this basis. As such, the farmers are less inclined to
grow oil seeds and prefer other crops for better gain. The government should,
therefore, resolve this issue on an urgent for the benefit of the farmers and increase
in production of oil seed crop in the country.
The yield per acre of all oil seed crops (i.e. cottonseed, sunflower, canola, rapeseed
and mustard) ranges between 15%to 45%of their potential due to water scarcity and
lack of application of latest technology and farming techniques. The government
should take measures to remove these bottlenecks to increase output.
There is good potential for olive oil cultivation in Potohar region and Balochistan. The
government should take up this project in collaboration with the private sector to
start commercial production of olive oil in bulk that will help the trend of fortifying
edible oils with olive oil.
The government should consider doing away with the import duty on crude palmoil,
as in India and Bangladesh, in order to promote the local refining industry.
Oil and Gas Industry
Facts and Figures
Oil and Gas are major components of Pakistan's energy mix, meeting over 77.4% of
energy needs.
Pakistan has estimated crude oil reserves of 303.63 million barrels while its current
production is 65,531 barrels per day.
Pakistan has estimated gas reserves of 28.32 Trillion Cubic Feet (TCF) while its current
production is 4 billion cubic feet per day.
Over 700 wells have been drilled by local and foreign exploration and production
companies with over 250 discoveries Success ratio is one discovery per 3.22 wells
drilled, one of the best in the world. US$ 810 million was spent in 2010 alone on
drilling activities with 30 new wells drilled.
Pakistan is endowed with vast sedimentary area of over 800,000 square kilometers of
which over 70% is yet to be explored. Till 31
st
July 2012, 250 oil and gas fields (58 oil
and 192 gas) have been discovered in various basins of Pakistan with a success rate of
1:3.22.
Pakistan imported oil to the tune of US $15 billion, which constituted 36% of overall
import bill of the country. Pakistan meets about 18% of its oil demand from local
sources. Pakistan produced oil worth US$2.4 billion and gas worth US$4.3 billion.
The number of CNG vehicles has reached two million, giving Pakistan the distinction
of having the highest number of natural gas vehicles in the world. In 2011, total
investment of US$ 833 million was made in the CNG sector in Pakistan.
Heavy dependence on imported oil
Decrease in oil/gas discovery size
Security concerns
Circular Debt Issue in Energy Sector
Negative reserve placement
Lack of R&D in exploration activities
Lack of Skills and technology
Proposed Measures
The government should give high priority to investments in the oil and gas sector for
which it should devise a set of incentives to encourage the petroleum companies to
explore, develop and exploit petroleum resources to achieve greater self-reliance in
energy supplies.
There are abundant untapped reserves of oil and gas available in Sindh, Balochistan
and other parts of the country which need to be explored to end the existing energy
crisis. The government should capitalize upon this huge potential as an increasing gap
between supply and demand of oil and gas in the country would be a big challenge in
years to come.
The production from existing oil and gas reserves are on steep decline and rapidly
exhausting. According to an estimate, we are left with oil reserves for only 10 years
and gas reserves for about 15 to 20 years. The government should, therefore, take
this seriously and ask the oil and gas exploration companies to discover new oil and
gas fields.
The government should take immediate measures for removing all the grievances of
the oil and gas exploration companies which are hindering it in adding new
discoveries, such as security issues.
The government should frequently revise the petroleumpolicies, keeping in viewthe
global oil/gas exploration production scenario and domestic ground realities.
The government should also facilitate in providing training to geo-scientists and
engineers in latest exploration and production skills and also in promoting intra-
industry and intra-academia synergies.
Services Sector
Information Technology Sector
Facts and Figures
Pakistan stands at No.2 position in global IT services. Pakistan is also included in the
list of best IT countries, which points to the rapid growth made by this industry.
Pakistan's IT industry's global share is around US$2.8 billion, including global sales
revenue of US$1.6 billion.
The annual growth rate of IT Sector is 33% with 41% growth in employment of
professionals.
Pakistans IT industry consists of 110,000 skilled professionals, out of which 24,000
are engaged in exports.
Seven multinational companies have 'Development Centers' in Pakistan. 110 ISO
9001, 23 CMMi and 11 ISO27001 certified companies. Nine STPs are offering around
700,000 square feet of IT-enabled office space.
Pakistan Software Export Board (PSEB) has more than 1500 IT companies, out of
which two are listed on Karachi Stock Exchange (KSE), 2 on National Association of
Securities Dealers Automated Quotations (NASDAQ) and 1 on Dubai International
Financial Exchange (DIFX). These companies possess expertise in custom software
development, ERP, financial solutions, mobile content, document management,
enterprise computing and business process outsourcing (BPO).
Government incentives to foreign outsourcing community include 100% equity
ownership, 100%repatriation of capital and dividends, and income tax exemption for
IT companies till 2016.
Lack of adequate trained manpower
Inadequate telecommunication infrastructure
Moving abroad of IT professionals from Pakistan
Lack of special financing schemes for IT businesses
Lack of acceptability of IT services in public sector organizations
Proposed Measures
The government should devise a national IT policy which should focus on both the
private and public sector. This is important if we want to tap the true potential of IT
industry in Pakistan.
The government should support the IT industry in marketing software internationally
in order to get maximum projects and investment in research projects.
The government should issue directives to all federal and provincial governments,
affiliated departments and semi government organizations to procure software only
through local IT companies.
The government should exempt IT businesses from corporate income tax till 2020.
Similarly, tax relief be granted to business units on amounts spent on software
applications and related equipments.
Government should establish effective Information Technology Parks (ITPs) in
Federal &Provincial Capitals on Public Private Partnership basis so that IT companies
concentrate on their core business and not on peripheral issues related to facilities.
ITPs should also act as a showcase to the investors
The government should invest in various fiscal and non-fiscal incentives to nurture,
develop, and promote the use of IT in organizations, to increase their efficiency and
productivity.
The IT companies should be provided credit from banks on soft and easy terms to
promote IT industry.
The threshold level for floating IT companies on the local stock market should be
lowered to encourage listings of as many IT companies on the stock exchange.
The professional Institutes, especially those in IT subjects, should produce high-
quality graduates to meet growing demand both locally and internationally.
Telecommunication Sector
Facts and Figures
The telecom industry in Pakistan is growth fast, with total cellular subscription r
reaching the mark of 122 million subscribers. By March 2013, the total subscribers of
all mobile companies in Pakistan stand at 122,127,717.
According to Pakistan Telecommunication Authority (PTA), the telecom sector had
remained one of the most potential sectors during the last six years and it
contributed more than Rs 687 billion during this period, besides providing a large
number of employment opportunities.
In 2011-12, the telecom industry contributed Rs. 133.4 billion to the national
exchequer.
There are around 1,800 franchises of mobile phone operating companies working in
the country.
PTCL is dominant player in broadband market and its products viz. EVDOand DSL are
the popular technologies for broadband users in Pakistan. EVDOattains 35%share in
broadband market.
The telecom industry attracted the highest 54% share out of total FDI made in
Pakistan during the year 2005-2006. However, since then FDI share in telecom is
continuously falling i.e. 36% in 2007-07; 27% in 2007-08; 22% in 2008-09; 17% in
2009-10 and only 5% in 201-11.
Annual Cellular Subscribers in Pakistan
(Source PTA)
Mobilink Ufone Zong Instaphone Telenor Warid Total
2003-04 3,215,989 801,160 470,021 535,738 5,022,908
2004-05 7,469,085 2,579,103 924,486 454,147 835,727 508,655 12,771,203
2005-06 17,205,555 7,487,005 1,040,503 336,696 3,573,660 4,863,138 34,506,557
2006-07 26,466,451 14,014,044 1,024,563 333,081 10,701,332 10,620,386 63,159,857
2007-08 32,032,363 18,100,440 3,950,758 351,135 18,125,189 15,489,858 88,019,812
2008-09 29,136,839 20,004,707 6,386,571 34,048 20,893,129 17,886,736 94,342,030
2009-10 32,202,548 19,549,100 6,704,288 0 23,798,221 16,931,687 99,185,844
2010-11 33,378,161 20,533,787 10,927,693 0 26,667,079 17,387,798 108,894,518
2011-12 35,953,434 23,897,261 16,836,983 0 29,963,722 13,499,835 120,151,235
Jul-12 35,678,830 23,050,993 17,144,681 0 29,903,055 13,199,210 118,976,769
Aug-12 35,719,433 23,691,492 17,517,108 0 29,945,115 12,897,738 119,770,886
Sep-12 36,073,988 23,829,009 17,801,032 0 30,162,943 12,646,458 120,513,430
Oct-12 36,388,770 24,072,203 17,951,385 0 30,428,972 12,761,009 121,602,339
Nov-12 36,600,076 24,314,561 18,930,012 0 30,809,667 12,942,886 123,597,202
Dec-12 36,141,241 23,809,099 18,700,507 0 30,564,465 12,731,050 121,946,362
Jan-13 35,922,299 23,553,444 18,567,308 0 30,175,322 12,600,847 120,819,220
Feb-13 36,011,288 23,345,258 18,659,009 0 30,423,114 12,524,160 120,962,829
Mar-13 36,316,427 23,609,365 18,822,169 0 30,841,111 12,538,645 122,127,717
Lack of proper regulatory governance
Delay in third generation mobile spectrum
Cellular suspensions for security reasons
Restriction on SIMs issuance at retail outlets
Saturating cellular market
Proposed Measures
The government should announce an integrated and focused ICT policy for a period
of 10 years, rather than segmented policy frameworks. Emerging cross -cutting
segments e.g. mobile financial services should be a part of such policy.
The 3G/4G spectrum auction in 1900/2100MHz frequency bands should be
completed in 2013. The pending spectrum auction (of over 600MHz in
1.9GHz/3.1GHz bands to existing FLL, WLL &CVAS operators) should also be finished
this year so that operators get more spectrums to expand.
The government should offer an incentive package to telecomindustry on issues like
unverified SIMs, illegal international incoming traffic and same International Mobile
Station Equipment Identity (IMEI) number for cell phones. The government should
play an active role to stop this destructive competition environment.
The government should not allowor grant more licenses until the maturity of present
telecom sector, which is already going through astronomical survival pressures.
The government should consider special subsidy/incentives to the telecomsector for
providing services in the war zone where the losses are very high due to loss of
revenue, high repair and maintenance cost and destruction of installation.
The government should encourage the telecom companies to expand their service
network to rural areas in addition to universal service fund (USF).
Main services providing exchanges must be exempted from load shedding to
facilitate uninterrupted, smooth and regular supply of services to all the
important/vital installations, service users.
The concept of convergence of regulatory bodies should be introduced so that all
types of telecom services may be dealt with under a single umbrella
Excise duty on telecommunications services is quite high and need to be revised
downward to 16% so as to bring the telecom services at par with other services
subjected to FED. This will also provide some relief to public at large.
Housing and Construction Sector
Facts and Figures
The construction industry contributes 13.5% to the world GDP and employs around
7% of the total employed labour force in the world.
Construction industry is the prime source of employment generation for Pakistan,
offering job opportunities to millions of unskilled, semi-skilled and skilled workforce.
The construction industry has provided growth to the supporting allied industries in
Pakistan such as cement, iron, steel, marble, electrical works, sanitary works,
horticulture and transport sector.
The total share of construction in the GDP of Pakistan has declined from4.2%to 2.4%
during last two decades due mainly to exorbitant increase in prices of raw material,
funds shortage for PSDP projects and scarcity of financing opportunities.
The State Bank of Pakistan (SBP) estimates housing backlog of 8 million units with
increase of 300,000 more units every year.
According to an estimate, there is annual shortage of 0.45 million to 0.55 million
housing units in Pakistan. The urban housing need in the country is estimated at over
3.1 million and this figure is increasing due to increasing trend of urbanization and
legal and illegal immigration. The housing needs for Karachi Region, based on
conservative estimates, are 126,000 housing units per annum.
Rising prices of building materials
Accumulation of housing backlog
Shortage of housing finance
Increased cost of construction
Freeze on gas connection by SSGC for high rise buildings
Cuts in Public Sector Development Program (PSDP) Funds
Absence of system-based construction technologies
Proposed Measures
The government should encourage investment in the construction industry of
Pakistan which will bring the country out from the current economic turmoil.
The House Building Finance Company (HBFC) is the main authority for extending loan
for house building. Due to slow disbursement of loans by HBFC, many projects have
been delayed. The government and State Bank should come forward to finance
projects, requiring large money, on easy terms. This could facilitate in development
and expansion of the construction industry.
Banks and DFIs should extend credit facilities for balancing, modernization and
replacement of machinery used in housing and construction industry and the State
Bank should direct the Commercial Banks to allocate a certain percentage of the
credit to housing sector.
The HBFCL and other financial institutions should prepare and introduce packages at
preferential mark up to provide affordable credit to low income groups.
Sui Southern Gas Company (SGC) has put a freeze on gas connections for high rise
buildings. This restriction should be removed immediately to provide relief to
construction industry.
The Government must ensure implementation of all recommendations of the
National Housing Policy 2001 for the development of construction industry.
The presumptive tax on construction companies should not be more than 1% on
yearly receipts. Similarly, the stamp duties and registration fee be adequately
reduced to an aggregate 1%which will in turn increase government revenue as more
documentation will take place.
The government should advise the HBFC to invest minimum Rs. 10 Billion on annual
basis in small housing i.e. apartments smaller than 1500 sq. ft. and 120 sq. yards
bungalows
The annual disbursement of HBFCL loans should be substantially enhanced to Rs. 20
Billion to overcome the housing shortage.
The Government should not charge stamp duty, registration fee etc on housing
mortgage. Duties and taxes on construction materials be rationalized and reduced to
make construction affordable.
Import of important plant and machinery required for the construction industry
should be allowed at zero rated duty such as tower cranes, batching plants, elevators,
solar panels etc
The Government must initiate steps to eradicate the menace of land grabbing,
encroachment, kidnapping for Ransom, threat to life and property of builder and
their staff.
The Government of Sindh should abolish Sales Tax on Services imposed on builders
and developers in provincial Budget for 2011-2012 as builders and developers are not
service providers and they have been wrongly included in this category. Additionally,
the builders and developers already pay taxes which add up to 7%. These taxes
include stamp duty, Registration Fee, CVT etc. Any addition to these dues will make
property expensive and out of reach of the common man.
Transport and Logistics Sector
Facts and Figures
Pakistan has gained worldwide recognition as a regional gateway to international
trade markets. The country has been facilitating the transportation of all types of
goods across its territory.
Road transport is the backbone of Pakistans transport system. The 9,574 km long
National Highway and Motorway network which is 3.65 % of total road network,
handles 80% of total traffic.
Major transport in Pakistan is by land. The total length of the roadways is 258,340 km,
out of which 167,146 km is paved roads (including 711 km of express ways) and
91,194 km is unpaved roads.
Road transport services are largely in the hands of private sector, which handles
about 95% freight traffic. There are over 350,000 heavy cargo trucks in goods
transportation business in Pakistan.
The trucking sector carries 96% of the total freight traffic. The trucking sector is
characterized by the presence of a small fleet of owners who generally own less than
five vehicles.
The number of vehicles on Pakistani roads is estimated to be 4.2 million vehicles
including 250,000 commercial vehicles.
Pakistan railways provide an important mode of transportation for the people and
freights. The total railroad length in Pakistan is 8,163 km (2006).
Pakistans domestic airlines connect major cities in the country. There are 146
airports in Pakistan and 92 of them have paved runways while 54 have unpaved
runways.
Port traffic in Pakistan has been growing at 8%annually in recent years. Two seaports
Keamari Port and Port Qasim handle 95 % of all international trade.
According to World Bank, annual revenue generation from transport sector of
Pakistan is estimated at USD 17 billion, contributing 10.5% to GDP. It provides over
6% of employment.
According to Logistics Performance Index of World Bank, Pakistans performance on
logistics indicators, including quality of trade and transport infrastructure, is worse
than that of other Asian countries.
Pakistans transport sector suffered massive damages in the recent floods with a
World Bank and Asian Development Bank Saturday reporting a need for more than $2
billion for recovery.
Government has not declared transport sector as an Industry
Lack of proper investment in transport infrastructure by the government
No government licensing authority for freight cargo transporters
No official law/ Act enacted for Transport Sector in Pakistan
Outdated legal framework for carriage of goods by roads
Lack of rail services and logistics to transport containers from Ports
Damages or roads and other infrastructure due to floods
Dilapidated roads and transport network
Restrictions on provision of bonded transport
High Cost for Less than Container Load (LCL)
Non-operation of Pakistan Railways on commercial basis
Lack of Road Safety Devices (RSD) main cause of accidents
Proposed Measures
The government should make proper investments in the transport infrastructure to
allow goods and services to be delivered on time and to make traveling convenient
and time saving.
Indus River Systemshould be developed as a way for transporting goods fromKarachi
to rest of country.
Short-terminvestments in improving existing roads and railways infrastructure need
to be initiated. In long-term, new roads and railway tracks should be built in both
urban and rural areas.
Pakistan needs more traffic lights since in many parts of Pakistan there are no lights
except in the major cities, which is a hindrance for drivers at night.
The government must ensure a strong and safe transport and traffic system of
Pakistan to allow the country to have a smooth journey towards socio-economic
development.
The government should encourage the business community to come forward and
take initiative to improve the air, sea, rail and road logistics and supply chain system
in the country. For this purpose, the government should announce some kind of
incentives and tax concession as well.
The government should make legislation to regulate carriage of goods through air,
sea, rail and road routes within and outside the country. This would help put in place
a regulatory mechanism for transport logistics and supply chain in the country.
The government should establish a proper cargo complex to house costly export
goods including leather, textile, surgical and sports goods as well as livestock.
Financial Sector
Banking Industry
Facts and Figures
The banking system of Pakistan is a two-tier system including the State Bank of
Pakistan (SBP), commercial banks, specialized banks, DFIs, Microfinance banks and
Islamic banks.
The total number of scheduled banks operating in Pakistan was 44 as on June 2012.
Total liabilities/ assets of all Scheduled Banks stood at Rs 12,931.8 billion at end June
2012.
As on 30th June 2012, there were 17 banks involved in Islamic banking with a network
of 874 branches in the country.
There are 20 commercial banks which are listed on stock market. In 2012, these
banks posted a combined profit-after-tax of Rs118 billion against Rs107 billion in
2011, showing 9% growth.
The Big-6 banks (UBL, NBP, HBL, MCB, ABL and BAFL), with combined assets of Rs500
billion, posted a net profit of Rs96 billion in 2012, up by a modest 9% YoY.
There are about 20 million bank accounts in different banks operating in Pakistan. For
a country with 180 million people, this figure is quite small.
As per SBP data, total deposits with banks in January 2013 stood at Rs 6.61 trillion, of
which around 38 per cent were in saving accounts.
In Pakistan, 80% of aggregate revenue of banks is generated through Net Interest
Income.
Pakistani banks are enjoying the highest spreads in the Asian region (7% to 7.5%), as
compared to 3.21 per cent in India, 3% in China, and just about 2.17 per cent in
Thailand.
SBP reduced the discount rate from12.5%to 9.5%in 2012, creating opportunities for
increased investments and lending in the economy.
SBP increased the minimum profit rate on deposits to 6% from 5%. This allowed
consumers higher returns on their savings.
Reliance on net interest income, instead of fee-based transaction and other sources
Uncontrolled government borrowing from banks
Decline in Discount rates
Shrinking banking spread
Acute liquidity crunch
High mark-up rate
Proposed Measures
The government should advise all banks, through the SBP, to introduce fee-based
products and tap Small and Medium Enterprises (SMEs), and the huge
undocumented economy, where all the transactions are cash-based with no place
for banking.
Banks should play a role in the economic growth of the country, and not as a source of
financing government activities. The government should take a policy decision to
make the banks performprudent banking, by restraining themselves frominvesting
in government papers. Presently, almost half of banks deposits are invested in
Treasury-Bills. To discourage this present practice, the government may consider
levy of higher tax on income derived by banks from investment in T-bills.
Banking sector needs to be encouraged especially with the help of consolidation.
Pakistan needs at least 5 big investment banks to support capital markets
development and economic growth.
Banks should play an instrument role in mobilizing domestics savings which are
critical to increase the overall investment levels.
SBP needs to ensure prudential regulations are in line with the need of the economy.
SBP can play a critical role in promoting venture capital for greater
entrepreneurialism especially in SME sector.
The SBP should decide about a mechanism in rules whereby banks may verify the
actual nature of remittance and no duty is deducted except in cases where
remittance is in the nature of royalty/ technical or franchise fee.
The SBP should reduce the high mark up rates to bring down the cost of doing
business.
Banks should provide finance to SMEs in simple and soft terms with simplified
documentation process to encourage expansion of small business sector.
Rates of Return / Profits on Deposits should match the current rate of inflation. The
financing rates may be revised and should be equal to Export Refinance rates.
The banks should improve their online services to save time of consumers. Banks
should upgrade their systems and invest in infrastructures and hardware/software.
ATMs installed in banks branches should be constantly checked by banks to keep
them workable 24 hours a day.
There should be no Minimum balance limit/ condition for maintaining any kind of
bank account to encourage the documentary economy. Cheque Books should be
available free of cost.
Cash withdrawal limit exemption to be enhanced to Rs.100, 000/- in one day under
section 231/a.
Insurance Industry
Facts and Figures
Life Insurance Industry is among fastest growing Industries in Pakistan. State Life
Insurance Corporation (SLIC) dominates insurance market in Pakistan with 63%
market share / life premiums.
Pakistans current insurance penetration (measured as total premiums to GDP)
stands at only 0.7% which is the third-lowest in Asia as against 4.1% of India. The
insurance density in Pakistan is recorded at around US$ 6.13, which is one of the
lowest in the world.
Pakistans general insurance penetration level (0.3%) is lower than the regional
average (1.6%).
The total number of active non-life insurance companies in Pakistan is 40 whereas
number of active insurance companies (life and non-life), including Pakistan
Reinsurance Company, stands at 50.
Pakistanis spend around Rs 48 billion on life insurance per annumwhich put per head
contribution to Rs 266. Similarly, per capital expenditure on non-life insurance stands
at Rs 327.The combined life and non-life insurance spending for each person stands
at Rs 593.
Almost 85%premiumis written by private sector insurance companies. The customer
base is predominantly corporates.
In 2005, government issued Takaful Rules. At present, the share of takaful
companies in the insurance market in Pakistan stand at 2% as compared to 1% of
takaful share in global insurance.
Pakistan is the second country after Indonesia to officially allow takaful windows,
which enable firms to offer sharia-compliant and conventional products side by side,
provided client money is segregated. Takaful share of the total insurance market
there is only 2 to 3 per cent.
Dismal performance of Non-Life Insurance sector
Lack of insurance penetration in remote and rural areas
Lack of general awareness about insurance / Takaful
Declining motor premiums
Falling Non-Life penetration and density
Proposed Measures
There is much potential and prospects for insurance growth in rural areas. The
insurance companies should devise an aggressive marketing strategy to explore the
untapped market.
The Securities and Exchange Commission of Pakistan should issue more licenses to
non-life insurance companies to expand health and other general insurance business.
After 2009, the SECP has granted license in 2013 to Sahara Insurance Co. Ltd. (SLIC), a
wholly owned subsidiary of Employees Old-age Benefits Institution (EOBI) allowing it
to conduct non-life insurance business in the country.
The government and the Insurance Association / Institute should make a collective
action plan to improve the insurance penetration and density figures that is one of
the lowest in region.
The conventional insurance companies should not be granted permission to operate
Takaful Operations, which will destroy the true essence of takaful business and also
affect the business of Takaful companies, which is basically their domain.
The general insurance companies should upgrade their operating platform by
exploring other untapped avenues and reducing their reliance on the banking sector
as a tool to mitigate risks associated with the credit exposures.
The non-life insurance companies must comply strictly with the law to ensure that
their insurance agents have completed foundation course from Pakistan Insurance
Institute within three years. The agents working in life insurance companies are
required to complete a three-month-long foundation course to be organized by the
relevant insurance company.
Chapter 4 Assessment of Taxation Policies
Income Tax
1. Tax on Companies
1.1 Reduction in Corporate Tax Rate
The corporate Income tax rate of 35% in Pakistan is comparatively much
higher in the region. This proposal is long pending and the tax collectors and
taxpayers have common opinion that this should be brought down to promote
business.
ICMA Pakistan strongly recommends that the corporate tax rate should be
brought down to 25% or else a uniform tax rate of 30% be introduced for all
businesses, irrespective of their legal status, so as to encourage
corporatization and expansion of companies. This would help attract
investment; promote industrialization; increase tax elasticity; improve tax
compliance and reduce tax evasion and corruption in businesses.
1.2 Tax Rebate for Listed Companies
The effective corporate tax rate for listed companies is 30 percent which
discourages listing of companies on the stock exchanges.
ICMA Pakistan suggests that the tax rate on listed companies be reduced to
25% to provide them an edge over unlisted companies. This would not only
help maintain a differential between listed and non-listed sector but would
also provide financial incentives for the companies to go public and expand
their corporate ownership structure.
1.3 Levy and collection of Workers Welfare Fund (WWF)
A tax on account of workers welfare fund is deducted at 2% of profit before
deduction of income tax. After 18th Amendment in Constitution of Pakistan,
1973, levy and collection of Workers Welfare Fund as an Income Tax Levy is no
more a Federal Jurisdiction.
ICMAPakistan proposes that the FBR should issue immediate instructions to
their RTO's not to issue notices for collection of provincial levy.
| 87
2. Tax on Dividends (Section 5)
2.1 Imposition of Tax based on period of holding Shares
Under Section 5 of Income Tax Ordinance, 2001, a 10% tax is imposed (as
specified in Division III - Part I of First Schedule) on every person who receives
dividend from a company.
ICMA Pakistan suggests that investors who hold their shares for more than
one year may be charged a tax rate of 5%; those holding shares from one
month to one year may be charged tax at present rate of 10% and those
holding shares for one month or less at 20%. The proposed dividend tax
structure would further help develop the stock market and discourage short-
term speculative investors and increase longer term investment.
3. Deductions not Allowed (Section 21)
3.1 Enhancement in Threshold of payment through Cash
Under Section 21(l) of Income Tax Ordinance, 2001, deduction for single
transactions exceeding Rs. 10,000 and aggregate in Rs. 50,000 has not been
allowed in single account paid otherwise than crossed. It is to be pointed out
here that under section 73 of the Sales Tax Act, 1990, payment through cash in
single transaction is allowed up to Rs. 50,000 and there is no limit for
maximum number of transactions.
ICMA Pakistan suggests that to harmonize the tax laws under newsystemof
Inland Revenue, the threshold of payment of single transaction should be
allowed up to Rs. 50,000 and aggregate transaction in single account should
be extended up to Rs. 200,000.
4. Contribution to an Approved Pension Fund (Section 63)
4.1 Enhancement in amount of Annual Contribution made by Employer
Under Section 63, Part X on Tax Credits, in calculation of tax credit allowed to
a person for a tax year, as given in C (ii), the age limit has been mentioned as
40.
It is proposedthat the age limit be reducedto25 toencourage saving habit in
youngsters.
5. Tax Credit for Enlistment (Section 65C)
5.1 Increase in Tax Credit Rate for Enlistment
Under Section 65C of Part X Tax Credits, a tax credit equal to 15% of the tax
payable has been allowed to a company which pays tax for a tax year in which
it is enlisted with any registered stock exchange in Pakistan.
ICMA Pakistan proposes that the tax credit rate should be 15% for three
consecutive years. This would help to increase tax collections.
88 | Chapter 4: Assessment of Taxation Policies
6. Minimum Tax on Turnover (Section 113)
6.1 Reduction in Minimum Tax rate to 0.2% on Total Turnover of Taxpayer
Under Section 113 of Income Tax Ordinance, 2001, Minimum Tax is levied @
one half percent on the turnover of taxpayer, where no tax is payable either
due to loss during the year or due to brought forward losses of previous years
or if the tax payable is less than the minimum tax on turnover. However,
reduction in tax is available to certain companies/persons e.g. for distributors
of cigarette, it is reduced by 80% (Section 7 Part III Second Schedule) etc.
This regime is effectively negating the provision of Section 57 that allows for
losses in tax year to be set-off against future profits and forcing the taxpayer
to pay more corporate tax that would otherwise have been due.
To maintain a level playing field, ICMAPakistan proposes that other than the
companies and sectors to whom the reduced rate or exemption is already
available; the general rate of minimum tax be reduced to 0.2% on the total
turnover of the taxpayer.
6.2 Exemption of Refineries and OMCs from Turnover Tax
A turnover tax @ 0.5% is applicable on Refineries and Oil Marketing
Companies (OMCs) u/s 113 of Income Tax Ordinance (read with Section 9, Part
III of Second Schedule). OMCs and refineries operate under controlled pricing
mechanism whereby its prices are controlled by OGRA. The margins of OMCs
are from2%to 3%. As such, OMCs end up paying tax at an effective rate of 70-
80% of profit as against normal tax rate of 35% of taxable income.
It is proposed that OMCs and refineries be exempted from applicability of
turnover tax u/s 113 of Income Tax Ordinance or turnover tax should be on
the basis of Gross Profit.
This would help OMCs and refineries to present investment projects for
expansion/up-gradation, mandatory under the directives of Ministry of
Petroleum and Natural Resources.
7 Advance Tax paid by Taxpayers (Section 147)
7.1 Reversal of Advance Tax Payment Dates to 15
th
of next month of each
quarter
Section 147 of Income Tax Ordinance, 2001 required companies to pay
advance tax on the basis of estimates of current years income. In case, the
company fails to pay advance tax including tax deducted at source is less than
90% of the tax chargeable for the relevant tax year, additional tax @ 18% per
annum is levied on the amount of tax so chargeable or the amount by which
the tax paid by the company falls short of the 90% as the case may be.
Through the Finance Act 2010 a change has been introduced in the payment
dates of advance tax i.e. 25
th
day of each quarter and reduced time period by
20 days. Before the amendments it was become due on 15
th
of next month of
each quarter. Due to said reasons, it is difficult to estimate the exact amount
of tax payable of tax year; therefore it may create refund or short fall of 90%.
Further, these revised dates are creating immediate liquidity problems in
present depressed market condition to discharge the advance tax liability
before the end of each quarter.
Chapter 4: Assessment of TaxationPolicies | 89
ICMA Pakistan suggests that advance tax payment dates should be
preferably brought back to previous position in order to allow the tax payer
to overcome liquidity problem.
This would provide much needed cash flowto invest in business and generate
more income that could be subsequently taxed.
8 Withholding Tax on Imports (Section 148)
8.1 Re-instatement of Final Discharge of Liability on Imported Edible Oil
Under Section 148 (8) of Income Tax Ordinance, 2% withholding tax was
applicable on import of edible oils before 30th June 2009 as Final discharge of
liability and the tax paid on import of packing material was refundable to the
manufacturers. Through Finance Bill, 2009, the tax rate was increased to 3%as
Minimum tax liability instead of Final Discharge. The tax paid on import of
packing material has been converted as tax payable under section 148(8),
which has adversely affected edible oil industry.
It is suggested that the previous status of 148(8) as final discharge of
liability should be reinstated and tax paid on packing material should be
refunded as per previous practice.
This would reduce the cost of production on Vegetable Ghee/Cooking Oil for
consumer benefit and simplify the book keeping procedure for the
manufacturers.
9 Tax on Salaried Individuals (Section 149)
9.1 Rectification of anomalies in Tax Slabs for Salaried Persons
The tax slabs for salaried persons, as amended through the Finance Act, 2012,
contained serious anomalies in tax slabs 4, 5 and 6. The Federal Tax
Ombudsman (FTO) in its suo moto verdict dated 17-8-2012 observed that tax
computation mechanism that militates against the principles of horizontal
and vertical equity clearly violates Articles 4 and 25 of the Constitution. Being
arbitrary, unreasonable, unjust and discriminatory, such a treatment
tantamount to maladministration as defined in section 2(3) of the FTO
Ordinance, 2000. Accordingly, the FTO passed order for revision of these tax
slabs. However, this anomaly has still not been rectified by the FBR.
ICMA Pakistan proposes that the tax slabs should be suitably amended in
accordance with recommendation of FTO, to give some relief to salaried
class.
9.2 Tax Credit for Salaried Persons
The income tax on gross salary income of salaried persons is deducted at
source, without allowing any deductions. It is a fact the salary of employees,
especially in the private sector, in not increased in line with the current
inflation in the country.
ICMA Pakistan therefore suggests that the salaried persons be allowed tax
credit on utilities and the expenses paid on education of their children so as
to provide them compensation and improve their living standard.
9.3 Extension in Date of Filing Tax Returns
The date of filing of Income Tax Return for salaried person is August 31, of
subsequent year which is very short. As a result, FBR has to extend the date
every year.
It is suggested that the date of filing of return should be extended to
September 30 in order to increase number of return filers and ease
compliance for the salaried persons.
9.4 ExtensioninDate of Filing Annual Statements under Section149 and165
Similarly, the date of filing of annual statements under section 149 and 165 of
the Income Tax Ordinance is August 31 which is too short.
ICMA Pakistan suggests that the date of filing annual statements should be
extendedtoSeptember 30, whichwouldhelpincrease the compliance level.
9.5 Allowing Credit to Salaried Person under Section 62 and 63
ICMAPakistansuggests that the salariedpersonshouldbe allowedtax credit
under section 62 and 63 of the Income Tax Ordinance, 2001, in order to
relieve tax burden on them. Accordingly, the IT Form 3 should be amended to
effect this change.
9.6 Adjustment of Refund to Salaried Person
ICMA Pakistan proposes that refunds through Income Tax returns should be
allowed as adjustment by the employer. This would relax the tax burden on
salaried persons.
10 Withholding Tax on Payment for Goods, Services &
Contracts (Section 153)
10.1 Adjustment of tax collected against final tax liability
Under Section 153 (a), 3.5% withholding tax is deducted on supplies made by
Distributors for consumer products and 1% for Pharma products and
cigarettes. The tax is deducted by persons who fall in the category of
withholding agents. Such deduction of 3.5% & 1.0% is treated as final tax
liability and exceeds even gross and net margins of some distributors/traders.
For persons dealing in products with government fixed prices, this additional
impact cannot be added to the selling prices. The general perception is that
the tax so deducted is adjustable against final tax liability which is contrary to
the fact.
ICMA Pakistan, therefore suggests that the tax so deducted from supplies
made by Distributors, Dealers & Whole sellers be made adjustable against
the final tax liability.
11 Withholding Tax on Payment to Traders and
Distributors (Section 153A)
11.1 Withdrawal of Withholding Tax Collection under Section 153A
A newSection 153A was inserted in the Income Tax Ordinance, 2001, through
Finance Act, 2012, whereby every manufacturer has to collect withholding tax
@ 0.5% of gross amount of sales at the time of sale to all distributors, dealers
and wholesalers, whether registered or unregistered. This was done with a
view to document the economy. However, it may be pointed out here that
certain categories of taxpayers e.g. Oil Marketing Companies (OMCs),
motorcycle dealers, distributors of fertilizers, pharmaceutical and consumer
goods, having huge turnover and also liable to pay minimumtax under Section
113 of the Ordinance are facing liquidity problembecause of huge differential
in tax deduction rate u/s 153A and ultimate liability u/s 113 of the Ordinance.
Secondly, many Distributors, Dealers and Wholesalers are already
documented and in tax net with valid NTN/STRN.
It is, therefore, proposed that tax deduction u/s 153A should be
permanently withdrawn through Finance Act, 2013, to improve liquidity
position of OMCs, and other distributors and also avoid double taxation as
well as accumulation of refund of tax with the FBR.
12 Withholding Tax on Petroleum Products (Section 156A)
12.1 Sale of Petroleum Products by OMCs to Petrol Pumps in AJK
Under section 156A of Income Tax Ordinance, 2001, the Oil Marketing
Companies (OMCs) are required to withhold tax @ 10% on discount or
commission allowed and deposited to government treasury. The OMCs
making sales fromthe territory of Pakistan to petrol pumps located in the area
of Azad Jammu & Kashmir deposit said tax into treasury of Government of
Pakistan as per instruction/clarification. However, AJK Council is demanding
that tax on commission or discount allowed on sales to petrol pumps located
in AJK should be deposited into treasury of AJK council in-spite of sales from
area of Pakistan.
It is therefore proposed that FBR should make clear laws for deposit of tax
deducted at source on commission allowed to petrol pumps located in area
of AJK under section 156A of Income Tax Ordinance. This would bring clarity
in tax laws and avoid adjudication.
12.2 Interpretation of Discount allowed to customers
Under Income Tax and sales tax laws, the discount allowed to customers is
allowable and not chargeable to tax. Certain field formation has interpreted
discount allowed to customer as sales promotion and asked to deposit tax @
20% under section 156A of the Ordinance.
It is proposed that section 156 should clearly disclose that discount allowed
to customer does not attract withholding tax @ 20%. This would harmonize
tax laws; increase economic activity in the country and create healthy
competition between suppliers.
13 Withholding Tax Exemption (Section 159)
13.1 Doing Away with Requirement of Withholding Tax Exemption Certificates
Section 159 Sub sec (1) of Income Tax Ordinance, 2001 requires filing of
application with the Income Tax Commissioner to make payments without
deduction of withholding tax or at a lower rate. This requirement was
abolished vide Finance Bill 2008 but later vide Corrigendum to Circular No. 5
dated 27 August 2008; the requirement for submission of application for Nil
rate withholding tax cases was restored.
ICMA Pakistan suggests that requirement of filing application to avail
exemption for withholding tax obligations should be done away with in
order to avoid undue hassle and harassment for taxpayers. The taxpayers
may alternately be required to file intimation only in respect of cases where
no withholding tax obligations arise in terms of relevant tax treaties for
avoidance of double taxation.
14 Payment of Tax Collected or Deducted (Section 160)
14.1 Extension in period for deposit of tax collection amount by
Withholding Agents
Section 160 states that any tax that has been or to be collected or deducted, is
required to be paid to the Commissioner by the person making the collection
or deduction within the time and in the manner as may be prescribed. Rule 43
provides that where the tax has been collected or deducted by a person is
required to deposit treasury within seven days from the end of each week
ending on every Sunday vide SRO 392(I)/2009.
The Government must realize that all the withholding and collecting agents
are providing service voluntarily and this restriction of payment within seven
days in quite cumbersome and creating hardship.
ICMA Pakistan therefore proposes that the deposit of withholding tax
should be allowed within seven days from the end of previous month.
15 Statements (Section 165)
15.1 Filing of Monthly Statements of Withholding of Tax
Under Section 165, every person collecting or deducting tax froma payment is
required to furnish the monthly statement by 15th day of the month following
the month to which withholding pertains. This procedure is not only
increasing volume of work but also creating high cost of compliance.
Moreover, the date for filing monthly sales tax return is coinciding with filing
of monthly statement of income tax.
It is proposed that the date for filing of monthly statement under Section
165 be changed to 25th day of the month, following the month to which
withholding pertains. Furthermore filing of monthly statements should also
be substituted with quarterly.
16 Refunds (Section 170)
16.1 Reducing period allowed to Commissioner from 60 days to 15 days for
Refund
Under clause 4 of Section 170 of Income Tax Ordinance 2001, the
Commissioner has been allowed maximum 60 days after receipt of refund
application, to serve an order in writing of the decision to the person applying
for refund (after providing him an opportunity of being heard). Though the
Ordinance is very tough against taxpayers for recovery of due tax amount, but
it is quite lenient towards its own officials who commit delays in refunds or
other rights of taxpayers. Under Section 170, the taxpayers interests or rights
in respect of obtaining refund of tax paid in excess to the amount they are
chargeable to tax under the Ordinance are not adequately taken care by the
Department.
It is therefore recommended that Section 170(4) may suitably be amended
in viewof the above proposed amendments, particularly substituting the 60
days with 15 days within which the Commissioner shall pass the order, and
in case of his failure to pass the order within the stipulated period of 15 days,
the refund application be deemed to have been accepted by him. Similarly,
provision be made in section 170 (2)(c); whereby the Commissioner may be
authorized to admit an application made after the expiry of the stipulated
period of 2 years on genuine reason.
17 Notice to obtain Information or Evidence (Section 176)
17.1 Notices be issued after verification of Data available at PRAL
Under Section 176 of Income Tax Ordinance, 2001, the tax authorities are
empowered to call for any information/ documents from assesses as and
when required. This also includes verification of tax deducted at source, tax
deduction Challan and tax certificates issued to different vendors. Despite
implementation of electronic / automatic filing of monthly and annual
statements of tax deduction and maintenance of database at PRAL, notices
under section 176 are still issued to the taxpayers for verification of data
already available at the PRAL. This results in duplication and unnecessary
hassle for the taxpayers.
It is proposed by ICMA Pakistan that field formations of FBR should firstly
verify the data fromits own data base and in case of any discrepancy found,
it should be forwarded to the concerned parties. This would minimize
paperwork and facilitate the taxpayers.
18 Offences and Penalties (Section 182)
18.1 Insertion of new provision of penalty on offences by Tax Officers
Under Section 182 of Income Tax Ordinance, 2001, a list of penalties has been
provided for different offences committed by the tax payers. However, there
is no mention of any provision in case any offence is committed by the tax
officers. It is a fact that noncompliance of Act by the tax officer causes
mistrust, loss in faith of law and shakes the confidence of tax payers and
investors.
It is suggested that a newclause/ provision be inserted in Section 182, which
should provide appropriate actions against non-compliance or late
compliance from FBR officials, to fix the responsibility and to place proper
check and balance. This would give equal rights and opportunities to the tax
payers.
19 Appointment of Income Tax Authorities (Section 205)
19.1 Disclosure of Imposition of Withholding tax on Sale of Air Tickets
Under Section 205(3) of Income Tax Ordinance, 2001, a person who fails to
pay tax as required under Section 160 on or before the due date for payment
shall be liable for default surcharge at 18%per annumon unpaid amount. This
rate is too high.
It is proposed that the rate should be brought down to 15% in order to save
the taxpayer fromany inadvertent mistake that may be committedby him.
20 Cash Withdrawal from a Bank (Section 231A)
20.1 No advance tax deduction from cash withdrawal by NTN holder
Under Section 231A of Chapter XII on Transitional Advance Tax Provisions of
Income Tax Ordinance, 2001A, every banking company has been allowed to
deduct tax at the rate specified in Division VI of Part IV of the First Schedule, if
the payment for cash withdrawal, or the sum total of payments for cash
withdrawal in a day, exceeds Rs. 50,000/=
It is proposed that under Section 231A, a clear distinction should be made
between the taxpayer and non-taxpayers by imposing higher rate of taxes.
The advance tax collected indiscriminately be withdrawn fromthe tax payer
holding a valid NTN certificate whereas from non-taxpayers a tax @ 1% of
cash amount withdrawn from bank should be collected.
21 Advance Tax on Brokerage and Commission (Section 233)
21.1 Disclosure of Imposition of Withholding tax on Sale of Air Tickets
Under Section 233 of Income Tax Ordinance, 2001, airlines are required to
withhold tax on commission allowed to travel agent. As per clause 43-B of
second schedule of IT Ordinance, travel agents are exempted from
withholding tax on sale of air tickets subject to condition that airlines have
already deducted tax on commission allowed to travel agent. However,
companies purchasing air tickets are unable to ascertain whether air lines
have deducted tax on commission allowed to travel agent or not.
It is suggested that section 233 and clause 43-B should clearly disclose
imposition of withholding tax and exemption allowed to the clearing agent.
This will minimize anomalies in the income tax laws.
21.2 Tax Credit for Withholding Agents on Performing State Duty
The Withholding agents collecting income tax and sales tax on behalf of the
FBR; deposit them in government treasury without any compensation. They
have to bear substantial costs in hiring accountants and utilizing their own
resources in this respect.
It is recommended that the withholding agents may be provided tax credit
@ 5% of annual tax withhold and deposited with the FBR, as compensation
for performing the state duties. This would help improve the performance of
the withholding agents.
22 Telephone Users (Section 236)
22.1 Imposition of tax on Mobile Connection
Section 236 under Chapter XII on Transitional Advance Tax Provisions of
Income Tax Ordinance, 2001, calls for collection of advance tax (at the rate
specified in Part IV of First Schedule) on the amount of telephone bill, prepaid
cards and sale of units through any electronic medium.
ICMA Pakistan suggests that a newclause may be inserted in Section 236 for
imposing annual tax on mobile connection, to be collected at the time of
renewal of Sims.
According to an estimate there are around 60 million Sims in Pakistan and if a
tax @Rs. 100 per year per sim is imposed, it would generate Rs. 6 billion as
revenue to the government. This would be helpful in security as well by
locating dummy Sims.
23 Second Schedule Part II
23.1 Withdrawal of Tax Reduction on Import of Gold, Silver and Mobile Sets
Under Section 148 of Income Tax Ordinance, 2001, the Collector of Customs
has been allowed to collect advance tax from every importer of goods on the
value of goods. Presently Clause (13G) of Part II on Reduction in Tax Rates of
Second Schedule provides that tax under section 148 on import of Gold,
Mobile telephone sets and Silver, shall be collected at the rate of 1%of import
value as increased by Customs Duty, Sales Tax and Federal Excise Duty, if any
levied thereon.
Since all above items are being used by the well to do segment of the society
and do not justify any reduction in rate of tax, as such, it is suggested that tax
rate on these items be either withdrawn or brought at par with other goods
imported for commercial purposes.
23.2 Tax Incentive for handicapped Tax payer
Clause 1A of Part III of the 2
nd
Schedule provides that where the taxable
income, in a tax year, of a taxpayer aged 60 years or more on the first day of
that tax year, does not exceed Rupees one million, his tax liability on such
income shall be reduced by 50%.
It is proposed that similar incentive may be announced for the handicapped
taxpayers.
24 Sixth Schedule Part 1
24.1 Enhancement in amount of Annual Contribution made by Employer
In the Sixth Schedule, Part 1 on Recognized Provident Fund, under Rule 3:
Employer's annual contributions, when deemed to be income received by
employee, states that the contributions be made by employer in excess of
one-tenth of salary or Rs.100, 000, [whichever is low] of the employee.
ICMA Pakistan proposes that this amount be increased to Rs. 200,000/- in
viewof the fact that the existing amount of Rs. 100,000 was inserted in 2008
and almost five years has passed since then. At that time, exempt salary was
Rs.180, 000/- which has now reached Rs.400,000/-
Sales Tax
1 Definitions (Section 2)
1.1 Enhancing the exemption limit for Cottage Industry
Under clause (5AB) of Section 2 of Sales Tax Act, 1990, a cottage industry has
been defined as a manufacturer whose annual turnover fromtaxable supplies
made in any tax period during the last twelve months ending any tax period
does not exceed five million rupees or whose annual utility (electricity, gas
and telephone) bills during last twelve months ending any tax period do not
exceed 700,000 rupees.
ICMAPakistan feels that the limit of cottage industry as defined in the above
law has become outdated in view of consistent inflation, devaluation of
Pakistan rupee and increasing trend of cost of doing business. It is proposed
that the exemption limit for cottage industry should be enhanced fromRs. 5
million to Rs. 10 million and the utility limit should be increased fromRs. 0.7
million to Rs. 1.2 million to counter increase in inflation and utilities tariff
and devaluation of Pak currency. This would help the government to collect
more taxes from cottage industry.
2 Change in the Rate of Tax (Section 5)
2.1 Reduction in Sales Tax Rate
The current rate of sales tax is 16 percent which is comparatively higher in the
region.
ICMA Pakistan strongly recommends that sales tax rate should be brought
down to 15% and gradually to 10%. This would give boost to economic
activities and control inflation.
3 Determination of Tax Liability (Section 7)
3.1 Allowing Input within one year from Invoice Date for Refineries and OMCs
Under Section 7 of Sales Tax Act, 1990, a registered person is allowed to
deduct input tax paid or payable during the tax period for the purpose of
taxable supplies made, or to be made, by him from the output tax that is due
fromhimin respect of that tax period. In this connection, it is to be pointed out
that local purchase from refineries and imports of all the Oil Marketing
Companies (OMCs) are subject to sales tax, which is subsequently deducted
from output tax at the time of sale. Generally the quantum of input tax for
OMCs is higher than output tax due to zero rating in case of supplies to EPZ,
foreign flight/vessels refueling, exports etc.
It is therefore proposed that input should be allowed within one year from
the date of invoice in order to avoid accumulation sales tax refund. This
would help minimize the sales tax refundable position of OMCs and reduce
litigations between tax payers and tax authorities. Non-refundable position of
OMCs will also be favorable for government treasury.
4 Adjustable Input Tax (Section 8B)
4.1 Allowing 100% Input Tax Adjustment
Under section 8B of Sales tax act, 1990, the tax payers (excluding under SRO
647(I)/2007) are allowed adjustment of input tax up to 90% of output tax for
that period.
ICMA Pakistan proposes that 100%input should be allowed in tax period for
avoidance of accumulation of fund with Government in such adverse
economic situation of the country.
5 Debit and Credit Note (Section 9)
5.1 Relaxation or Extension in Time Restriction for issuing Debit/Credit Notes
Under Section 9 of Sales Tax Act, 1990, a registered person is allowed to raise
Debit or Credit Notes in order to adjust output tax due to any adjustment/
change in value of supply, cancellation of supply or return of goods. However,
such an adjustment is only allowed to be made within 180 days of date of
actual invoice.
It is proposed that this time restriction on issuance of Debit / Credit note
may either be relaxed or the time period of 180 days may be extended to 365
days to facilitate taxpayers.
6 Refund of Input Tax (Section 10) Including e-refund claims
6.1 Integrationof STARRSystemwithFBRe-Portal for speedy Sales Tax Refunds
A major hurdle in timely refund of claims is due to lack of integration between
STARR and FBR e-portal. The sales tax refunds, being processed on Sales Tax
Automated Refund Repository (STARR) Computer System of FBR, have not
been integrated with e-portal, which results in rejection of various valid
claims. There is a need to rectify errors in STARR system on an urgent basis. A
completely harmonized system should be introduced or manual over-ruling
be allowed in current setup, in case where there are systemrelated issues. For
instance, if blockage of taxpayer is cleared in e-portal by FBR, it continues to
show as blocked unit in the PRAL/STARR.
It is, therefore, proposed that an amendment be made in e-portal should
automatically be updated in STARR/PRAL system and vice versa.
6.2 Streamlining of Flawed Automated STARR System of Sales Tax Refund
Claims
The STARR Computer Systemof FBR defers some of the sales tax refund claims
on ground of discrepancies in filing of sales tax returns on the part of suppliers
of refund claimant. The discrepancies indicated by STARR System are mainly
due to not matching of suppliers data or missing of suppliers declaration such
as non-filer, non-existence of data, blocked/non-active taxpayers, timing
difference etc.
ICMA Pakistan proposes that entire refund verification and sanctioning
process, which is full of logical error, should be completely streamlined;
especially the deferred claims where genuine taxpayers are not made to
suffer.
This would help taxpayers avoid unnecessary and time-wasting exercises to
get their discrepancies removed from STARR system.
6.3 Allowing Listed Companies to avail PRAL system of claiming Refunds
The manufacturer-cum-exporters are currently eligible for expeditious refund
processing through the Pakistan Revenue Automated System Limited (PRAL),
developed for improving Sales tax collection.
ICMA Pakistan proposes that all the listed companies should be entitled for
processing of refund claims through PRAL.
This will improve refund processing system and minimize accumulation of
funds of exporter.
6.4 Allowing Offsetting Income Tax Liabilities / Refunds against Sales Tax
The Inland Revenue, income tax, sales tax and excise have been integrated
and being operated under a single window. However, offsetting for income
tax and sales tax refunds/ liabilities is still not allowed. Due to processing
delays on part of the tax department, the tax payers have to suffer financial
brunt.
It is, therefore, suggested that a systemshould be introduced whereby a tax
payer can adjust/ offset his income tax liabilities/ refunds against sales tax
and vice versa.
This would lead to timely processing of refund cases and help the taxpayers in
management of cash flows in an efficient way and ultimately enhance
business activities in the country.
6.5 Allowing Option of Duplicate Invoice in Sales Tax Act
In case of invoice being misplaced or destroyed due to any reason, there is no
option for issuance of duplicate invoice under Sales tax act, 1990. It creates
problems for input claimants.
It is proposed that, option of duplicate invoice should be incorporated in the
sales tax act, 1990 for proper documentation of input claims and avoidance
of harassment for taxpayers.
7 Assessment of Tax (Section 11)
7.1 Rectification of mistake in Assessment Orders
Under section 221 of Income Tax Ordinance, 2001, the rectification
application may be filed for rectification of mistake in any assessment order
issued by tax authorities. The Federal Government has harmonized the
Income tax and Sales tax laws through ordinances issued in the year 2009 and
Finance Act, 2010.
It is proposed that option of rectification of mistake of any kind should be
incorporated in Sales Tax Laws in line with the Income Tax Laws.
This would help minimize adjudication and rectification of error in assessment
order.
8 Sales Tax Exemption (Section 13)
8.1 Exemption to OMCs from Payment of Sales Tax on import of POL products
Oil Marketing Companies (OMCs) import POL products in bulk quantity for
which it has to pay heavy amount of sales tax during the month of arrival of
vessel for import of POL products. It is difficult for OMCs to adjust input tax in
the same month.
It is suggestedthat sales tax levy onimport of petroleumproducts (input tax)
be waived and it should be levied only at the time of sales/supply of
petroleum products by OMCs. This would avoid accumulation of input tax
paid on import of POL products. It would also provide sufficient time to
OMCs for import of POL product and avoid short fall of POL products.
8.2 Exemption of the Vegetable Ghee/Cooking Oil from Sales Tax
The Vegetable Ghee/ Cooking Oil industry is paying sales tax /FED @ 16% at
the import stage. Vegetable Ghee and Cooking Oil importers/manufacturers
are paying 16% Federal Excise Duty (FED) under Sales Tax Mode and Re.1 per
kg Fixed Value Addition which is final. Vegetable Ghee/Cooking Oil, being an
essential food itemof daily use should also be given exemption fromsales tax
as being offered on import of other essential products e.g. Flour (Atta), Rice,
Pulses etc.
It is proposed that levy of Sales Tax/FED on import/manufacturing stage
should be waived off or else reduced to atleast 8%. This will result in
reduction of the market prices of Vegetable Ghee/Cooking Oil and will bring
a sizable relief to the masses.
9 Sales Tax Return (Section 26)
9.1 Declaration of Exports in Sales Tax Return
From March 2012 onwards, those shipping bills, having data in PRAL system
are allowed to be entered in Annexure D of sales tax return. It may be noted
here that shipping bills data of certain sites like Custom Station Chamman is
not updated in PRAL system. Also, shipping bills issued against supplies to
vessels as provision and export under Section 24 of Customs Act, 1969 is not
updated in PRAL. Hence, said export cannot be declared in annexure-D of
Sales Tax Return.
It is, therefore, proposed that manual entries of all shipping bills should be
authorized in annexure-Dof sales tax return in accordance with the sales tax
laws. This would lead to proper declaration of exports in the sales tax return.
9.2 Amendments in Sales Tax Return format through E-Portal
Following amendments are proposed in the Sales tax return format on e-
portal of FBR:
Option of Sales Tax Withholding should be created in line with payment
of withholding tax under the Income Tax Ordinance, 2001.
Option of Withholding tax certificate be created in line with Income Tax
Ordinance 2001
Debit / Credit Note annexure I should be improved for easy uploading
data. An option for downloading of debit credit note summary be also
created.
Option for downloading of customer wise summary from annexure C
of sales tax return for the purpose of verification of sales to customers.
Procedure for declaration of duty paid exports be incorporated in sales
tax return.
9.3 Allowing Manual Feeding of ComputerizedPayment Receipts (CPR) for E&Ps
The date of payment of duties and taxes and filing of sales tax return for the
Exploration and Production Companies (E&Ps) is 25
th
of subsequent month. In
case payment is made on the last date (i.e. 25
th
of subsequent month), the CPR
does not appear in CPR FEED window, resultantly return cannot be filed in
accordance with sales tax laws.
ICMA Pakistan proposes that manual feeding of CPR should be allowed for
timely filing of return. This will help in timely compliance of tax laws.
10 Power to Call for Information (Section 38A)
10.1 Withdrawal of discretionary powers of Commissioner for seeking
information
Under Section 38A of Sales Tax Act, 1990, the Commissioner has been given
blanket permission to require any person, including a banking company to
furnish information or statement in connection with any investigation. This
discourages faith of depositors in banking companies.
It is proposed that this discretionary power given to the Commissioner may
be withdrawn so as to maintain the account holders trust on banks. It may
be noted here that the Lahore High Court has already given its decision against
SBPs BPRD Circular No.22 dated 30-6-2003 seeking information regarding
financial matters of accounts holders.
11 Refund to be Claimed within One Year (Section 66)
11. 1 Extension in period of claiming Input Tax
Under Section 66 of Sales Tax Act, 1990, refund of un-claimed input tax is
allowed to be claimed within one year from the date of invoice.
ICMA Pakistan proposes that period of claim of refund of un-claimed input
tax should be extended up to two years from the date of invoice. The
rationale is to protect the fundamental right of claim of input tax of
taxpayers.
12 Delayed Refund (Section 67)
12.1 Allowing ST Department to release amount at time of refund claim
Under section 67 of Sales tax act, 1990, the department is required to pay
additional amount equal to KIBOR per annumon delayed processing of refund
claims (time as mentioned under section 10) under section 10 of the sales tax
act, 1990.
It is proposed that necessary amendment be made in Section 67 so as to
allow the department to release itself the amount at the time of processing
of refund claims.
This would facilitate expeditious payment of delayed refund claims.
13 Certain Transactions not admissible (Section 73)
13.1 Extension in limit of payment
Under section 73 of Sales tax act, 1990, payment above Rs. 50,000 is allowed
to be made through banking channel from business account of customer to
business account of supplier with 180 days from the date of invoice.
ICMA Pakistan proposes that limit of payment should be extended to Rs.
200,000 and time limit should be extended up to one year, in view of high
inflation rate.
14 New Areas for Generating Tax Revenue
14.1 Tax on revenues of Ship breakers
The Ship breakers are paying sales tax only on 70.5 % of the weight of scrap
ship. No Customs duty or sales tax at 16%is paid by themon remaining 29.5%
expensive and cash revenue generating items e.g. Copper Scrap, Brass Scrap,
Aluminum, machinery, kitchen stainless items, ropes, chains, wood, BUNKERS
OIL, Lubricants, paints, ship tackles, electric cables, switches, etc.
It is suggested that this 29.5% unpaid amount which translates into huge
untaxed revenue going into the pocket of ship-breakers, be recovered and
brought under the tax net.
Custom Duty
1 Duty and Tax Remission for Export (DTRE)
[Chapter XII (7)Custom Rules 2001
1.1 Simplification of DTRE Approval Process
In sub-chapter 7 of Chapter XII of CustomRules, 2001, DTRE scheme has been
introduced under which exporters can procure goods on zero-rate basis from
the local market and then export the same as zero rated goods to foreign
buyers. The Customauthorities have also introduced software namely 'PACCS'
to route DTRE approval applications.
DTRE was a significant measure to boost exports, however, obtaining DTRE
approvals from the Collectorates and fulfilling the requirements of tax
authorities to avail the benefits of DTRE has proved to be a real hardship and a
time consuming activity for the exporters.
ICMA Pakistan recommends that the process of granting DTRE approvals
should be simplified so that more exporters can benefit from this facility.
This would facilitate export earnings thereby leading to increase in foreign
exchange reserves for the country.
1.2 Provision of DTRE Facility to SME Garment Sector
Under Rule 297, the DTRE facility is available to garment exporters for re-
exports of fabrics (not available locally) in the form of finished goods. DTRE
Scheme is admissible if the manufacturer is having complete in-house
production facilities including all incidentals, auxiliary and ancillary processes.
Due to this ruling, only large-scale manufacturing are able to utilize this facility
whereas the small and mediumgarment exporters (SMEs) are unable to do so.
Even if exporting companies require a small process outside (such as industrial
washing), they are unable to take benefit from DTRE scheme. Similarly,
according to sub-rule (6) of Rule 297 of Pakistan Customs Rules, 2001, a DTRE
exporter was allowed to get his finished good fromanywhere in Pakistan. This
Rule was later amended through SRO 801(I)/2002 dated 15/11/2002. Later
on, certain amendments were introduced in the DTRE Rules vide SRO
563(I)/2005 dated 6/6/2005 through which sub-rule (6) of Rule 297 was
omitted, thereby withdrawing the vendors facility to the DTRE users. Now
therefore outsourcing is not permissible for availing DTRE facility.
ICMA Pakistan suggests that the small scale garment manufacturers should
also be provided DTRE facility. Further, sub-rule (6) under SRO 801(I)/2002
dated 15/11/2002 should be re-enacted in letter and spirit, enabling the
SME industry to avail DTRE facility.
This would enhance exports earnings contributions made by the SME garment
sector.
1.3 Doing away with Requirement of Bank Guarantee/ Indemnity Bond etc for
DTRE Approval
Under Rule 300 of Customs Rules 2001, a Regulatory Collector is entitled to
grant DTRE approval on satisfaction with the bonafides of DTRE applicant. In
case of suspension, there is a requirement of post dated cheques / bank
guarantee amounting to the value of import duty and taxes, indemnity bond,
customs audit / inspections.
ICMA Pakistan proposes that the above requirements should be done away
with as currently there are five different departments involved in DTRE
inspections and verifications. Alternately, these powers be delegated to a
single authority to reduce the bureaucratic hassle.
1.4 Extension in DTRE utilization Period to two years
Through the Finance Bill 2012, DTRE utilization has been decreased from two
years to one year.
It is suggested that utilization period should be extended to two years as per
previous laws.
This would result in proper utilization of input purchased under DTRE and
decrease the frequency of DTRE approval from Custom Department.
1.5 Application of DTRE Scheme for Vegetable Ghee/Cooking Oil Exporter
DTRE coverage is no longer available to importers of raw-edible oil which they
process for export of vegetable ghee/cooking oil, against the export orders
in hand.
ICMAPakistan suggests that DTRE scheme be extended to those ghee and oil
manufacturers which use imported raw edible oils and capable /eligible for
export to Afghanistan and Central Asian States (CAS) countries for earning
foreign exchange. This would provide incentive to exporters of ghee and oil
made from imported raw edible oils.
2 General Power to Exempt from Custom Duties
[Section 19Customs Act 1969]
2.1 Duty Exemption on Import of Palm Stearin
There is an existing rate of 10%customduty on import of PalmStearin by local
vegetable ghee and cooking oil industry.
To give protection to industry and provide relief to the general public in
shape or reduction in prices, it is suggested that custom duty exemption be
granted on import of Palm Stearin.
3 Reduction in Custom Duty
3.1 Reduction in Custom Duty on Imported edible oil
Vegetable Ghee/Cooking Oil industry is mainly dependent on imported edible
oils fixing local prices in market depends on the prevalent high prices of this
product in the international market. To bring down the prices of ghee and oil
for relief of common people, the government has no option but to reduce
duties and taxes on this product. Presently, the total duties/taxes paid by
Vanaspati Manufacturers are around Rs.26,000/M.Ton. In 2010-11 and 2011-
12, Pakistan imported Edible Oils to the quantum of 2.01 and 2.2 million M.
Tons, and in 2012-13, import of Edible Oils stood at 1.9 million M. Tons.
It is suggested that a reduction of Rs. 3000 per ton in the customduty on RBD
PalmOil / PalmOlein and Soyabean Oil be considered by the government to
bring relief to the common man.
3.2 Reduction in Custom Duty on Imported Tinplate
Tinplate importers are paying custom duty @20% on C&F price of imported
Tinplate, in addition to sales tax of 16 percent. According to PVMA, M/s.
Siddique Sons, manufacturer of tin plate, have increased packing price of
container by Rs. 30/per container of 16kg packing which is comparatively
higher than increase in price of imported tin plate. Due to increase in
imported price of tinplate used for fabrication of containers for packing
Vegetable Ghee/Cooking Oil, the packing cost of 16 kg container now stands
at around Rs.125, due to which per kg packing cost of ghee and oil is about
Rs.8/- which also increase sale price of Ghee/Cooking Oil to that extent.
ICMA Pakistan suggests that custom duty on imported tinplate be reduced
to 5% to provide relief to manufactures of ghee and cooking oil in shape of
reduced packing cost of product.
This would lead to decrease in retail price of the product in the market for
benefit of people.
4 Warehousing Period [Rule 350, Chapter XV Customs Rules 2001]
4.1 Enhancement in Warehousing Period for Ghee and Oil
The Vegetable Ghee manufacturers were liable to pay 1%surcharge on import
of edible oils in addition to Customs Duty, FED, Advance Tax, etc. Later, the
government, on recommendation of PVMA in Finance Act, 2007 (SRO
626(I)/2007 dated 21 June, 2007) reduced the warehousing surcharge to
0.25% in spite of the fact that the warehousing cost is paid by importers of
Edible Oil to the terminals for handling of imported edible oils involving no
government activity.
ICMAPakistanproposes that warehousing periodbe enhancedfromexisting
30 days to 60 days @ 0.25% and after 60 days upto 90 days @ 0.75%. This
would help mitigate the negative impact of fluctuating international prices
and provide relief to the ghee and oil industry.
Federal Excise
1 Levy, Collection and Payment of Duty [Section 3]
1.1 Basis of Charging and Recovery of Federal Excise Duty
The First Schedule under Section 3 of Federal Excise Act, 2005, Federal Excise
Duty (FED) is chargeable on value of certain goods or it is chargeable on
quantity of certain goods. Also, FED is recoverable for dutiable goods,
whereas, recovery of FED is not available on specific goods.
ICMAPakistan suggests that a harmonious approach, based on fixed levy per
liter, should be applied to charge FED so as to simplify the procedure of
charging FED.
1.2 FED on Franchise Services (Tariff Heading 9812.9410)
In Table II Excisable Services of First Schedule under Section 3 of FE Act,
2005, the franchise services falling under PCT heading 9812.9410 are
chargeable to Sindh Sales Tax @10%of the value of services with effect from1
July 2011 and @Punjab Sales Tax @16%of value of taxable services effective
from October 01, 2012. Under serial no. 11 of table II of First Schedule of
Federal Excise Act, 2005, the Franchise Services are also liable to Federal
Excise Duty. It creates the ambiguity among the tax payers regarding legal
standings whether it is still a Federal Levy or now comes under Provincial
domain. Further, it is double taxation.
ICMA Pakistan proposes that Federal Excise Duty Act, 2005 should be
amended in accordance with 18
th
amendments to remove this
ambiguity/double taxation and bring clarity in law.
1.3 Rate of provincial sales tax on Franchise Services
The Sindh Government has imposed sales tax @ 10% on Franchise Services
whereas the Punjab government has imposed sales tax @ 16% on same
services.
ICMA Pakistan suggests that Punjab Sales Tax on Franchise Services should
alsobe decreasedto10%inline withSindhSales Tax onFranchise services.
This will harmonize provincial tax and give equal treatment of taxpayers in
different provinces.
2. Deposit, pending appeal, of duty demanded or
penalty levied [Section 37]
2.1 Refund of FED on Export for Tax Payers
Under Section 37 (1) of Federal Excise Act, 2005, there is a mandatory
requirement for the taxpayer that prior to appeal before the Office of
Commissioner Inland Revenue (Appeals) or Appellate Tribunal; he should
deposit the impugned duty demanded or penalty imposed in the appealable
order. This requirement is considered as a hindrance in the dispensation of
justice.
ICMA Pakistan therefore proposes that the registered persons should be
allowed to file appeal without the mandatory requirement for payment of
disputed demand.
3 Refund of Duty [Section 44]
3.1 Refund of FED on Export for Tax Payers
There are certain ambiguities in rules for processing of refund of Federal
Excise Duty (FED) on the export for tax payers, other than manufacturers.
ICMA Pakistan proposes that laws and rules should be updated for clear
procedure of processing of refund claims of FED for exporter other than
manufacturer.
ICMA Pakistan submitted these taxation proposals, prepared by its Research

Department, to the Member Legal/ Tax Policy FBR vide letter dated 16
th
May 2013 to
consider for inclusion in the Federal Budget 2013-2014. It is now published with this
Booklet as a record and reference of our members)
ICMA Pakistans Suggestions for
10-Point Agenda of New Government of Pakistan
Muslim League (PML)
S.
#
Priority Agenda Short Term Measures
(First 100 Days)
Long Term Measures
(Next 2 to 3 Years)
1. Meeting Energy
Shortfall
(Energy concerns)
1. ASpecial Task Force may be formed
to take immediate crack down on
energy thefts' throughout the
country to reduce losses in
electricity transmission and
distribution.
4. Instead of importing expensive
oil and gas, we can move to
import cheaper clean coal for
use as fuel in power generation.
The price of coal is stable in
international market, which will
help bring stability in our
electricity prices.
2. In those parts of country where
national grid do not exist, business
community may be allowed to set
up their own power projects (solar,
wind based) without the prior
permission of NEPRA.
5. Focus on building large number
of small dams on Public-Private
Partnership (PPP) basis to
generate hydel power and to
boost agriculture productivity.
3. A Committee may be formed
immediately to finalize a national
plan to generate electricity through
use of waste materials of crops like
sugarcane baggasse, cotton waste,
rice husk and organic materials.
6. Government may provide
interest-free loans (to be paid in
easy installments) to public in
urban areas (initially in Karachi,
Lahore and Islamabad) to install
small solar panels in their
homes to generate energy. For
this purpose, funding can be
obtained from international
donor agencies.
2. Improving Law
and Order
(Security
Concerns)
1. The Citizens-Police Liaison
Committee (CPLC) may be allowed
to play an active and effective role
with additional powers to take
actions against money extortions
from business areas, especially in
Karachi, the hub of trading activity.
3. An Independent Police
Complaints Commission (IPCC)
be established (as existing in UK
as per Police Reform Act) to
investigate most serious
complaints and allegations of
misconduct against the police,
as well as handle appeals from
people not satisfied with the
way police have dealt with their
complaint. The proposed IPCC
should be self-governing,
making decisions entirely
independently of the police,
government and complainants.
It will provide a powerful legal
regulatory framework making
the police accountable for their
actions.
2. The country has to suffer business
loss of billions of Rupees due to
strike calls given by political and
religious parties. As such, new
government may consider
imposition of complete ban on such
strike calls. A huge sum of penalty
may be asked from those parties
which violates this ban.
3. Bringing Down
Inflation
(Public concerns)
1. Government should immediately
waive of all kinds of taxes and levies
on essential commodities like flour,
sugar, rice, ghee, oil and dairy
products to bring some relief to the
general public.
4. Government may consider
forming nation-wide network of
Consumer Societies or
Associations to assert pressure
on the Retailers Associations
not to charge excessive profits
on essential items. The
provincial government may be
asked to support these
Societies.
108 | Annexure
2. Government should make
immediate crack down on hoarders
of food items, (irrespective of their
political affiliations) that result in
artificial inflation.
5. There is an urgent need to
restrict government borrowing
to curtail excessive monetary
growth leading to inflationary
pressure. A ceiling may be
imposed by the government
itself.
3. Cost and Management
Accountants may be given a role to
carry out cost-profit analyses of
goods available in market to
discourage profiteering by
producers or middlemen or
retailers.
4. Restoring
Confidence of
Business
Community
(Business
concerns)
1. A Joint Government- Business
Forum (JGBF) may be formed,
comprising of Ministers of Finance,
Commerce, Industry, and
Investment (from Government
side) and Presidents/ Chairmen of
Chambers of Commerce and
industry Associations (from private
sector) that meet regularly on
quarterly basis to resolve problems
faced by trade and industry as well
as to seek their proposals in
framing economic policies. A
permanent secretariat of this
forum may also be set up.
3. Government may announce a
special package of incentives for
the overseas Pakistanis who
wish to invest in Pakistan in
feasible projects. They may also
be allowed incentives for setting
up SMEs in the Special Economic
Zones in Pakistan. The increased
flowof remittances will not only
improve balance of payment
position, but also give impetus
to industrial and economic
growth.
2. Arenowned business personality of
each province may be nominated
as Special Advisor to the Chief
Minister for advising him about the
business concerns and to identify
areas for future business growth.
FPCCI should be taken into
confidence.
4. The Corporate tax rate on
companies may be reduced to
25%or else a uniformtax rate of
30% be introduced on all
businesses, irrespective of their
legal status to encourage
corporatization.
5. Tackling
Corruption and
Inefficiencies of
PSEs
(Governance
concerns)
1. Private Sector representatives with
good track record of management,
organization and administrative
skills, be appointed as heads of
Public Sector Entities (PSEs) like
PIA, Railways, Pakistan Steel Mill,
PEPCO, NHA, PASSCO, TCP, Utility
Corporation etc
4. Political will is the key driver of
systematic change in corruption
environment. An anti-
corruption reform be
undertaken in public and civil
services.
2. A single government holding
company may be formed to
replace and take up role of
different administrative ministries
in controlling PSEs. Independent
boards of directors may be formed
and empowered to govern these
PSEs with clear mandates, targets
and accountability.
5. NAB should be given more
powers and independency to
check corruption cases. It
should be truly independent of
any executive or political
control to investigate into
allegations of corruption against
politicians, bureaucrats etc.
3. A code of conduct should be
framed for the public servants and
parliamentarians. Through an act of
parliament, it should be made
obligatory to follow the code.
6. The business community and
the civil society may be
associated in anti-corruption
reforms and initiatives, to keep
a check and balance on NAB.
7. There should be continuous and
effective audit of personal
accounts and bank accounts of
politicians and bureaucrats.
Annexure | 109
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ICMA Pakistan - A ProfiIe
Tbo lnslilolo wos osloolisboo in 151 in lbo nomo o Po|islon lnslilolo o
lnooslriol /ccoonlonls [Pll/} ono wos cborloroo oy lbo Covornmonl o
Po|islon lbrooqb on /cl o Porliomonl in 1. ln 17, lbrooqb on onolbor
/cl o Porliomonl, il wos ronomoo os lnslilolo o Cosl ono Monoqomonl
/ccoonlonls o Po|islon. Mr. Mobomomo Sbooio [Lolo}, lbo ormor Finonco
Minislor o Po|islon ono o Cosl ono Monoqomonl /ccoonlonl oy roossion,
loio lbo oonoolion o lbo lnslilolo ono olso oocomo ils oonoor Prosioonl in
151.
lnslilolo o Cosl ono Monoqomonl /ccoonlonls o Po|islon [lCM/ Po|islon} is
ono o lbo biqb-ron|inq occrooiloo roossionol lnslilolos in Po|islon, ooly
rocoqnizoo oy lbo lnlornolionol Fooorolion o /ccoonlonls [lF/C}, lbo Soolb
/sion Fooorolion o /ccoonlonls [S/F/} ono Conooorolion o /sion ono
Pociic /ccoonlonls [C/P/}. /l lbo nolionol lovol, lbo roossionol corliicolion
o lCM/P is ooly rocoqnizoo oy lbo Hiqbor Eoocolion Commission [HEC} os
ogoivolonl lo ocooomic Moslors Doqroo.
Prosonlly, ovor 5,CCC momoors o lCM/ Po|islon oro boloinq sonior osilions
in lrooo, commorco, inooslry, qovornmonl in Po|islon ono oorooo.
|.6.H.A.P.
Estd. 1951
ICMA

www.icmap.com.pk
kesearch & ub||cat|ons Department
nead Cff|ce: S1-18/C, 8lock-6, lCMA Avenue,
Culshan-e-lqbal, karachl-73300, aklsLan
h.: (0092-21) 99243900, Iax: (0092-21) 99243342
L-ma||: research[lcmap.com.pk
last|tete el 0est aa4 Maaagemeat
cceeataats el Pak|staa

Proposed ST Rage Gy For Economic Growth

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|.6.H.A.P.

ICMA Pakistan submitted these taxation proposals, prepared by its Research

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