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Unravelling the budget

The ‘Made in Pakistan’ slogan is not helped by taxing imports of raw material and machinery

Unravelling the budget

In several ways, the Budget 2019-20 is a deviation from PTI’s manifesto which promises making Pakistan’s manufacturing exports competitive. The inputs of export-oriented sectors namely textile, leather, surgical items, carpets and sports goods, which in the past fiscal year were allowed zero-rated sales tax will now face a standard rate of tax. The zero-rating of utilities allowed for these sectors has also been withdrawn. Higher prices will now also be seen in the case of LNG and CNG fuels.

This axe falls on the export-oriented sector at a time when manufacturing exports could not see much increase even after currency depreciation. Additionally, high policy rate announced by the central bank has made the cost of accessing the working capital and credit for fixed investment expensive. Despite alternate arrangements, such as the launch of promissory notes, a large part of liquidity of exporting entities remains stuck with Federal Board of Revenue in the form of delayed tax refunds, duty drawback of taxes, duty drawback of local taxes and levies, withholding tax refunds, and customs duty rebate.

Some of the sector-specific taxation measures could also negatively impact the foreign direct investment (FDI). For example, while the new investment regime in the auto sector had created some interest of foreign vehicle manufacturers, the Budget 2019-20 has now slapped duties on vehicles of all engine sizes. Again, this is one sector which is already getting stifled due to the falling value of the rupee. Likewise, some of the costs faced by the construction industry will also see an increase. Most notably, the hike in duties faced by the cement industry will be easily passed on to the end-consumer, ultimately leading to reduced demand. Negative implications could also be seen of the Prime Minister’s ambition of providing low-cost housing.

Perhaps the most startling and unexpected taxes have been seen in the food and food processing sector. The increase in duties imposed on cooking oil, sugar, cream, milk and other household items shows the desperation of a government which is willing to tax even the most essential needs of the citizens. Of course, such actions have implications for the future of food security and nutrition in the country.

The local industry, particularly real estate, building, iron, steel, cement, construction services and accessories, and consumer durable goods, has traditionally benefited from the infrastructure disbursement under the public sector development programme (PSDP).

Unfortunately, the PSDP for the fiscal year 2019-20 has been slashed by almost 25 percent with negligible allocation for projects falling under China-Pakistan Economic Corridor (CPEC) programme. This situation could have been averted had the government taken early decisions to reduce the size of the federal government and its affiliate departments; and had it pulled out its resources dedicated to keep the loss-making public sector enterprises afloat.

Incentives to become an exporter in industries other than the traditionally zero-rated sectors seem weak. The Competition Commission of Pakistan, which could have helped in increasing the pace of competition policy reforms, desired enterprise-level learning and market development of non-traditional products, today faces issues of its own.

Instead of moving towards consolidation and merging the existing ministries and divisions, the government still seems in an expansionary mode. To reduce poverty, the government came up with the idea of forming a new ministry for poverty reduction. One is left to wonder what then is the objective of having a Ministry of Planning, Development & Reform?

This milieu will be particularly challenging for new exporters, potential exporters, small and medium enterprises (SMEs). With rising cost of electricity, gas and oil there will be a clear increase in the cost of production. The government’s own plan to expedite the ease of doing business lost speed once the Chairperson of Board of Investment at the Prime Minister’s secretariat recently resigned, citing the government’s inability to operationalise a one-window operation for current and potential investors.

The budget also remains silent on how compliance costs faced by honest taxpayers could be reduced. Currently, Pakistan has one of the highest man-hours dedicated to tax compliance. With new and multiple tax authorities emerging in all provinces, corporate taxpayers are required to file multiple returns (within a single tax year) with multiple tax bodies and also face audits and hearings at multiple desks within each of these bodies.

The future growth of SMEs and potential exporters will critically hinge on the availability of credit. The reality, however, remains that even at high policy rates, accessing credit still remains a challenge for most SMEs. Even the access to Export Finance Scheme and Long Term Financing Facility is not without its own intricacies.

The government’s narrative in the budget also advocates that the ambition to pursue low-cost housing programme will kick start the local industry. However, industry representatives have informed that even acquiring land for such projects could hit a snag, as seen in the case of special economic zones (SEZs) across the country which even after several years of CPEC’s initiation could not be operationalised. According to the doing business ranking by the World Bank Group there remain over a dozen administrative processes requiring over 250 days to get the permit before starting a construction on-ground.

The same ranking puts Pakistan among the poorly performing countries in terms of ‘trading across border’ and the costs of both border- and documentary-compliance remain higher than competitors. The budget speech suggested that the government aims to help Pakistani enterprises integrate in global value chains. However, this in reality is not possible in an environment where taxes on imports are being increased. The ‘Made in Pakistan’ or ‘Pakistan first’ slogan is not helped by the imposition of taxes on imports of raw material, machinery, and other intermediate inputs.

The author made an attempt to ask industry players what in fact are their expectations from the PTI government? This should be taken not just as a proposal to give final shape to Budget 2019-20 but may also help PTI’s future fiscal policy.

None asked for tax exemptions! All, in fact, wanted ease in tax compliance and reduction in costs associated with interfacing with tax departments. Second, they would like to see uninterrupted supply of energy and related utilities in industrial areas and overtime reduction in business costs allocated to energy. Third, a reduction in regulatory costs is desired.

Also read: Loaded with heavy taxes

Currently, all expenses related to municipality, building, environment, labour, worker safety, health safety, and consumer rights regulations go much beyond the statutory costs due to the element of corruption. Fourth, the progressive industry players want the government to share the financial risks associated with research and development, and introduction of new technologies.

On the same point, it was stressed that some sharing of costs to improve quality of labour should also be a future priority. The Export Development Fund could have helped achieve this. However, considering EDF to be fungible in the budget has often allowed the government to use this for deficit financing and not for the uplift of industry.

Fifth, incentives to become an exporter in industries other than the traditionally zero-rated sectors seem weak. The Competition Commission of Pakistan, which could have helped in increasing the pace of competition policy reforms, desired enterprise-level learning and market development of non-traditional products, today faces issues of its own which overtime has weakened the writ of the commission. Lack of incentives for self-discovery by private enterprises can also undermine Pakistan’s pursuit to effectively embrace the fourth industrial revolution.

 

Dr Vaqar Ahmed

The writer is joint executive director of the Sustainable Development Policy Institute, Pakistan. Tweets @vaqarahmed

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