Yusuf H Shirazi
THE main issues in sharp focus these days are entrepreneurship, sanctity of the elections and political, economic and social order.
Achieving over two-third majority in the election is quite singular. The overwhelming majority was perhaps neither wholly for the PML-N’s sanctity nor wholly for the Pakistan Peoples’ Party’ performance. The truth is that the people revolted against the performance of the political system, the economic management and the social order. They reposed confidence in the new set up in order to ensure that this situation is rectified. There were quite a few surprises in the election with a number of big-wigs falling from grace. About one-third of the public representatives in the assemblies are new - from all walks of life. This change in the public representatives speaks of shift from the landed aristocracy to the entrepreneurs, professionals and those who do not belong to an elite class.
The voters have voted in favour of a change in the political, economic and social system in order to secure their future economic well-being. Therefore, it may not be wrong to assume that another future election could have similar results favouring another dramatic change in the political, social and economic order. If the PML-N does not ensure a marked improvement in the socio-economic well-being of the people, it is possible that in future voters may behave in a similar manner as in the present election to bring about such a dramatic change once again!
The ‘economic package’ is the subject matter of concern in this respect. Briefly, the prevalent rate of Customs duty and sales tax demand to be broadly lowered. Several anomalies have also come to surface. For example, the Customs duty has been reduced on the built up spare parts and components, while Customs duty on the raw materials used in manufacturing these very parts and sub-assemblies locally generally attracted a higher duty. In several cases, in fact, it increased. These anomalies have to be rectified through the Anomaly Committee or the Tariff Commission: The package on the whole, however, has to be investment friendly, discouraging smuggling and under-invoicing. The industry friendly package must encourage investment, export and employment which is the need of the day. Industry, in fact, has all along received lip service. The ten basic industries including the basic steel and engineering industry once nationalised are begging development. They are all hi-tech, hi-value added and hi-volume industries with potential of exportable surpluses capable of net foreign exchange earnings as against current restricted devaluation - driven traditional exports. Only hi-tech, hi-value added and hi-exportable surplus industry can help deficit finance, trade imbalance and inflation. These issues can only be tackled with an industrial package, not a trade package, as the present economic package seems to be!
In addition, it is the industry which pays the greater amount of taxes than the trade! Tax evasion is more prevalent in trading which is an un-organised sector as compared to the organised and tax paying industry. The landed aristocracy hardly pays any tax. With due deference to the assessment of economists and tax planners, the agriculture is inefficient where the cost of input is normally higher than the output. The yields are poor and productivity minimal and therefore genuine income from agriculture is not high. The landed aristocracy’s main source of income is from the ‘business of politics. A line thus must be drawn in door to set this matter right. Tax is also not paid by the drug barons. The main responsibility for this falls on the guardians of the tax frontiers. Then, there is the unorganised sector, which has the “street power” so that none dare touch them. It includes those people who indulge in under-invoicing and smuggling including the trade through Afghanistan and generally the out of book business, evading all taxes – 66pc according to the World Bank and 79pc according to an FBR Chief. The loopholes thus must be identified and plugged. This is the only way to increase tax receipts -presently 21pc, that is, about Rs2 trillion against potential of about Rs8 trillion - enough not to need any loans or credits.
The interest rates are also up to 9-10pc, though much reduced but still higher than the world over - an anti-growth measure indeed. No change has been made in the basic concept of taxes on income. The basic structure of taxation is presumptive tax (tax on incomes whether there is income or not) and deduction of income tax at source, whether the taxes are due or not due. These measures increase cost to the consumer, rob the entrepreneur from working capital and, as such, real income arid Government’s taxes thereon.
This also brings taxation system into sharp contradiction with the system prevalent in other countries and particularly in the neighbouring one, with whom we compete and will have a free trade policy - sooner or later! In India, the rate of sales tax ranges from 5 to 7pc from province to province. The same is the case in many other countries. There are several exemptions for localisation of the industry particularly where there is value addition. There is no presumptive tax or deduction of tax at source except to the extent of the actual income tax liability, avoiding the menace of refund, which costs a fortune - about a 30pc cost of the amount refundable in Pakistan, a malpractice right under the Tax Collector’s nose.
Compared with India, India’s is an economy of scale. It has a much bigger market: the volumes are huge and hence lower overheads. The lower overhead costs of the social and physical infrastructure are almost 1/3rd of what they are in Pakistan. The economy is about 10 times bigger than that of Pakistan. Manufacturing contributes largely to the GDP. The industrial sector contributes 60pc of exports, with over 20pc in engineering, including the automotive sector - being almost equivalent to the total Pakistan exports in non-traditional items - against less than 1pc in Pakistan. The infrastructural costs are heavily subsidised. Subsidies are direct income-exempt based. The wage structure is low as are other direct and indirect costs.
The Indian industry is thus highly subsidised. There are trade and non-trade barriers - basically what is produced locally cannot be imported since Nehru days. How shall Pakistan balance the trade and protect industry from these pressures of fierce unhealthy competition, dumping and smuggling from such countries unless Pakistan is competitive in all respects of social and physical infrastructural costs, concessions, subsidies and taxation system. There are some basic differences which, it is hoped, the Government is fully cognisant. Tax payers however are expecting some fine tuning - sooner than later: otherwise, the economic package will be just window dressing and a measure ill deserved to be commended in terms of being the engine of growth to be achieved through the industrial sector. Without an industry friendly package, the economic package presented is not likely to give the intended results. Less said the better!