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Bulls, bears don’t quite manage to settle dispute Page 03
profit.com.pk
Tuesday, 10 April, 2012
CommEnT
KA-CHInG
‘national Integrated Budget’, euphemism for wishful thinking Bankers for federal, provincial govts working in tandem g KCCI gets worked up over energy debate, wants a security plan g Facilitate exporters or buy yourself a begging bowl: Dr Ishrat g
KARACHI
A
ISMAIL DILAWAR
S the country is fast nearing to have a new federal budget reportedly next month in May, the former central bankers propose the federal and provincial governments to formulate a “national Integrated Budget” for Fiscal Year 2012-13. Further, the traders and industrialists Monday expressed strong reservations over the Energy Conference being held in Lahore saying they were not taken onboard by the organizers. Terming increasing the country’s existing 9 percent Taxto-GDP ratio as a must for a lasting solution to the government current socioeconomic problems, Dr Ishrat Hussain, former Governor State Bank of Pakistan, said a “budgetary framework” may be agreed upon at the pre-budget Council of Common Interest meeting due next month. Also, the seminar was addressed by Mian Abrar Ahmed,
President Karachi Chamber of Commerce and Industry (KCCI) who presented salient features of the budget proposals the KCCI had forwarded to the concerned. The KCCI chief also urged the need for an “energy security plan” for at least next 20 years that, Ahmed said, the country was lacking for last 64 years. Dr Ishrat, sitting director Institute of Business Administration, stated this at “Pre-Budget Seminar 2012” organized here at KPC by the Karachi Press Club and Karachi Union of Journalist Monday. The economist said if the centre and provinces did not prepare a national budget the country’s fiscal deficit would keep widening. “The money rests with the provinces while the expenditure side is to be taken care of by the federal government… the (fiscal) gap will keep increasing,” he warned. Urging the provinces to transfer additional funds of Rs 200 billion devolved to them by the center under the nFC Award to
the local governments on district and UC level, the economist said two parallel economies, private and public, were creating socio-economic imbalances running in the country’s urban and rural areas. The accomplished banker stressed the government to tax the country’s untaxed rural and urban segments, including agriculturists, beneficiaries of remittances, middlemen, clinics, beauty salons, tutors, doctors etc. “This creates the basic imbalance and no economic disease will ever rid us unless we tax the untaxed,” the former SBP government told the seminar. The urban-based salaried and business class, he said, was the worst hit by this imbalance. While the income was transferring to rural from the urban areas the tax contribution by the former was zero in the troubled economy. Dr Ishrat also urged the need for savings by the masses the 13-14 percent rate of which he said was much lower in Pakistan than 60 and 25 percent in China
BUDGET BASH
KCCI exercises its little grey cells over FY 2012-2013 budget KARACHI
K
STAFF REPORT
ARACHI Chamber of Commerce and Industry (KCCI) the largest chamber in the country representing over 50,000 businesses and industries has recommended the national Budget for the year 2012-2013. The proposal which, what the chamber claims, are aimed at reversing the economic downslide and stimulate growth through a package of relief and incentives for the private sector. In a country where the rate of population growth is around 2.0 percent and each year 3.6 Million more babies are added to the population, the Growth rate of GDP should at least be 4.5 percent just to break even or achieve Zero Growth. Looking at budget deficits in the last few years, it is improbable that the targets could be achieved with prevailing economic and fiscal policies. Innovative approach is badly needed. Can the government of Pakistan create 3 to 4 Million new jobs every year? Can we absorb the number of graduates we produce each year into the economy and provide them jobs? The answer is nO. According to the proposal the only hope for salvaging this country from total economic collapse is the Private Sector. It is imperative to inject a new spirit of dynamism in the entrepreneurs to expand existing businesses as
well as to undertake new ventures. For that the cost of borrowing from banks has to come down significantly. KCCI BUDGET PROPOSALS 2012-13: To meet these challenges, KCCI’s budget recommendations this year are aimed at reversing the negative trends in various sectors of the economy. In the last few years, Government’s focus has remained on rural economy. As a result Urban economy which encompasses large scale industries, SME’s, Trading Houses, wholesalers, retailers and a vast service sector have badly suffered. now is the time to shift focus to urban economy and take necessary measures to provide stimulus to Industry and Trade. It is necessary to restore confidence of the private sector by taking these decisive steps: 1. Curtail domestic borrowing from private sector banks as well as State Bank. Government borrowing has crowded out the private sector for credit, resulting in very high interest rates and restricted availability of credit to private sector. 2. In any country where the economy is facing a recession, the interest rates are brought down to stimulate growth, whereas in Pakistan it is the opposite. In the last two years interest rates in Europe and the United States have been brought down close to Zero to save the economies from collapse. 3. Rates of GST and InCOME TAX be brought down to a maximum of 9 percent and 25 percent respectively to provide relief to trade and in-
and India, respectively. Illustrating economic growth in Malaysia and Indonesia, the banker said Pakistan would have to address the problems of exporters and further incentivize them that would enable them to bring in more foreign exchange. “We would carry the begging bowl unless we facilitate our exporters,” he maintained adding the Islamabad, like Bangladesh, should go for valueaddition and engineering goods demand for which was growing. Earlier, Mian Abrar Ahmed, President KCCI, said he had shared with those concerned his side’s strong reservations over the energy conference in Lahore as the KCCI was not consulted by anyone. Dwelling on budget proposals, the industrialist said the country was witnessing the “flight of industries” to Dubai and African countries due to lingering problems ranging from a poor law and order to energy crises in the country. The speakers were presented mementos by the office bearers of KUJ and KPC.
dustry. 4. Customs duty and taxes on capital goods such as machinery and basic raw materials be brought to Zero rate. 5. High rates of Customs Duty, Sales Tax and WithHolding Tax on import of Raw Materials, Intermediate and finished goods must be brought down to curb smuggling and illegal imports under the guise of Afghan Transit Trade. 6. ATT is a bleeding wound for Pakistan’s economy. The flow of goods through ATT has to be more regulated and controlled. A separate proposal regarding the ATT has been included in the recommendations. 7. Prices of fuel, electricity and gas should be kept in check and reduced wherever possible so as to reduce cost of production. 8. GST System of Revenue generation suffers from major flaws which results in hardships to the tax payers. Online computerized system of filing tax returns will take time to evolve and streamline. 9. Sales Tax Act’1990 and Income Tax Ordinance 2005 should be comprehensively amended to repeal the draconian laws governing the tax policy and curtail the unbridled discretionary powers to the officers of Inland Revenue. 10. To achieve revenue targets and offset the deficit, loopholes and avenues for evasion must be closed. Exemptions to be withdrawn DTRE scheme be replaced with Export Promotion Scheme which has been explained in the proposals. 11. Today the biggest drains on resources are PIA, Railway and Steel Mills. Government should take the difficult and unpopular decisions to off-load these three institutions to the private sector or foreign investors in order to save Billions of rupees lost through these unviable and loss-making ventures. 12. Restore Law and Order in the largest city of Pakistan which contributes 65 percent of tax revenue. Karachi has become a battleground for all kinds of political and ethnic forces from all over Pakistan.
Global growth and Pakistani linkages A dark cloud continues to hang over the global economy. The hope that sustained emerging market growth would complete the process of bottoming out of the prolonged downturned fizzled out with visible signs of stress in Asia’s largest economies. Then when American q-o-q growth and employment numbers ignited fresh risk appetite in capital markets, beginning to swing the market’s pendulum back from fear to greed, fresh evidence emerged that renewed signs of life were unstable at best, and a sustainable recovery is still quite far. Add to that high oil prices over nonsensical geopolitical tension in the gulf, and continued sovereign debt trauma across Europe, and chances of the global economy falling into double-dip recession are not exactly remote. Pakistan’s position is perhaps uniquely distressing, especially in the south-east Asian setting. Its low productivity and unimpressive export base implies limited penetration in the international trade market, hence there is little to gain from smooth credit market flows such as the one that preceded the severe recession of ’08. Yet it is just as exposed to international liquidity freeze as the most insulated economies, both directly and indirectly, as market ability to fund our exports, and desire to indulge our borrowing excesses, diminish. The pressure is compounded by homegrown problems, like corruption and insecurity, ruling out foreign participation even in our better performing sectors. It bodes ill for the country that even stellar stock market performance cannot attract foreign investment. Interestingly, one thing the government has not been behind the curve in is reorientation of trade markets as economic and political linkages are redefined in the post-recession environment. And that’s the first bit of good news to come from the commerce ministry since the previous government’s ambitious trade outreach in the face of growing international isolation. By leveraging our unique geopolitical location, we can gain a lot from enhanced intra-regional trade. But we will still have to expand exports. And we’ll still have to check unnecessary leakages.
How about reducing corporate tax, asks SECP ISLAMABAD AMER SIAL
I
n its budget proposals, the Securities and Exchange Commission of Pakistan (SECP) has suggested to the government to opt for the taxation model where taxes on corporate entities were low as compared to the Association of Persons (AOPs) to give a push to corporatization in the country. The budget proposals of the corporate sector regulator forwarded to the Ministry of Finance and Federal Bureau of Revenue suggests that Pakistan should follow the taxation model adopted in many countries where the taxes on corporate entities were low and the same on Association of Persons (AOPs) were high. It notes that the high taxes on the corporate sector were discouraging the documentation of the economy as the small and medium sized investors prefer to operate undocumented businesses and opt for cash based economy. A vast majority of businesses in documented economies are companies whereas it is the other way around in Pakistan, SECP said, by being in non corporate business is always easy to operate without any oversight or regulation and pay low taxes too. The corporate taxes are high up to 35 percent in Pakistan compared to 25 percent for non corporate sector. SECP proposal has highlighted that due to high rate on the company structure and a large number of businesses prefer to stay undocumented and cash based. SECP has highlighted that in the Asia Pacific region the average rate of corporate taxation is 22.7 percent, while the rates increasing globalization of economic activity and inte-
grated world markets has increased tax competition among various countries due to capital flow towards low taxation places. Highlighting its importance the SECP has said that the corporate sector contributes almost 70 percent federal direct tax revenue collection, and the tax collections from the corporate sector have increased at a fast pace during the past few years. This is despite the gradual and steady reduction of corporate tax rates, mainly in banking and private sector companies, overall collections have improved substantially and the corporate share in gross income taxes has jumped from 60 percent in 2004-05 to 70 percent in 200910. SECP has also said that the existing tax regime for small companies discourage corporate progression from small company to normal company. There is a basic anomaly in the system and the growth of small company is restricted due to high taxation in the normal taxation regime. It highlighted that the present taxation regime has incentives on corporatisation and the tax rate for small companies is 25 per cent. The definition of a small company means that its paid-up capital plus undistributed reserves do not exceed Rs25 million, number of employees not exceeding 250 during the year and the annual turnover not exceeding Rs250 million and it should not be formed by splitting up or reconstitution of business already in existence. However, the taxation regime in the country does not allow smooth graduation for the small company to normal company. If a company increases, its employees above 250, then in principle entire net income of the company is immediately taxed 35 percent, the proposal said.