Estimating the black economy

By Qazi Masood Ahmed & M. Haider Hussain

http://www.dawn.com/2006/11/13/ebr1.htm

THE tax and tariff reforms during the 1990s can be regarded as the first comprehensive exercise of its kind and therefore it becomes desirable to gauge their impact on the black economy and on tax evading practices.With some modifications, this paper uses the standard monetary approach to obtain the latest estimates of the size of the black economy and its macroeconomic implications.If the underground economy is large and significant, there is a clear evidence of market distortions, poor governance and of disproportionate administrative regulations.The phenomenon has been discussed and defined in economic literature under many different names such as unofficial, informal, unregistered, unobserved, shadow, subterranean, parallel, hidden, invisible and irregular.Conceptually, there are four classifications of the underground economy according to the particular institutional rules they violate. These are: illegal economy; unreported economy; unrecorded economy and informal economy.Moreover, as Schneider and Frey (2001), point out, the notion of underground or the black economy should not be identified only with illegality. Most of the activities are perfectly legal but the taxes are evaded due to different reasons and due to loopholes in the economy itself.The study addresses the issue of the size of the unreported economy in Pakistan and in estimating the resources that are lost due to tax evasion and its avoidance.As is evident, a comparison of these studies in the context of Pakistan reveals contradicting results vis-à-vis the size of the black economy. Econometrically, the bases of these alternative results may include (i) choice of variables, (ii) choice of the estimation period, and (iii) choice of the functional form and underlying assumptions.The data for our analysis covers the 1960 to 2003 period and is obtained from various issues of the Pakistan Economic Survey and the State Bank of Pakistan’s annual reports.The black economy turns out to be at its peak during the early 1960s, when the corporate and personal income tax rates were high. The corporate income tax rate was 30 per cent including 30 per cent super tax during that time. This (aggregate corporate income and super tax of 60 per cent) rate dropped to 40 per cent during the late 1980s.Likewise, the maximum personal income tax rate was 75 per cent during the 1960-64 period, which was the reason for the black economy to remain well above 30 per cent of the GDP during the same period.The black economy kept declining during the 1965-75 period, when this rate was brought down within the 60-70 per cent range (Qureshi, 1989, pp.23). Furthermore, this rate was 56 per cent during 1980-1986, later brought down to 39 per cent in 1988 and subsequently to 28 percent in 1993 – the effect of which is consequently reflected by the shrinking black economy in the periods under review.However, Kemal (2003), reports an increasing trend of the black economy during 1995 and 1998 – which is contrary to our results.A possible explanation could be the tax reform effect, which was absent in Kemal (2003). Furthermore, results of Kemal (2003) are based on a special specification where lagged dependent variable is used as explanatory variable with a high positive co-efficient.In the present study, the impact of tax reforms is dominating. The black economy as a percentage of GDP declined by nine percentage points in case of both currency ratio and currency bearer bond equation during 1996 and 1997. The corresponding decline in tax evasion as percentage of GDP was 39 per cent and 32 per cent, respectively, for both methods used.( Figure 1 and 2)The black economy remained relatively high during the early 1990s at around 26 per cent of GDP. During that period, tax-to-GDP ratio was almost stagnant at 13 per cent and the rate of return on deposits was falling - a disincentive to withdraw from activities related to the black economyNevertheless, during 1996-97, tax-to-GDP ratio dropped to 12.7 per cent after touching its peak at 14 per cent, coupled with the increase in rate of return on deposits from 6.4 per cent to 6.8 per cent. Both these factors, especially the tax reform effect, played a significant role in slashing the black economy.The further decline of tax-to-GDP ratio during the 1999-00 period, which does not appear to have great impact on the size of the black economy, was actually the result of re-basing of the country’s GDP. On the other hand, the sharp decline of rate of return on deposits from 1998 onwards, acted as a hurdle in reducing the size of the black economy.Roughly, the inclusion of bearer bonds increases, on an average, the black economy as a percentage of the GDP by five percentage points each year. Bearer bonds were introduced during the mid 1980s to promote savings.Later on, they became a handy medium of exchange due to their limited physical quantity requirement for any transaction as against currency and also because of their hassle-free acquisition.The annual compound growth rate of currency in circulation and bearer bonds during the last two decades remained almost the same; i.e. at 12 per cent. Also the size of the black economy has slightly increased from 2000 onwards. This is, perhaps, due to the reduction of rate of return on deposits, which declined by more than 30 per cent during the 2000-2003 period, revealing the weak stance of the monetary policy.During the same period, the effective coverage of indirect as well as direct taxes was increased. This brought some of the untaxed sectors into the tax net, causing the tax-to-GDP ratio to increase slightly by 0.26 per cent.In this paper, an attempt has been made to estimate the size of the unreported part of the economy, that is the result of tax evasion. This becomes of special importance once the impact of taxation reforms is incorporated. Overall, the black economy has a declining trend as a percentage of GDP. This is due to the tax reforms involving rationalisation of tax rates.Despite the fact that the black economy as a percentage of the GDP has decreased, the annual compound growth rate of the black economy during the sample period remained more than 11 per cent. At disaggregated level, this growth remained at two per cent during the 1960s, 17 per cent during the 1970s, 15 per cent during the 1980s and 13 per cent during the 1990s and onwards .Similarly, tax evasion grew at the rate of 12 per cent. This growth remained at five per cent during the 1960s, 19 per cent during the 1970s, 16 per cent during the 1980s and 11 per cent during the 1990s and onwards.Estimates of the black economy cannot be taken as precise measures. They can, nevertheless, be effectively used to deduce broad trends and directions.In the light of above discussion, therefore, several suggestions pertaining to policy actions can be made. Although increase in the direct tax revenue is vital for a developing country because of its redistributive effects, the medium of this increase, nonetheless, cannot solely be the increase in tax rates since this gives rise to tax evasion.Instead, broadening the tax base would be an ultimate solution. To supplement these efforts, official administration regarding the detection and preventing of tax evasion should be improved.Tax reform process should be consolidated and integrated with other macroeconomic reforms. The presence of loopholes in the system and the prevailing corruption among the tax authorities cannot be ignored when dealing with the issue of evasion.These inefficiencies must be dealt accordingly in order to curb the tax losses and to reduce the cost of being part of the reported economy.(Edited excerpt from SPDC research report on “Estimating the Black Economy through Monetary Approach”: A Case Study of Pakistan”).

The pace of tax reforms

http://www.dawn.com/2007/04/23/ebr1.htm

By Nasir Jamal

Fearing delay in the release of loan tranche of $100 million from the Asian Development Bank, the Punjab government has finally ramped up the pace of reforms meant to restructure the existing inefficient, archaic and cumbersome tax administration in the province.Though the pace of change in the tax collecting agencies still remains very slow, it nevertheless has shown signs of picking up in the recent months, say finance department officials involved in the restructuring and reorganisation of the tax collection system.The situation relating to tax administration reforms, they say, began changing, and the tax collecting agencies and the bureaucrats managing them woke up to the “urgency” of reorganisation of tax collection system after the provincial chief minister and the chief secretary intervened to prevent further delay in the release of the Asian Development Bank tranche.The Punjab government has initiated the tax reforms with the assistance from the Asian Development Bank under its Punjab Resource Management Programme (PRMP), launched back in 2003 to undertake wide-ranging governance and financial reforms to improve public service delivery and poverty alleviation.The Asian Development Bank has provided $500 million soft term loan as budgetary support for the reforms programme. Impressed with its performance, the Asian Development Bank is said by the officials to have offered a similar support upto to $1 billion or so to ensure continuation of the PRMP for undertaking second generation reforms.“The Asian Development Bank has given us a blank cheque. But the Punjab government is yet to determine the size of loan it requires. It will be finalised in the next few days,” the PRMP officials say. It means the multilateral lenders are quite interested in seeing the reforms process in the largest province continue till the attainment of desired results, say the officials.The tax administration reforms programme was initiated with the ADB assistance , which promised to advance $100 million for undertaking reorganisation of tax collection arrangement. The work on tax reforms began with a report prepared by a consultant hired to look for options for the proposed taxation reform..The consultants studied and documented the existing tax administration structure, which was later shared with the relevant departments of the Punjab government, including finance, excise & taxation and Board of Revenue. Gaps were identified in the existing tax administration of the Punjab government vis-à-vis international best practices.Tax revenues of the provincial government consist of taxes collected and levied on assets and properties located in the province, such as stamp duty, mutation fee, urban immovable property tax and motor vehicle tax. Other sources include taxes levied on income generated in the province, other than those collected by the federal government such as agriculture income tax. Furthermore, the provinces are also allowed to levy provincial excises, such as excise on liquor, hotels etc.Tax collection under the present system is distributed between the Board of Revenue and the excise & taxation department. The existing distribution of tax administration to each of the respective department depends on historical practices ..“One of the conceivable basis of allocation of administrative function is that taxes related to land holding or ownership such as stamp duty, mutation fee and Agriculture Income Tax are administered by the Board of Revenue. It is so because the Board of Revenue maintains the base records of the land ownership and its use. In principle, all other taxes and duties fall within the ambit of the Excise and Taxation Department,” the report says.Hence, in its report, the consultant had proposed creation of a single, central revenue collecting agency for the province as a long-term tax reform strategy on the pattern of the Central Board of Revenue by merging the excise & taxation department and the Board of Revenue. The proposed tax collecting agency is supposed to work as part of the provincial finance department to address the issue of distribution of responsibility and administration. The proposed single revenue collecting agency was to be created by 2009, and was to be preceded by reorganisation of the excise & taxation department and the provincial Board of Revenue.However, officials say, the establishment of the proposed single tax collecting agency would be delayed beyond the stipulated time by at least one year to 2010 because of a very slow movement so far on the restructuring of excise & taxation department and the reorganisation of taxes like agriculture tax collected by the Board of Revenue.By the time the excise & taxation department is merged with the Board of Revenue to create a single tax collecting agency, the consultant had proposed reorganisation of the two tax collecting agencies on functional lines --- that separation of functions of assessment, collection, audit and recovery. The restructuring of these agencies is supposed to also streamline data and tax collection procedures within these organisations so that consolidation could be undertaken at a later stage.“The consultant had proposed that till such time that the merger of the revenue collecting functions of the Board of Revenue and excise & taxation takes place, the organisational structure, human resource capabilities and procedures for inductions, database and collection processes within each department should be gradually improved by reorganising them on functional distribution of work. This improvement should include streamlining the data and tax collection procedures within these organisations so that at a secondary stage consolidation of the two entities could be undertaken seamlessly,” the officials say. In addition it has also proposed to revamp certain provincial taxes, with a huge potential for revenue generation, like the agriculture income tax. It has been proposed that the agriculture tax must been collected on the income of farmers, and the existing land mode of computing this tax should be scrapped. The revamping of this particular tax is expected to generate substantial additional revenue for the province.The purpose undertaking the tax administration reforms, according to the officials, has been to improve efficiency of tax collectors and facilitate taxpayers by reducing discretion, minimise interaction between taxpayers and tax collectors and encourage self assessment with effective audit. Therefore, the reforms focus on improving “business processes” rather than laws governing the taxes.Another major objective of initiating reforms in the tax administration area, the officials say, has been to plug leakages because of rampant corruption owing to concentration of all functions in one person and inefficiencies of the present system. This, they hope, will strengthen collection and improve province’s own tax revenue, and consequently reduce its dependence on federal transfers, which form a very big part of its revenue.Nevertheless, as is insisted by a former provincial finance secretary, there is little chance for the province to significantly improve its tax revenue to the level of actually reducing its reliance on the federal transfers. Unless the provinces get the sales tax on services, a major potential source of revenue for them, they will continue to look towards the federal government for meeting their revenue needs, he says.

Taxing the farm income

By Abdus Salam

http://www.dawn.com/2007/03/19/ebr12.htm

WHO should tax the agriculture income--the Central Board of Revenue (CBR) or the provincial revenue department? The official opinion seems to be divided. In a recent report on “Securing Sindh’s Future”, prepared jointly by the World Bank and the Asian Development Bank, the donors supported Sindh finance department’s proposal for transferring farm income tax to district governments.But later reports indicate that the CBR has been advised by the president to prepare a blueprint to boost revenue from agriculture income tax (AIT). The CBR may be empowered to collect the AIT either on behalf of the provinces or it may centralised as in the case of sales tax.Yet another question is : will the federal government succeed in taking over IAT from the provinces in an election year when the national and provincial assemblies are dominated by landed gentry and the political situation is gradually heating up. Can the government take a constituency on which it substantially bases its political support?After seven years of rule, the regime also suffers from an authority deficit. Agriculture is a provincial subject and so is the tax on farm incomes. If the big farm owners are persuaded to pay taxes, agriculture with its of 22 per cent of the share in GDP has the potential of emerging as a major source of revenue for the provinces, handicapped so far by poor revenue- yielding taxes. The collection of sales tax which is normally a provincial tax in most countries, has been taken over by the central government.The World Bank report says “ There is considerable merit in the Finance Department’s (Sindh) suggestion of devolving the tax to districts as this would not only provide the district with one major tax base to utilise, it will also remove the problem of adverse incentive as the tax would then be levied and collected by the same level of government.”With the tax-to-GDP ratio at the low level of 10.5 per cent , the government and particularly the CBR , is under pressure to enhance the revenue from areas that are either under-taxed or not taxed at all. The taxation system is devoid of equity.These include poor collection of taxes on farm incomes. Nearly 45-50 per cent of the direct taxes are raised from withholding tax that is passed on to consumers who are heavily taxed in variety of other ways. The CBR thinks that given the responsibility, it can initially raise revenue from an estimated Rs2 billion a year to Rs60-70 billion per annum.This optimism is not backed by its own performance in case of tax evasion in urban areas despite the reforms.While volumes are low, .efforts by provinces seem to have been stepped up as indicated by the rise in income tax revenue in the past two years. . Punjab’s revenue from farm incometax jumped up from Rs735 million in 2005 to Rs1312 million in 2006 and is estimated atRs1493 million for this year. Simultaneously, Sindh ‘s collection went by 50 per cent from Rs197 million to Rs300 in 2006 with anticipated revenue of Rs450 million for 2007.It has been generally acknowledged that the tax administration has improved as indicated by increasing provincial tax revenues but further efforts are needed to strengthen the tax administration. Highly skilled persons need to be inducted and tax records are required to be computerised specially in the provincial boards of revenue. Instead,. surprisingly, the federal government is considering taking over the agricultural income tax collection.The World Bank report notes that there is considerable overlap in federal and provincial taxes. Similar is the situation of expenditure side in respect of health, education and many other areas of governmental activities. For example, the federal government has levied commercial vehicle tax (CVT) and withholding taxes on motor vehicle which has a provincial tax base. And the provincial infrastructure development cess is levied on imports which is a federal tax. The government does not abide by the constitutional rules.In case of over-centralisation of collection and distribution of taxes, sharing of the tax proceeds becomes a contentious issue between the federation and the provinces and among the various provinces themselves. The political disharmony thus created is further aggravated by ad hoc and arbitrary decision- making by the Centre. Political economy is made to suffer from federal deficit, democratic deficit and legitimacy of authority.

How much Islamic are Islamic banks?

By Dr Abdul Karim

http://www.dawn.com/2007/03/05/ebr15.htm

ISLAMIC banks are very much in the limelight — both in Pakistan and abroad. In Pakistan, two brands of such banks are in operation. The first was the Zia model, which was struck down by the Supreme Court of Pakistan and referred to the Federal Shariat Court for reconsideration. As such, it is still operative.At the same time, a new brand of Islamic bank, which may be called the Musharraf model, has been introduced. This does not replace the existing system, which, though called Islamic previously, is now practically treated as conventional banking.The new system runs parallel to give choice to the public. This creates a very peculiar dual system of banking. Under the new arrangement, Shariah Advisory Boards have been set up at various levels to advise, approve and supervise Shariah-compliant products. On the other hand, there is no accepted Islamic code to serve as a criterion for determining whether a product is Shariah compliant or not. As Governor of the State Bank has put it, “At present, Shariah Compliance standards vary across jurisdictions since in absence of a well conceptualised framework, countries evolve their own framework drawing from their own needs and experiences.” In this perspective, the question is: how much Islamic are Islamic banks?There was no concept of an institution, some thing like the present day banking in the early days of Islam. The question can thus be answered in terms of Islamic philosophy of life and cardinal economic principles. Banking is a modern institution born out of capitalism and serves its philosophy, which, in turn, creates an individualistic acquisitive society. Concentration of income and wealth is actively promoted for the propensity to save, invest and produce more. The belief is the more wealth the betterIn sharp contrast, in Islam acquiring wealth is not an end in itself but is just a means of carrying out the obligations to God, fellow human beings and oneself, as specified by God. The Quran says, “That it (wealth) may not circulate only among those of you who are rich.” (59:8)Islamic code of conduct is anchored in justice. There should be no economic exploitation whatsoever. This is the basic rationale for prohibition of interest-based loans in Islam The Quran says, “You will have your principal, you shall not wrong nor shall you be wronged.” (2:280)Interest based banking is so deeply entrenched that Islamic banks are also conceived within the framework of that system so that there would be no disturbance in the economy. There is least concern about the ruthless exploitation of poor bank depositors for the benefit of rich borrowers. Islamic Banks are expected not to be indifferent to this phenomenon and are required to ensure justice between the two classes. Is this so? The answer unfortunately is an emphatic `No’.Banks -conventional as well as Islamic-- give a very poor deal to depositors.. Following the tight monetary policy pursued by the central bank, the return on bank advances has gone up substantially. There has been no corresponding increase in return poor depositors and banks are fattening themselves at their expense. The weighted average of return on advances has gone from 6.49 per cent in June, 04 to 10.71 per cent in September, 06, while the improvement in the weighted return on bank deposits has been from 1.21 to 3.24 per cent.. The difference, called bank spread, has thus widened from 5.28 to 7.47 per cent. This is more than twice the return on deposits.Inflation at eight per cent, the return to depositors is negative by 4.76 per cent in real terms. The stark disparity has been noticed by the State Bank Governor, who has publicly y urged banks to improve the return on deposits. The weighted averages do not tell the whole story. There is a very wide dispersion in nominal rates. As of June, 06, no less than 18 per cent of advances to the private sector under Islamic modes of financing were at rates less than eight per cent.There were advances at the zero rate to the tune of Rs.86.9 billion, or five per cent of the total advances under the Islamic modes. The advances at 20 per cent and above were Rs50.04 billion, or three per cent of total advances. This points to the special treatment of influential borrowers. For some of them, the rate is immaterial as they can hope to have their loans written off. Five major Pakistani commercial banks wrote–off 649 loans worth Rs22 billion in CY 05. Of these, 60 loans of Rs100 million and above each accounted for Rs15.7 billion. The largest loan written-off was of Rs1.98 billion followed by a loan of Rs1.16 billion. For this, Islamic teachings regarding sanctity of debt are worth recalling.As regards the return to depositors, banks prescribe a high minimum balance to be eligible for return. This ranges from Rs20 thousand to Rs100 thousand. The rate of return is also graduated for the benefit of large depositors. For instance, in case of NBP, for the half year ending December 05, the return on PLS saving deposits for balances up to Rs20 thousand was 0.2 per cent and above that it was 1.2 per cent, the ratio working out 1:6 In case of ABL for less than Rs100 thousand balance, the rate was 0.10 per cent when for Rs100 thousand and less than Rs1 million, it was one per cent. Here the ratio was 1:10 Larger balances carried higher rates.Attention has been mainly focused on the banks’ assets side, or the modes of financing. Islamic modes have been identified which are believed to be Shariah compliant. The Zia model had 12 Islamic modes of financing. One to them, which was most frequently used, was mark-up. This was struck down by the Court as un-Islamic. The Musharraf model omits this and, in terms of Section 4 (ii) of the Financial Transactions Ordinance, 2002, it has eight , namely. Musharikah, Mudaribah, Equity Participation, Salam, Istinsa, Ijara, Murahabah and Musasawamah. The main reliance of the Islamic banks is on Murabaha and Ijarah, which accounated for 38.8 percent and 33.1 per cent respectively of the loans as of September 06.The share of other modes was; Diminishing Musharikah, 12.3 per cent; Salam, 4.4 per cent;, Musharikah, 0.7 per cent and Others, 9.4 per cent respectively. It is worth noting that with the exception of Mussharikah and Mudharibah, including Equity Participation, the modes are those of trading and not financing. . It is significant that Allah does not allow equating trade transactions with interest or financing. It is in the Quran: “Those who devour interest do not rise except as rises one whom Satan has smitten with insanity. That is because they say, ‘Trade is like interest, whereas Allah has made trade lawful and made interest unlawful.” (2:276) To say, “Banks are deemed to have purchased and sold the goods,” is a far-fetched poor consolation and no justification.The modes of trading are justified for businessmen who play with their own capital as well as labour and can use any fair device to promote their business by winning stable future clients at the expense of immediate reward. In contrast, banks are not the owner of the capital, which they use, but that of depositors. Use of Arabic names instead of the known terminology may attract the naïve but not the knowledgeable.Conventional banks are primarily worried about the collateral for loan in the interest of recovery and care little for its end-use In fact, it is generally believed that the end-use of credit cannot be ascertained.In sharp contrast, Islamic banks cannot finance, directly or indirectly, those activities, which are either specifically declared unlawful or discouraged by Islam for their deleterious economic implications. This covers a very wide range from production, sale and serving of wine and other intoxicants to hoarding and cornering of goods and speculation. This demands intimate banker-client relationship. Thanks to the current anti-terrorism and money-laundering campaign conventional banks have been given the motto: “Know your client.” This brings them closer to the Islamic approach.Depositors status vis-à-vis Islamic banks has not received due attention. These banks do have profit and loss sharing accounts but this is just a misnomer as depositors do not share either the profit of the bank or its borrowers. What they, in fact, get is what banks just dole out. People place their savings with banks for various considerations. Some park it there for safe-keeping, while some do so for payment facility through bank account.There are others who hold fixed-deposits by way of investment. As such, the nature of deposit determines whether bank is a trustee, ameen or agent or partner. Return to the depositor will depend on the relevant arrangement. This whole area needs to be carefully explored to arrive at a formula which may assure justice to the depositor in the true Islamic spirit.Islam, being the religion of the poor and for the poor, assigns great social responsibility to financial institutions, conventional or Islamic, engaged in intermediation to help in poverty alleviation.In a message to a new Islamic bank just launched the State Bank Governor observed: “Above all, the growth of Islamic banking will help to create a better distribution of wealth in Pakistan and the Islamic world.”

Farm income tax to be a federal subject

By Ihtasham ul Haque

http://www.dawn.com/2007/03/05/ebr2.htm

THE Central Board of Revenue has advised President General Pervez Musharraf that agriculture income tax should be made a federal subject as the provinces have failed to deliver, with annual collection stagnant around Rs2 billion from a sector which contributes over 22 per cent of the gross domestic product(GDP). The landed gentry virtually gets away without paying any income tax.The CBR reckons the first priority for widening the tax net should go to improving agricultural income tax (AIT) collection. The job should be entrusted to the CBR, either by making AIT a federal subject or the CBR should be allowed to collect the tax on behalf of the provinces.A presentation on the latest CBR strategy was made to President Pervez Musharraf when he visited the CBR House on February 22. The objective is to increase the tax-to –GDP from the present 10.5 per cent to about 15.5 per cent in the next 10 years.Insiders maintain that the president agreed to let the CBR to prepare a blueprint for effective recovery of agricultural income tax. The president is also believed to have agreed to support a legislation to make the AIT as federal subject. However, the assemblies are dominated by big farmers who are expected to resist the move.If empowered , the CBR reckons that it could initially collect Rs60-70 billion from the farmers.Over time, the figure would .go up.The government has decided in principle to recover tax from agriculture and the issue is expected to be finalised during the next financial year. It will be followed by tax on services, real estate and stock market.The share of CBR in taxes in terms of tax-to-GDP ratio is 9.5 per cent while one per cent is that of provinces. However, both are considered low by tax officials and international donor agencies.CBR Chairman Abdullah Yousuf has convinced the president that unless all segments of society paid their due taxes, the country could not progress and that time had come for the government to take a "political decision" and enforce levy of taxes on agriculture income which was consistently being avoided by the landlords.Meanwhile, the CBR chairman requested the president to let his organisation first prepare a blueprint for recovery of tax on agriculture income effectively. The president agreed to enact a legislation to make agriculture -- currently a provincial subject-— a federal discipline.However, the president's "go-ahead signal" to the CBR chairman for recovering tax on agriculture income has not been well perceived by over 80 per cent of the legislators sitting in the national and provincial assemblies.Both the MNAs and the MPAs of the ruling and opposition parties were believed to have reacted sharply to the proposal. Some of them also met PML President Chaudhry Shujaat Hussain and informed him about their concern over the government's tentative decision.The late Dr Mahboob ul Haq used to say that landlords earned over Rs600 billion annually but did not pay even Rs1 billion tax on their agriculture income.Deputy chairman of the Planning Commission Dr Akram Sheikh is also a supporter of tax on agriculture income. He said that everybody should pay tax on his/her income and that the state must recover it.The CBR Chairman, when approached, confirmed that for the first time in Pakistan's 60-year history there was a realisation at the top level that agriculture income should be taxed effectively."We have told the president that in the first place agriculture income should be made a federal subject. And if it is not possible at this stage, then the CBR should be allowed to collect this tax on behalf of the provincial governments," Mr Yousuf said.He was of the view that initially the government could collect Rs60-70 billion tax on agriculture income which could gradually be increased. "Although this Rs60-70 billion is still not enough, it is modest,” he said.Currently, he regretted, less than Rs2 billion was collected through tax on agriculture income which needed to be increased. He said the agriculture sector accounted for 22 per cent of the GDP, but taxes coming from this sector were very marginal. "There is a need to have certain equitable and fair across-the-board tax dispensation in which all sectors must pay their due taxes".Similarly, he said, the high-level meeting agreed to impose capital gains tax on property and recover adequate tax from the stock market. Property, he said, was also a provincial subject which needed to be made a federal concern. Then the services sector, he said, must pay their taxes for GST purposes.Former director of the Pakistan Institute of Development Economics (PIDE) Dr A. R. Kamal also supported tax on agriculture income and said the government should introduce a piece of legislation, declaring it a federal subject. The major problem, he said, was in Punjab and Sindh where agriculturists did not want to pay their due taxes on their incomes.TA substantial amount of revenue from tax on agriculture income, Dr Kamal said, could be collected from Punjab and Sindh for which the government should fulfil its responsibilities. He termed the February 22 meeting a "good beginning" in this direction and said if tentative decisions were converted into hard decisions, the government could collect sufficient resources to generate income and reduce poverty.

Levying tax on capital gains

By Sultan Ahmad

http://www.dawn.com/2007/04/30/ebr13.htm

THERE have been insistent demands from many quarters for the imposition of capital gains tax on the large income from investment on shares of companies. The demand has become very insistent after the Karachi Stock Exchange 100 index shot up to 12,000 and large fortunes began to be made by some individuals through outright speculations in the market.At the same time prices of land shot up and real estate prices became too high, vastly increasing the fortune of some persons even with a small piece of land in a significant area. If by now a new apartment being built in Karachi can cost as much as Rs40 million it shows a new dimension of the real estate business.But the political consensus now is that land is a provincial subject and any tax on land should be a provincial tax, including all kinds of real estate transactions. And that gives rise to the issue whether build up real estate in areas like defence housing authorities all over the country can be treated differently from a simple land transaction which can be in the provincial domain.But while many institutions have urged the imposition of capital gains tax on shares, few have come up with specific rates. Meanwhile, the government has been keeping on extending the exemption from capital gains tax by one to two years.But the Institute of Chartered Accountants, which is a representative body of accountants who audit accounts of all corporate entities, has come up with a new formula. It has suggested a levy of 20 per cent tax on those who hold their assets for less than one year, five per cent tax on sale after one year and before the completion of five years and no tax on sale thereafter.The 20 per cent tax may seem too high to shareholders who are now paying a nominal capital value tax more for documentation than for real taxation and a 10 per cent tax if the share is held long enough to earn a dividend.As a result of boom in stock exchange, the government’s income from companies, including companies earmarked for privatisation, has risen very high.A boom in stock exchange helps the government in many ways. Apart from rising income from dividend, it collects a far larger sum as 10 per cent tax on dividends of others, which the corporate sector describes as double taxation of the corporate income, plus 2.5 per cent zakat from a large number of shareholders other than those who do not furnish sect certificate.For these reasons, as well as the preference to treat the KSE hundred index as the index of economic success of the government, and to attract more foreign direct investment, Prime Minister Shaukat Aziz is disinclined to levy a capital gains tax on share transactions despite the fact it could yield large profits. At a time when the low tax-to- GDP ratio is being deplored by the donors, there is no valid reason why this most obvious remedy is not being applied.The ICAP has also called for a reduction in the rate of corporate tax from its peak of 35 per cent. The ICAP is among the many institutions of tax payers who have called for reduction of the maximum rate of corporate tax from 35 to 30 per cent. Among them are the Federation of Pakistan Chambers of Commerce and Industry, overseas investors’ chamber and the American Chamber of Commerce. The government is inclined to accept this demand, but whether it will be done in the forthcoming budget or later is not known.The chartered accountants, who are alive to the fiscal problem of the country, have also called for a provincial capital gains tax on real estate transactions with a low rate of taxation to be reintroduced on sale of immovable property. They do not want the centre to collect taxes on real estate transactions.The major stockbrokers in stock exchanges and the professional speculators will oppose the 20 per cent levy on share transactions. They certainly are not in the business for holding the shares for a year before disposing them off.The capital gains tax will hurt initially the speculators among whom some buy shares in the morning and sell them in the evening. They are content with even small gains as they don’t pay the brokers fees either when selling or buying. But if the shares are held for more than a year, the five per cent CGT is not too heavy. The capitals gains tax has a two-fold advantage, it checks wild speculation and adds to the revenue of the government and strengthens the real investors.Now those who hold shares as investors or savers lose if they do not declare themselves as belonging to a sect which does not have to pay Zakat. They also lose 10 per cent of the tax on dividend after their companies had paid full corporate tax which is high in the country with multiple taxes.Small investors have moved away from the stock exchange. That happened even before the KSE 100 index rose to around 12,000. It happened when the KSE decided that the minimum number of shares it would trade would be 500. Along with that, the prices of many blue chips have shot up. You need big money now to play the stock exchange unless you have got a number of shares allotted during the initial public offering (IPO). Of course, if you don’t have your own money you can borrow from brokers but then you will run a risk as many have, to come to learn the government has provided for the continuous flow system (CFS) under which borrowing touched the peak of Rs54.5 billion last week. The KSE wanted the limit to be raised but the SECP refused.The small investors now have to be content with the mutual funds led by the NIT whose unit holders are doing very well after losing heavily earlier so more and more mutual funds are coming up sponsored by the top brokers which are proving to be popular.The chartered accountants also want the tax on dividend payments to be exempted on inter-corporate dividend payments so that groups of companies could be found.Present taxation system discourages group formation and it makes Pakistan out of step with the world.The real profit and today’s share prices are not so much from dividends unless you got the shares allotted during the IPO or through bonus shares. The real profit comes from small circulation which is done both intelligently and cautiously. It has become more and more an insiders’ game with knowledge of what will happen to particulars companies and trimming their own sales accordingly.

The pace of tax reforms

By Nasir Jamal

http://www.dawn.com/2007/04/23/ebr1.htm

Fearing delay in the release of loan tranche of $100 million from the Asian Development Bank, the Punjab government has finally ramped up the pace of reforms meant to restructure the existing inefficient, archaic and cumbersome tax administration in the province.Though the pace of change in the tax collecting agencies still remains very slow, it nevertheless has shown signs of picking up in the recent months, say finance department officials involved in the restructuring and reorganisation of the tax collection system.The situation relating to tax administration reforms, they say, began changing, and the tax collecting agencies and the bureaucrats managing them woke up to the “urgency” of reorganisation of tax collection system after the provincial chief minister and the chief secretary intervened to prevent further delay in the release of the Asian Development Bank tranche.The Punjab government has initiated the tax reforms with the assistance from the Asian Development Bank under its Punjab Resource Management Programme (PRMP), launched back in 2003 to undertake wide-ranging governance and financial reforms to improve public service delivery and poverty alleviation.The Asian Development Bank has provided $500 million soft term loan as budgetary support for the reforms programme. Impressed with its performance, the Asian Development Bank is said by the officials to have offered a similar support upto to $1 billion or so to ensure continuation of the PRMP for undertaking second generation reforms.“The Asian Development Bank has given us a blank cheque. But the Punjab government is yet to determine the size of loan it requires. It will be finalised in the next few days,” the PRMP officials say. It means the multilateral lenders are quite interested in seeing the reforms process in the largest province continue till the attainment of desired results, say the officials.The tax administration reforms programme was initiated with the ADB assistance , which promised to advance $100 million for undertaking reorganisation of tax collection arrangement. The work on tax reforms began with a report prepared by a consultant hired to look for options for the proposed taxation reform..The consultants studied and documented the existing tax administration structure, which was later shared with the relevant departments of the Punjab government, including finance, excise & taxation and Board of Revenue. Gaps were identified in the existing tax administration of the Punjab government vis-à-vis international best practices.Tax revenues of the provincial government consist of taxes collected and levied on assets and properties located in the province, such as stamp duty, mutation fee, urban immovable property tax and motor vehicle tax. Other sources include taxes levied on income generated in the province, other than those collected by the federal government such as agriculture income tax. Furthermore, the provinces are also allowed to levy provincial excises, such as excise on liquor, hotels etc.Tax collection under the present system is distributed between the Board of Revenue and the excise & taxation department. The existing distribution of tax administration to each of the respective department depends on historical practices ..“One of the conceivable basis of allocation of administrative function is that taxes related to land holding or ownership such as stamp duty, mutation fee and Agriculture Income Tax are administered by the Board of Revenue. It is so because the Board of Revenue maintains the base records of the land ownership and its use. In principle, all other taxes and duties fall within the ambit of the Excise and Taxation Department,” the report says.Hence, in its report, the consultant had proposed creation of a single, central revenue collecting agency for the province as a long-term tax reform strategy on the pattern of the Central Board of Revenue by merging the excise & taxation department and the Board of Revenue. The proposed tax collecting agency is supposed to work as part of the provincial finance department to address the issue of distribution of responsibility and administration. The proposed single revenue collecting agency was to be created by 2009, and was to be preceded by reorganisation of the excise & taxation department and the provincial Board of Revenue.However, officials say, the establishment of the proposed single tax collecting agency would be delayed beyond the stipulated time by at least one year to 2010 because of a very slow movement so far on the restructuring of excise & taxation department and the reorganisation of taxes like agriculture tax collected by the Board of Revenue.By the time the excise & taxation department is merged with the Board of Revenue to create a single tax collecting agency, the consultant had proposed reorganisation of the two tax collecting agencies on functional lines --- that separation of functions of assessment, collection, audit and recovery. The restructuring of these agencies is supposed to also streamline data and tax collection procedures within these organisations so that consolidation could be undertaken at a later stage.“The consultant had proposed that till such time that the merger of the revenue collecting functions of the Board of Revenue and excise & taxation takes place, the organisational structure, human resource capabilities and procedures for inductions, database and collection processes within each department should be gradually improved by reorganising them on functional distribution of work. This improvement should include streamlining the data and tax collection procedures within these organisations so that at a secondary stage consolidation of the two entities could be undertaken seamlessly,” the officials say. In addition it has also proposed to revamp certain provincial taxes, with a huge potential for revenue generation, like the agriculture income tax. It has been proposed that the agriculture tax must been collected on the income of farmers, and the existing land mode of computing this tax should be scrapped. The revamping of this particular tax is expected to generate substantial additional revenue for the province.The purpose undertaking the tax administration reforms, according to the officials, has been to improve efficiency of tax collectors and facilitate taxpayers by reducing discretion, minimise interaction between taxpayers and tax collectors and encourage self assessment with effective audit. Therefore, the reforms focus on improving “business processes” rather than laws governing the taxes.Another major objective of initiating reforms in the tax administration area, the officials say, has been to plug leakages because of rampant corruption owing to concentration of all functions in one person and inefficiencies of the present system. This, they hope, will strengthen collection and improve province’s own tax revenue, and consequently reduce its dependence on federal transfers, which form a very big part of its revenue.Nevertheless, as is insisted by a former provincial finance secretary, there is little chance for the province to significantly improve its tax revenue to the level of actually reducing its reliance on the federal transfers. Unless the provinces get the sales tax on services, a major potential source of revenue for them, they will continue to look towards the federal government for meeting their revenue needs, he says.

How critical is US assistance?

Ishrat Husain

http://www.dawn.com/2007/04/16/ebr3.htm

A SPATE of editorials, articles, columns and reports emanating from the United States in the last few months have argued that the US assistance to Pakistan should be made conditional upon the progress in the achievement of US’s strategic goals in the region. These assertions echoed in the national media and the popular discourse in the country. This article tests the validity of these assertions with the help of empirical evidence and attempts to disentangle the myths from the reality.The US economic and military assistance to Pakistan since September 11, 2001 has come in four main forms (a) debt relief (b) military assistance (c) economic assistance (d) emergency relief assistance. In addition, the US . has been reimbursing in dollars the expenditures incurred by Pakistan in supplying logistics services to US troops in Afghanistan.Although normally this reimbursement should not be considered part of any aid package, it has been so included in this analysis for the sake of comprehensiveness. If this broader definition of US assistance is accepted, then the next step is to calculate the quantum of this assistance.In FY 2002, the US provided debt relief of $600 million and in FY 2003 used Economic Support Fund of $186 million to retire bilateral US debt of $1 billion. Between FY 2004-2007, the US has provided budgetary support of $800 million under Economic Support Fund. In addition it also funded (a) development assistance (b) Child Survival and Health Programme and (c) PL 480 Title II in the amount of $530 million. The US is committed to further $600 million in FY 08 and FY 09 under economic assistance.Under Earthquake relief and reconstruction the US has provided $105 million and has committed to allocate an additional amount of $200 million for reconstruction in the AJK and NWFP.The military assistance that has been received so far is approximately $900 million with further commitment of$600 million in the coming two years. Finally, the US has been reimbursing Pakistan at $80 million a month for the logistic services provided to the US troops in Afghanistan since 2002. This amount aggregates to $4.8 billion in all and is shown under the services account in the current account balance. This amount is in actual fact, payment for expenditures that Pakistan has been incurring out of its own resources in rupees and is not included in any standard definition of “aid”. But we have included the reimbursements as aid in order to address the arguments raised by the proponents of “Pakistan dependent upon US” theory.Table-1 presents an aggregate total picture of all these four types of US assistance since September 2001. The annual inflows during the last six years amount to approximately $1.75 billion from all types of US assistance - military, economic, and reimbursements for logistics support. Of these flows, the aid – military and economic accounts for $ 787 million etc annuallyIn order to examine the importance of these flows to Pakistan’s economy and evaluate the dependence of our economy on US four key indicators are selected (a) US assistance as per cent total budgetary expenditure (b) US assistance as per cent of total foreign exchange receipts (c) US assistance as per cent of total current account receipts and (d) US assistance as per cent of total value of imports.. These indicators have been carefully chosen to see as to how much damage will accrue to our balance of payments and fiscal accounts if the US for one reason or the other abruptly decides to withdraw its assistance of all types.The results of this analysis shown in Table II indicate that even under the worst case scenario of zero aid flows and no reimbursements for logistics services rendered to the US troops, the diminution in foreign exchange receipts or budgetary resources would be insignificant — varying between 4.5 per cent of total foreign exchange receipts to 7.2 per cent of total budgetary expenditures. The other two indicators i.e. the proportions of total value of imports and current account receipts financed by U.S. assistance account for 6.4 per cent and 5.8 per cent respectively — not worrisome amounts.Some observers would argue that the World Bank and ADB assistance to Pakistan would also be reduced if the US takes action to suspend its financial aid. Although this assumption is open to question and debate but even if it is accepted at its face value, the total gross flows of foreign aid from all official bilateral and multilateral sources (excluding reimbursement for services) amount to 8.5 per cent of the country’s foreign exchange receipts. in 2006-07 and 10.8 per cent if the re-imbursement for services is included.As a proportion of GDP, these gross flows from all sources work out to only three per cent. Using a more appropriate indicator i.e. net transfers onaccount of all foreign assistance, the impact is even more negligible — only 1.1 per cent of GDP. Should these amounts raise any alarm bells when the country has already weathered much worse shocks of greater magnitudes in the past seven years.This worst possible case scenario ,although possible but not probable, will have a consequence in form of immediate drawdown of our foreign exchange reserves from $13.5 billion to $9.5 billion assuming that all current expenditures in foreign exchange are protected. In case this scenario materializes the policy makers will have to make necessary adjustment in our imports and other foreign exchange expenditures, take measures to attract larger volume of remittances and foreign direct investment and will access the international capital markets. We can be assured on the basis of the above “What if:” kind of analysis that under the highly improbable worst case scenario where the US along with all multilateral development banks withdraw its assistance of all types in one go, Pakistan’s economy is unlikely to face any serious risk.It is also less well known that the U.K Government provides much larger volume of economic assistance to Pakistan than the U.S does. The Department for International Development (DFID) of UK has raised its annual grant aid to Pakistan from £240 million ($480 million) to £480 million ($960 million). Most of this aid is targeted at education, health, social development i.e largely on the development of the people.Despite such hefty amounts involved - more than the entire U.S economic and military assistance - there are very little noises from the British Parliament or think tanks or even the influential media that Pakistan should be penalised “as it is not doing enough to help meet the British objectives in Afghanistan”. There is a sense of maturity in the U.K that recognises that these kinds of tactics in fact end up alienating and antagonising public opinion in the recipient countries rather than alter their behaviour. Ill will rather than goodwill is created against the donors if they continue to flaunt the stick they possess. A better way is to engage in dialogue, listen to and understand the perspectives and limitations of the recipient countries as to why there is divergence in the views of the two sides and what can be done to set things right.There is no doubt that the government and the people of Pakistan do very much appreciate the financial and moral support demonstrated by the US government at the critical moment of Pakistan’s economy. Several other collateral benefits accrued to the economy as a result of the U.S bilateral debt forgiveness, strict scrutiny of remittances through informal channels, the US EXIM Bank and OPIC’s highly positive initiatives and the withdrawal of all different types of economic sanctions. U.S Administration played a helpful role in ensuring larger volume of concessional assistance to Pakistan through the IMF, World Bank and Asian Development Bank. The prompt and generous response to the Earthquake of October 2005 by the US government, private sector and non-governmental organisations left a very favorable impressions in the minds of Pakistanis.US is an important trading and investment partner of Pakistan and we should continue to remain friends with this superpower. The purpose of this analysis is not to show that we care little for our friendly relations or do not cherish friendship with the government or the people of the United States. As a matter of fact we should expand our relations with the United States in the areas of higher education, science and technology transfer, trade, investment and labour flows. We should also seek duty free market access for the products exported from the Reconstruction opportunity Zones (ROZs) in the tribal areas as part of our joint strategy to provide economic benefits to the three million population living on the porous border with Afghanistan. But the main argument of this analysis is that the pundits in the US who believe that they can use the leverage of US official aid to paralyze Pakistan’s economy are sadly mistaken as they have an exaggerated sense of the importance of these official flows. Any attempt to impose conditions that impinge upon the sovereignty of Pakistan or conflict with our own national interests can be resisted without creating a serious dislocation to our macro economic stability or growth prospects.This analysis explodes the popularly held myth that Pakistan is so dependent on foreign assistance for its economic survival that pulling the plug would force it to yield under this pressure. These sages and their followers in Pakistan are well advised to seriously reconsider their basic premise. Successive governments in Pakistan since 1974 – whether military, democratically elected or interim- had successfully resisted all kinds of pressures placed upon them for discontinuing the nuclear programme under worse economic conditions than prevail today. The present and the future governments of any political persuasion would be able to meet the highly unlikely event i.e abrupt withdrawal of U.S economic and military assistance of all types and forms with courage and fortitude because the capacity of the country to respond to this and other exogenous shocks has become much resilient in the recent years. During the last seven years Pakistan has successfully withstood the internal and external shocks of severe and prolonged drought, mobilization of Indian troops on the borders, terrorist attacks on foreign nationals, the war against terrorism in Afghanistan, and the oil price hike. None of these shocks, some of which are more severe than $750 million provided by the US has hurt the macroeconomic stability or growth. Oil import bill that went up by almost $2 billion in a single year was more devastating in nature but the economy grew at 6.6 per cent despite this shock.

Taxing the bourses

By Usman Hayat

http://www.dawn.com/2007/05/14/ebr15.htm


There are four major taxes that have a relatively direct and strong impact on the stock market.These are: (i) capital gains tax, (ii) transaction taxes, including capital value tax (CVT) (iii) tax on dividends and, (iv) income tax for listed companies.Share trading is exempt from capital gains tax till June 2007. This exemption is in place since 1974 and it has been consistently renewed by different governments. Since a lot of money is made and lost (usually not by the same set of people!) in short -term trading, many argue in favour of imposition of capital gains tax to raise revenue for development expenditure. This tax is in force in a number of developed and developing countries such as UK and India.Due to the UIN system, measuring and collecting capital gains tax with reasonable degree of accuracy has now become possible. However, while addressing the KSE Top Companies Award ceremony in January 2007, prime minister announced that exemption from capital gains tax would be extended by one more year to end June 2008.He is also reported to have shown his willingness to consider reduction in transaction taxes. Perhaps this also explains why KSE’s tax proposal for the financial year 2007-08 is silent on the issue of capital gains tax and wants elimination of transaction taxes.Capital Value Tax (CVT) and other withholding taxes on transactions were introduced in 2004-05. Under pressure from stock brokers, government reduced the rate of CVT from an unrealistic rate of 0.1 to 0.01 per cent. In 2005-06, rates of transaction taxes were left unchanged probably due to the fear of renewed controversies but in 2006-07 these were doubled.It is widely held that these taxes are the main reason that turnover at bourses is falling. However, the revenue collected by the government has consistently increased because while rates of taxes have doubled, traded value has not halved. KSE’s budget proposal also says that KSE has collected over Rs1.7 billion on account of transaction taxes, up 31 per cent compared to Rs1.3 billion during July-Dec 2005,Transaction taxes have indeed increased the cost of trading stocks. For instance, when in a day-trade a broker at KSE first purchases and then sells shares worth Rs1 hundred thousand in regular segment, KSE collects from him Rs58 out of which Rs50 are passed to the government on account of transaction taxes, whereas rest of the Rs8 go to the KSE, SECP, and NCCPL.These taxes on trading are widely criticised. Market participants argue that taxes should be on profits and not on trading activity. The argument clearly has weight. If the idea is to reduce “satta” in the stock market, then that is best done through measures which fall in the domain of SECP, such as eliminating ‘badla’ financing (or CFS), changing margining and settlement systems, and educating investors. If the idea is to generate revenue, then it should be generated from those who are making gains and not from everyone buying or selling securities.Next important tax for the stock market is withholding tax on dividends of listed companies. Market participants would like to see it eliminated. They argue that dividends are paid by companies out of post-tax profits therefore taxing shareholders for dividends is double-taxation. Successive governments, including this one, have continued to ignore the economic rationale against double taxation of dividends. At present dividends are being taxed at different rates for different types of investors. For instance, dividends for individuals are taxed at 10 compared to five per cent for public and insurance companies.The fourth is income tax for listed companies. Till 2002, unlisted public companies were taxed at 45 compared to 35 per cent for listed public companies. Since 2003-04, the government has been narrowing this differential at two percentage points per annum so that now both listed and unlisted companies would be taxed at 35 per cent. KSE has proposed a 25 per cent income tax rate for listed companies to encourage new listings and to compensate listed companies for the cost incurred in complying with the Code of Corporate Governance. Not every one is convinced. Others argue that whether or not a company decides to list or de-list should be based on its capital requirements rather than tax advantages and to be rewarded for better governance companies should look towards market forces and not to the government.In principle, taxes for the stock market should be levied under a clear and pre-defined framework which should be developed through a transparent and consultative process and taxes, as a policy tool, should fit in with broader policy objectives of turning the capital market into a fair, efficient, and transparency economic agent.Economic managers should have the right to exercise their best judgment in setting taxes and how the tax money would be spent but then they should also be accountable for the same. Ground realities, however are quite different. Changes in taxes are often a surprise and these changes are made on the basis of short term political pragmatism of a few. Worse, people remain unconvinced that government can put their tax money to good use and the moral cause of taxation is becoming weaker.The current economic managers are perceived to be quite friendly towards the stock market. In the wake of March 2005 stock market crisis, their soft corner for large market players has led to widespread criticism and suspicion. It is quite debatable if an average Pakistani looks at the KSE-100 to gauge what is happening to Pakistan but the desire of this government to see the index at politically correct levels has not abated. In fact, it seems to have hit a new high in the background of ongoing judicial crisis, worsening law and order situation, and upcoming elections.In view of these dominating political realities, it seems likely that finance bill for 2007-08 would probably offer more good news than bad news for the stock market, perhaps as a parting gift from the current economic managers who would later like to remind others how great the stock market used to perform when they were in office.

Farm tax : a must for the provinces

Sultan Ahmed

http://www.dawn.com/2007/05/21/ebr17.htm

Two major proposals have remained before successive governments for over 30 years now. They are: levying of proper income tax on the large farm incomes and the crop insurance.The earlier governments would have liked both the moves going together with crop insurance linked to the income tax levy But the farm lords have been hardly interested in the crop insurance. Besides, the insurance companies were not at right stage of the development to extend their operation to the rural areas. The farm lords also have been averse to the levy of proper income tax on their big incomes.The crop insurance can could increase real income of the farmers in case of destruction or damage to their crops. Now, come of the farmers are having a second thought about crop insurance. At the same time, they want to avoid paying income tax in spite of their increasing incomes. In fact, crop prices have risen, procurement prices increased, loan sanctions and subsidies on fertilisers expanded along with the irrigation facilities and subsidised electric supply.The major international lending agencies like the World Bank and the Asian Development Bank have been pressing the government for increasing income tax revenue from farm incomes to boost revenues for financing development and social sector progress. While they lend more and more money for development, they also want the government to mobilise more of its own revenues through taxation which has now at a very low tax- to -GDP ratio of 10.5 per cent.The lenders have also advised successive governments to opt for land reforms. The earlier two land reforms were seen as more cosmetic than a real solution to the problem. And soon after Mir Zafarullah Jamali became the first prime minister under president Musharraf, he formally announced that the age of land reforms was over and now was the time to help the farmers to maximise their output.With the feudal lords and the ladies dominating the assemblies, there is no question of land reforms coming..So far it has been a one-way street in the relations between the government and the farm lords. They want enhancement of the support and procurement prices from time to time along with large farm credit at reduced rates of interest, writing off of their defaulted loans for farm machinery and higher subsidies for fertilisers in a period of rising prices, along with enough water and subsidised power for the tube wells. In return, they pay a nominal provincial income tax which yields altogether Rs2 billion, more than half of which comes from the Punjab.The next Annual Development plan outlay is to be raised to Rs500 billion from over Rs400 billion and five major dams including Kalabagh Dam and the Bhasha Dam are to be financed. Far more funds are needed now to increase its share of the development funds and raise that not through borrowings but through taxes. And the farm income tax is the right source of revenue for that now.The Central Board of Revenue has been showing keen interest in using its hands for raising revenue from the farm land. And the CBR chairman Abdullah Yusuf has offered his services for collecting the provincial agricultural income tax.Initially, the revenue from farm income tax may not be much and Mr Abdullah Yusuf himself wants a modest beginning. The large family farms are split between the members of the feudal families and each will show a number of workers on their payrolls which will reduce the tax payable by them.An earlier estimate said the first year of the farm income tax may not yield more than Rs5 billion but it will go on increasing rapidly. Anyway he wants to achieve a total tax-GDP ratio of 15.5 per cent in the next 10 years. The farm income tax can be an essential ingredient of that substantial rise in tax revenuesNow as the economic growth rises and the prospects of a seven per cent cotninued growth becomes real and the GDP is much larger, the tax collection should increase correspondingly. More tax revenue is needed for sustaining a higher rate of investment. The farm income tax is one of the major means to achieve that as agriculture has a 22 per cent share of the GDP. The idea of crop insurance was first floated at the time of the Zulfiqar Ali Bhutto’s government in the 1970s, the insurance companies were then not too excited about that. They did not want to become captives of the feudal lords in the farm areas. The suggestion that they can choose some areas for experimental purposes did not find favour with them. The situation has not changed.As for the government, it would prefer both crop insurance and agricultural income tax to come together. But if crop insurance is slow to come, the farm income tax should come first.Agriculture with its 22 per cent share in the GDP cannot be such a low tax performer when even the common man has to pay 15 per cent sales tax for buying his essential requirements. The feudal lords have apart from their economic power, a tremendous political clout and enjoy the numerous advantages. They should pay not avoid paying income tax.We cannot depend too much on external loans or excessive domestic borrowings with the real beneficiaries of the economy not wanting to pay their tax dues fully. The fact is the feudal lords have failed even the co-operative system in the rural areas as they monopolised and abused it. It is a pity the small farmers cannot have their own cooperative societies because of the hegemony of the feudal lords.

Rain and cyclone havoc underscores the needto invest more money in Balochistan

The province is Pakistan’s most neglected and backward region, but it could become the country’s new economic frontier within the next decade or so if the govt pumps more money into developing its infrastructure

By Kaleem Omar


http://jang.com.pk/thenews/jul2007-weekly/busrev-09-07-2007/index.html#1


The government has somewhat belatedly appealed to the international donor community for aid to deal with the havoc caused by the recent cyclone and heavy rains in Balochistan. Many sections of the Mekran Coastal Highway, linking Gwadar and Karachi, have been washed away by flash floods. The RCD Highway, linking Karachi to Quetta, was re-opened to traffic only a few days ago, after having been closed for a week due to flooding. Several other roads in the province have also been badly damaged by flooding, leaving many towns cut off from the rest of the country.
Many power pylons are down, leaving large swathes of the province without electricity. Thousands of acres of land have been submerged by rainwater and by rain-fed streams bursting their banks, leaving more than a hundred thousand people marooned. For a while it even looked as if the recently completed Mirani Dam on the Dasht River in western Balochistan might be breached by the rapidly rising water level in the reservoir. Had that happened, the affect on downstream villages and towns would have been calamitous and many lives might have been lost.
All this underscores the need for the government to invest more money in upgrading the province’s existing infrastructure and in accelerating the pace of work on new infrastructure projects. A few projects have been completed in recent years, including Phase I of the new deepwater commercial port at Gwadar, but many others are still in the planning stage and exist only on paper. Work on these planned projects must not be allowed to get bogged down due to lack of funding.
Balochistan is the most neglected and most backward province in the country. But it could become Pakistan’s new economic frontier within the next decade or so if all the multifarious development schemes that are planned to be built over the next five to ten years in Balochistan and other parts of the country, as well as in the region around it, start gelling together and become a reality.
It is, therefore, vital that progress on this programme not be allowed to slow down for lack of money. One important source of funding could be the money the government expects to receive from foreign entrepreneurs interested in buying up state-owned enterprises under the privatisation process. Instead of using the money to reduce the country’s foreign debt or to meet non-development expenditure, the government would be well advised to invest the money in infrastructure projects in Balochistan.
A key element in opening up Balochistan to the outside world and making it an engine of growth for Pakistan’s economy has to do, in more ways than one, with what is happening in western China. This is the Chinese region that borders Pakistan.
Beijing says it intends to spend $ 250 billion dollars in infrastructure projects alone in western China over the next five years and another $ 250 billion in bank loans to industry and commercial enterprises to boost economic growth in the region and bring it at par with China’s other regions.
Pakistanis who have been visiting western China in recent months speak of seeing vast new infrastructure projects, including modern highways to rival the best highways in the world, water supply schemes, power generation and distribution networks, hotels, educational institutions and a host of other development schemes.
China’s eastern seaboard is 3,500 kms from Kashgar, western China’s main city, whereas the distance from Kashgar to the Pakistani coastal town of Gwadar on Balochistan’s Makran coast is only about 1,500 kms. So there is an obvious huge cost advantage to China in using Gwadar as the gateway port for the western China region instead of its far-off eastern-seaboard ports.
Oil supplies from the Gulf states have to travel even greater distances to get to western China, because they have to be shipped more than 15,000 kms all the way around India, through the Malacca Straits into the South China Sea and on to China’s eastern seabord ports, and then have to be sent 3,500 kms overland from these ports to destinations in western China.
With its economy growing at a scorching 10.5 per cent a year, China has now become as big an importer of oil as the United States, with imports averaging 10 million barrels a day.
This explains China’s interest in helping Pakistan develop Gwadar into a full-fledged commercial port, capable of handling big oil tankers and other large cargo ships. Beijing gave Pakistan $ 200 million in aid to build the port’s first phase, and has now also agreed in principle to give $ 500 million in aid for the second phase. The second phase will add 20 berths to the three berths built by a Chinese contractor in the first phase. Work on the second phase is expected to begin in the next few months.
Islamabad and Beijing are also discussing the possibility of Chinese financing for a highway linking Gwadar to the central Balochistan town of Khuzdar, on the RCD Highway connecting Karachi and Quetta. They are also discussing Chinese financing for upgrading the existing road-link connecting Quetta to the Indus Highway via Loralai and Dera Ghazi Khan.
From Dera Ghazi Khan the Indus Highway heads north through Punjab to Islamabad, to link up with the Karakoram Highway (KKH) at Havelian, near Abbottabad. From Havelian the KKH heads north for 500 km to the Khunjrab Pass on the Pakistan-China border and then another 250 km to Kashgar.
The KKH was built jointly by Pakistan and China in the 1970s and opened for traffic in 1979. China has now offered to help Pakistan to widen and upgrade the KKH on the Pakistani side to make it an all-weather highway capable of handing heavy truck traffic. An upgraded KKH will facilitate the flow of Chinese imports into western China and exports from there to foreign markets.
Beijing and Islamabad have also signed a memorandum of understanding under which China will build a 90-kilometre highway connecting the Chinese side of the KKH to the Russian-built highway network that already connects all the five Central Asian Republics of the former Soviet Union.
Once all the missing elements of the highway network are in place, there will be a direct overland route trade linking Pakistan and China. This route will connect the new commercial port of Gwadar on the Balochistan coast to western China and the landlocked Central Asian Republics, thus making it unnecessary for Pakistan to build a highway link to Central Asia through war-torn Afghanistan, where the American invasion and occupation of the country has done nothing to stop the fighting between fractious warlords and other groups, including an increasingly resurgent Taliban.
Pakistan could reap enormous economic benefits from this alternate overland trade route from Gwadar to the five Central Asian Republics and western China. All the export and import trade of these six countries could then flow through Gwadar, earning Pakistan hundreds of millions of dollars a year in port charges, bunkering charges, stevedoring fees, cargo-handling charges and other imposts.
Pakistan’s road transport industry would earn millions of dollars a year in freight revenues for carrying import cargoes from Gwadar to western China and the Central Asian Republics and export goods from those countries to Gwadar for shipment to international markets.
Also, Pakistan’s own export trade with these countries could receive a significant boost once the new highway links are in place. Some agricultural exports from western Punjab and southern NWFP destined for Gulf countries as well as some imports from those countries destined for Pakistan could also be routed through Gwadar, rather than only through the more distant port of Karachi. This alternate route would help Pakistan to achieve significant foreign currency savings in sea-freight costs.
Overland trade between neighbouring Iran and Pakistan would also be boosted by the coastal highway linking southwestern Balochistan to Karachi and the proposed highway connecting Gwadar to Khuzdar and points farther north in Balochistan and other parts of Pakistan. In short, there would then be a whole network of link-highways carrying a huge range of commodities and goods through the Pakistan-Iran-Central Asian-western China region.
The local population of the Balochistan coastal region and other parts of the province would benefit significantly from all the economic activity involved in creating this infrastructure. These benefits would flow not only from thousands of jobs for locals with companies and government agencies engaged in the construction programme but also from the numerous indigenous vendor industries, firms and individual enterprises that would then emerge to supply local goods and services to these companies and agencies.

Making the textile sector competitive

To increase exports, innovative measures will improve productivity and competitiveness.Official sources said that the incentives regime available to Pakistani exporterswas at par with and in some cases even better than those available elsewhere in the region

By Fazal Hakeem

http://jang.com.pk/thenews/jul2007-weekly/busrev-09-07-2007/p4.htm

The Economic Coordination Committee on 28th June approved hefty package of Rs20 billion for the Textile Sector to help it in acceleration of exports in 2007-08 Under the package six per cent R&D support for garment sector, 5 per cent on dyed printed home textile and 3 per cent on dyed printed fabrics. R&D package is to increase Research and Development activities. Though it was withdrawn in budget. The Prime Minister, however, gave consideration to grievances of textile sector and decided to continue the assistance to make the industry internationally competitive. Subsidy under the new package will continue till June 2008. Earlier, the reduction of subsidy rate was scheduled from 1st July 2007. The spinning sector will be given 3 per cent markup on long term loans. It will cost government Rs1 billion. While Rs2 billion would be incurred on R&D from 1.7.2007 to 30.6.2008. Under the new package, flat rate of one per cent subsidy would give more benefits to sectors like yarns, grey fabrics and cotton etc.
Textile industry had expressed disappointment over new budgetary proposals for 2007-08. The criticism was focused on government policy of making little difference between exporters of value added goods and manufacturers of semi-finished raw material. Textile business tycoons in their criticism stated that the government proposals confirmed global textile rating agencies predictions that Pakistan would ultimately be made supplier of semi-finished goods. But after the first ever protest by spinners, Pakistan could also miss the chance of supplier of semi finished textile goods. They were critical of relief in tax particularly the withholding tax in 2007-08 budget. And demanded subsidy as has been extended to agricultural sector. At the same time spinners were demanding R&D on marketing value added goods. Government’s new package has resolved the issue and now the responsibility fell on the shoulders of textile industry as to how efficiency the package is utilised.
In May this year, the Prime Minister while expressing dissatisfaction about textile industry role in global market had stressed for more investment, merger and consolidation of textile sector. To increase exports, innovative measures would improve the productivity and competitiveness. The official sources had stated that the incentives regime available to Pakistani exporters was at par with and in some cases even better than regional competitors. Textile is the backbone of our economy. It is on government’s priority list. Home grown production of good quality cotton is an additional edge for Pakistani textile industry. In terms of workers wages electricity, gas and POL prices, container cost and price of cotton, tariff and long term normal financing for exports in Pakistan is cheaper. Pakistan is the only country that provides R&D at the time of export of textile products. However, a study conducted by a team of CBR, Textile sector contribution was noted unimpressive @5 per cent in GDP and about 29 per cent in manufacturing because of zero-rate of sales tax and wide ranging tax exemptions and concessions.
In South Asian perspective, Bangladesh has outstripped the other regional states. It has secured the maximum share of leading garments on the US and EU. Pakistan has been left behind both by India (13 per cent increase in exports to EU&US) and Bangladesh (22 rise in exports to US&EU between Jan-Nov 2006 and 34 per cent in November alone). While Sri Lanka exports up by 24 per cent to EU due to Generalised System of Preferences plus scheme-zero rate of duty. Japanese market is also being lost to its competitors. Before, the budget, State Bank of Pakistan, an important source of revenues for government, had shown concerns that textile sector had serious excess liquidity, distorted the tightening of monetary policy, chewed the Bank’s profits despite record subsidised loans in 10 months. According to SBP, under Export Finance Scheme (EFS) and Long-Term Financing for Export Oriented Projects (LTE-SOP) an estimated amount of Rs328 billion had been disbursed during July 2006-April 21, 2007. While an amount of Rs284 billion had been given only under EFS. In response to textile industry demand for more incentives, the Bank had made it clear that “the financial sector was fairly competitive”. Financing to textile industry and real interest rates in the country are lower than its regional and competitive partners”. It is further clarified that the State Bank of Pakistan provides finance to Banks @ 7.5 per cent against commercial lending of 12.57-13-57 per cent. In India the rate is 9 per cent against 15 per cent commercial rate. Bangladesh and Sri Lanka the concession rate is 6.7 against 11.14 per cent commercial rate while Sri Lanka provides loans at 18 per cent in both cases. Borrowing rates for Pakistani exporters is the lowest in comparison to other regional competitors.
Government’s policy is to (i) rationalise tariffs, (ii) ensure a conducive trade, finance and fiscal policies; (iii) removed the sales tax on textile value chain and (iv) reduce import duty on polyester chain. The government also provides availability of development finance and export financing at low mark up rate including hassle free environment. After the new package, textile industry needs to go in to production of high value added goods, technology up-gradation and research to meet the global competitiveness and challenges. The over all exports increase up to 6.5 per cent is not encouraging. Before the budget, Chairman Aptama had claimed that 116 textile mills have been closed down. An estimated 700,000 spindles were going out of operation which includes closure of 20,000 during May alone. He had claimed that about 500,000 spindles have been closed during last year and had rendered more than 15,000 people jobless.
Government plan of cotton vision is to improve the quality of silver fiber in the country. According to Chief Executive Trade Development Authority of Pakistan, textile vision was `being updated in line with the chaining needs. Harmonised coding system is the backbone of trade in goods. The Chief Executive who was speaking at a pre-budget Seminar on “importance and management of harmonised coding system in international trade” at Lahore stated “harmonised coding system was a multi-purpose tool and for universal language for goods being traded, it helps give required boost to exports”. He had urged the exporters to mention correct HS on the goods declaration (GDs) forms for availing the facilities based on export performance. Country’s exports are under pressure because the core products failed to give matching performance in terms of exports. Nevertheless, a study by CBR’s team comprising senior officials conducted before the budget had revealed that Rs40.7 billion as a refund and rebate was paid to the textile industry whereas the industry paid only Rs13.8 billion of indirect taxes (sales tax, customs and excise). In case of income tax, the textile industry had made unimpressive payment of Rs45 billion through withholding tax ranging between 0.75 and 1.5 per cent.
Despite EU’s restrictions introduced in 2005, Chinese textile exports continued to gain share in all major markets. Smaller exporters like Morocco, Egypt, Cambodia have also expanded their textile and clothing exports. Share of LDCs textile exports to EU and US increased during 2006. Pakistan textile exports to EU&US increased by 12 per cent only in post quota regime. Exports of yarn and fabric to Japan is also declined by 7 per cent. Developing countries like Pakistan required outsourcing arrangements to ensure cheaper good production to get maximum returns. The proposed Reconstruction Opportunity Zones (ROZ) in Tribal areas will be another opportunity to give a new boost to 41-hot selling textile/clothing and non-textile (leather, surgical, medical, sports stone etc) identified items for exports to US at a zero custom duty. Government’s latest package would therefore, improve skill, professional knowledge and managerial know-how. Extension of R&D facility will help to focus on innovative measures. It will facilitate sustainable indigenous environment to protect and promote textile industry and benefit the economy at the same time.

Privatisation losing steam

By Ihtasham ul Haque

http://epaper.dawn.com/ArticleText.aspx?article=09_07_2007_606_004


THE privatisation proceeds, officially categorised as foreign direct investment, dropped to $133 million in ten months ending April 2007 compared to $1538 million in the same period of the previous year.
The slow down can be attributed to the growing complexities in privatisation including a politically charged environment and the recent Pakistan Steel Mills case.
The “nationalists” within the govern ment are also against strategic assets being given under foreign control. While the government is strongly committed to push ahead with its privatisation policy, the main hurdle in further progress is, however, stated to be lack of funds to offer terminal benefits to employees of enterprises on the privatisation bloc. In some cases, issues related to the land titles of the entities have yet to resolved.
As it appears politics is now in command. It is said that transactions concerning the oil and gas(mainly SNGPL and SSGC) have once again been delayed on the advice of the ruling PML(Q)leaders who do not want any political unrest on the eve of the elections.
Except for Services International Hotel to be privatised on July 26, no other transaction is at hand with the officials of the Privatisation Commission (PC) to be completed in the immediate future. The PC had sought Expression of Interests (EOIs) for Republic Motors and is believed to have been told by bidders to keep the transaction on hold till the uncertainty relating to general election, the president’s re-election and the Chief Justice Iftikhar Mohammad Chaudhry’s case comes to an end.
The privatisation of Hazara Phosphate company is being planned once again but the investors have not shown much interest in it. The PC officials thought that they would at least put up for sale Pakistan Machine Tool Factory (Karachi) but its land is under the name of PIDC; besides other problems have to be taken care of.
There are cash problems in the disinvestment of Heavy Electrical Complex (HEC) and units of the State Engineering Corporation. The government has already withdrawn Heavy Mechanical Complex (HMC) from the privatisation list.
Insiders maintain that the government has decided not to touch the mega transactions like ports and shipping, airports etc., and wants the new elected government to take up sale of such enterprises. The pace of privatisation slowed down, particularly after the controversial Steel Mills’ transaction that was declared invalid by the Supreme Court as it was conducted in inde cent haste and in a non-transparent manner.
.The privatisation of Pakistan State Oil (PSO), delayed many times, is creating suspicions about transparency. The transaction of Pakistan Petroleum Limited (PPL) is pending since last over two years due to the differences between the Centre and the Balochistan government.
President Musharraf had announced that a good share of profit of the company will be given to the provincial government before the finalisation of the sale deal. However, two of the potential bidders MOL of Hungary and OMV of Austria are reportedly losing interest in the PPL transaction due to the delays.
Generally, it is believed that there could be some acceleration in the privatisation process once the PC was reconstituted after the new elections and its terms of reference framed afresh to lure the local and foreign investors who were discouraged by the cancellation of the Steel Mills’ deal.
The Minister for Privatisation, Zahid Hamid told Dawn last week that the government has decided once again to privatise Pakistan Steel Mills. "But this is not in the offing as the lead manger of Mills is still to work out its terms of reference after which it will be sent to the mills's management for approval. Then the Pakistan Steel has not completed its balancing, modernisation and replacement(BMR) for which the federal government had approved Rs6.6 billion", a source said.
He said that the most important issue is the reference price of the mills which has not been finalised. Every thing relating to the mills has to be reflected in the reference price and this time we will have to share this price with the new owners to avoid various problems witnessed in a deal scrapped by the apex court in August last, the minister added.
"Except for GDR of OGDCL and UBL, there has been no significant privatisation indicating that the process has slowed down", an insider said.
It has also been proposed to refer various issues to the Inter-Provincial Coordinating Committee to speed up the privatisation process with the help of the chief ministers. Some people within the government believe that strategic assets should be defined so that certain procedure could be developed about various entities and their reference price.
"The issue of assets and liabilities is also needed to be resolved so that new owners are clear about the financial health of any organisation", a former senior government official said.
He said the investors should be clear about the inventory of any state sector enterprise along with the issues concerning "future payments" that had been made in some transactions.
These are the issues which concern transparency and should be sorted out if at any meaningful privatisation is to be carried out. Only by giving the list of transactions being planned means nothing as is invariably done by the Privatisation Commission.
However, when approached, the Minister for Privatisation Zahid Hamid disagreed that the privatisation process has slowed down or facing transparency issues. "It is unfair on the part of analysts who say that nothing is happening on the privatisation front", he said.
He said that the government earned Rs120 billion against the target of Rs75 billion on account of privatisation in 2006-07 and this is the highest ever amount collected in the past.
"If there are delays they are due to vertical and horizontal integration, third party access and fixation of tariffs", he said adding that there are some complicated issues causing delay in some transactions. "But it had nothing to do with transparency", he said when asked about the criticism being made by some quarters in this behalf.
The minister referred to new GDRs which helped the government to collect sizable funds both from local and foreign investors.

The blame game about cost of production

By Parvaiz Ishfaq Rana

http://epaper.dawn.com/ArticleText.aspx?article=09_07_2007_606_005

THE issue of cost of production in the textile industry has sparked a blamegame between policy makers and the industry leaders.
While the industry is lamenting high cost of inputs impacting adversely on cost of production, the government is accusing the manufacturers of inefficiency.
That explains why policy makers are giving a deaf ear to distress calls by textile industry at large. Perhaps, no one but the industry itself is to be blamed. “The industry has been shouting `wolf, wolf’ for the last five decades”, says an analyst adding, “for doing so, now no one is ready to believe them, although the problems are there”.
Over the years, successive governments have come out with incentive packages for the textile industry. When there were a sort of captive foreign markets owing to quota regime favouring the sellers, the industry kept demanding fiscal and monetary support and was obliged many times.
The textile tycoons were also blamed for having diverted incentives like cheaper bank loans to speculative trading for making quick money.The relief funds dished out from taxpayers' money were freely used for purchasing luxury cars and palatial bungalows.
Even this year’s budgeted relief failed to satisfy the textile industry. It did not come up to the expectation of value-added apparel and home textile sectors. The two vital sectors are labour-intensive and earn highest foreign exchange by value addition and need support to be competitive in the global market, it was maintained.
A large number of spinners also held a demonstration on June 22 2007, in front of the parliament to press for a relief package for the spinning industry. In the past, only growers and ginners adopted such tactics.
A visit by this writer to some textile units located at SITE and Landhi gave an impression that the old 'Seth' management system has changed into modern corporate culture. Yet the going is becoming tougher in a fiercely competitive world market. The quota –free trade has been followed by other restrictive trade practices by importing countries..
After lifting of quota in 2005, no exporter can sell anything if he is not able to meet buyers' compliances related to environment, social, security/safety and labour laws (including the child labour). Foreign buyers prescribe standardised chemicals that are environmental and user friendly. And the processing and value addition apparel and home textile units are induced to import certified European chemicals and dyes-- normally costlier.
The industry suffers because it is so much subservient to foreign buyers while the government is not very helpful , particularly with regards to its obligations towards providing some of the basic infrastructural needs like sustained supply of utilities such as gas, power and water.
The home textile and the apparel industry says that it not only carries out research work to stay abreast with latest developments taking place around the world -- from textile technology to designing, modern skills and marketing, but also has to make arrangements for such basic utilities such as water, power, security, and treatment plant which raises their cost of production. .
On a visit to a home textiles unit with exports of around Rs4.5 billion per annum, employing a labour force of around 4000, it was revealed that the unit has to generate its own power and treatment plant and manage its own security. The approach road to this unit was found to be in shambles.
Its management explained that a primarily processing unit starts its value-addition from grey cloth and needs a lot of water at each stage of production line. When there is no water supply from the KWSB (a government agency) it has to arrange water from its own source. In this case, the unit has dug tube wells some distance away from its production base and laid down a pipeline to carry water to the water processing plant. It arranges water supply through tankers to meet its needs. Before using this water for processing the fabric it is treated through an imported reverse osmosice (RO)) plant. The unit has its own power generation plant also.
The treatment plant is necessary to meet foreign buyers' condition of environmental compliance, ensuring that industrial waste is treated before throwing it into city sewerage system and does not harm the sea life. The textile units have to maintain its own security staff and follow labour laws as well as safety measures in the process of production as laid down by foreign buyers. Above all, industry has quality check at each stage of production line and the unit visited has a lab of world standard to test quality, strength and other parameters of cloth and dyes and chemicals. The industry has to incur huge cost towards bringing out the end product because it has to carry out many of the government’s obligations on its own. Thus, it also becomes uncompetitive in the world market.
A huge inventory, for at least six months, has to be maintained to meet the seasonal demand of foreign buyers. In the past, buyers used to maintain their own inventory but after the quota regime came to an end, they asked their suppliers to maintain stocks on their behalf thus saving huge investment on warehousing and the inventory. The textile trade in the world market has now turned from sellers into a buyers market.
Responding to a relief package approved by the Economic Coordination Committee (ECC) meeting on June 28, Readymade Garments Manufacturers and Exporters Association (PRGMEA) chairman Ijaz A Kokhar said it has extended the six per cent Research and Development (R&D) on apparel exports which was to come to an end on June 30, 2007.
Besides, the Finance Act 2007 has allowed 3.5 per cent R&D on local sale of polyester staple fibre, while five per cent R&D on home textile, three per cent on fabric would also continue.
Chairman, Pakistan Hosiery Manufacturers Association (PHMA) Naqi Bari said the government is not realising the gravity of the situation. Instead of giving R&D, it should look around what other countries of the region are doing to keep their textile industry internationally competitive.
He said that India has placed fixed investment of export- oriented industries in separate bracket with a separate mark-up rate. Bangladesh which enjoys the status of less developed country provides gas to export oriented industry- comparatively in Pakistan, gas is 30 per cent costlier. It is time for the government to create an enabling environment for the industry to compete in the world market, he added.