Tuesday, November 20, 2007

Pakistan Economy: Movie by Board of Investment

Economic growth spurs fuel-oil consumption

By By Dr Hina Lodhi 10/29/2007

Pakistan has come a long way since 1998/99 crisis when the country was on the brink of default as its foreign exchange reserves had depleted dangerously and economic activities were on a decline. Considering the critical regional and domestic environment, high oil prices and massive earthquake, Pakistan has made a revolutionary turnaround, specifically post 9/11. Steady economic performance is expected to continue, indicating that most of the financial indicators set by the planners would be achieved in the FY08 as well. Economic growth has accelerated averaging 7 per cent per annum; inflation and fiscal deficit have been contained within reasonable limits. Pakistan’s credit worthiness has been upgraded to B+ by Standard & Poor’s.The SBP report for the FY07 shows the key indicators of economy very much in manageable range despite global externalities and geopolitical situation. Forex reserves increased to over US$ 16bn, whereas foreign investment also witnessed an all-time high of US$ 4.1bn on YTD basis. Real GDP growth of 7 per cent was achieved in FY07 (FY06: 6.6), while trade and fiscal deficits remained within the reasonable range of 6 per cent and 4.2 per cent respectively.As the economic turnaround was on its way, major large-scale manufacturing industries such as cement and automobile flourished. Even today, Pakistan is going through a construction boom. Growth in these sectors resulted in huge demand of energy, specifically petroleum products. The oil industry has shown similar trend in line with steady GDP growth rate and ever-increasing power demand on account of industrial and construction activities being undertaken in the country as well as increased participation of agriculture sector and large-scale manufacturing depicting a growth of 5 per cent and 8.8 per cent respectively. The oil experts predict that POL industry would reach an all time high consumption of 19 million tons in FY08. High-Speed Diesel (HSD) would display a growth in the range of 8-10 per cent, white oil consumption would cross eleven million metric tons, an all time high since the inception of the country. White Oil comprises Motor Gasoline (Mogas), HSD, Jet Fuel (JP-1) and Kerosene (SKO). Comparing earlier Mogas projections, at the outset of FY08, there was a sharp rise in demand of Mogas and diesel which mainly resulted due to reduction of smuggled products from across the border. This demand has led major OMCs (PSO, Shell and Caltex) to import Mogas as existing refineries were unable to meet the enhanced demand. It is estimated that Mogas consumption in FY08 would be around 1.6 million metric tons compared to 1.1 million metric tons in the previous year.The oil industry would continue to consume higher Fuel Oil volumes owing to increased reliance on thermal power generation on account of ever-widening power supply-demand gap; and low gas availability to power plants and drop in hydel generation. The industry sources say that estimated demand of fuel oil in FY08 would be over 8 million metric tons, almost the same level recorded in FY01.In the absence of any abrupt increase in hydel power and big gas discoveries, fuel oil-based IPPs are the only sources that have idle capacity to meet incremental demand. Analysing the growth trend in IPP sector it would be safe to assume that power fuel supply is an area in which PSO’s superiority is difficult to challenge. It has gained experience of international markets for local import needs. PSO owns 82 per cent of storage facility and has pipelines to all major IPPs. The ability to handle high volumes and market shares provides PSO the ability to offer competitive prices to consumers. Oil industry sources disclose that some six major companies plan to setup IPPs which will require around one million metric tons a year. The state-owned company would be a major beneficiary in gaining fuel oil business of new IPPs thus capitalizing on its vast infrastructure.According to analysts, PSO successfully managed to post reasonable profits in all quarters of the fiscal year 2007 despite wild fluctuations in international prices resulting in significant inventory losses. Contrary to PSO’s performance, Shell’s earning before tax was only Rs 378 million. Caltex, not being listed on stock exchanges, does not make its data available, however, analysts assume that Caltex must have had results similar to Shell.Interestingly, PSO despite being the largest holder of inventory in the country reported after tax earning of Rs 4.7 billion with an EPS of Rs 27.3. Analysts attribute the positive bottom line of the state company primarily on account of higher fuel oil intakes and ever-increasing market participation in key white oil products through innovative and customer-focused approach. Industry experts observe that PSO has been displaying strong fundamentals in all key financial indicators for the last couple of years. This clearly shows PSO’s outstanding performance as a result of well-perceived and far-reaching strategies, which are contributing a lot in terms of higher volumes and market participation.During the last seven years, the state-owned oil giant’s motor gasoline participation increased over 49 per cent from 39 per cent despite the industry having been fragmented with eleven players, which used to be enjoyed by only three players till 1997-8. Shell’s Mogas share dropped to 28 per cent from 43 per cent, while Chevron also reported a decline in its participation from 18 per cent to 14 per cent. PSO successfully maintained its participation in Diesel at 60 per cent level and Shell came down from 30 per cent to 22 per cent and Caltex came down to 8 per cent from 10 per cent.Local and international analysts believe that the state-owned company has all it takes to sustain dominance in Pakistan’s oil industry supported by a strong retail network, continued investments in oil movement and storage infrastructure, experience in handling high volumes and a professional management. It is believed that these advantages are difficult to match by existing or new companies. PSO’s investments in storage and oil movement infrastructure not only support its logistics, but also a source of additional income as PSO offers hospitality to other players in the industry. Some experts believe that if PSO embarks upon its vertical integration plan by getting interest in refining, it would be one of the leading players in the region.

Tax exemption for all exports, 3pc refinance rate proposed

By thenews correspondent 4/28/2007

KARACHI: Saqib Naseem, Vice President Karachi Chamber of Commerce and Industry, attended the 58th meeting of the Advisory Council of the Ministry of Commerce, which was chaired by Asif Ali Shah, Federal Secretary for Commerce and discussed the Chamber’s suggestions for the Trade Policy 2007-08. KCCI suggested that in the Trade Policy 2007-08 all sectors of export must be exempted from all taxes. Export refinance rate should be reduced and SBP should decline it up to three percent and cap it for five years. Utility charges for all export-oriented industries should be reduced and capped for five years. New markets like South and Central America, West Indies and Bahamas should be explored. New exporters should be encouraged.Encouragement is necessary for diversification and promotion of value added items of sectors such as Chemicals, Dairy Farming, Electrical & Capital Goods, Energy Sector, Engineering, Fisheries, Food Processing, Fresh Fruits & Vegetables, Furniture, Gems & Jewellery, Handicrafts, I.T., Hi-Tech Logistics, Marble & Granite, Marine Processing, Meat & Poultry, Mining, Petroleum Products, Pharmaceutical, Research & Innovation and Tourism.R & D support should be provided to all sectors. Safeguard of Pakistani exporters in shipment of goods was also discussed and to avoid malpractices in this regard KCCI suggested that one full set of original carrier B/L be issued for each respective export shipment and be directly delivered to the exporters on submission of authority letter from the authorized exchange dealer, as per chapter xii rule 11 of SBP, Circular 23, dated 19-02-1992 should be withdrawn, Audit of all B/L for shipments from Pakistan be done by customs/DG Ports and shipping to check that the SBP rule 11 is being implemented, freight forwarders’ role must be defined in consultation with the exporters/stakeholders.To safeguard the small exporters, carrier bill of lading should be issued to the exporters as per chapter xii rule 11 of foreign exchange act of SBP and freight payment/charges be directly credited to the license agents of the carrier/shipping line. KCCI also suggested that exporters are made to contribute to approximately 36 heads, like social security, E.O.B.I, worker’s welfare fund, Education Cess/fund etc. Government must take remedial steps to give relief to exporters from these heads. It is proposed that a five years moratorium be implemented.KCCI demanded that according to current Import Policy 2006-07, import of iron and steel in small size is banned and it allows import of only specific width & length. Import of steel sheets irrespective of size should be allowed.KCCI further demanded removal of ban on import of stock lots of paper & paperboard, reduce import duty on paper waste, Import of Second hand machines like Spray Plant and Embossing plates as well as spares should be allowed. The chamber sough zero rate of duty on chemical imported by leather industry.The proposal also stated that either the import and other protective duties /territorial restrictions on all packaging materials, pharmaceutical production and quality control (qc) machinery should be brought down to zero percent or the prevailing export rebate should be increased to 13percent.It also stated that according to current Import Policy Procedure 2006-07, there is a positive list of 1076 items that are importable from India. This list is subject to amendments/addition. Instead of a positive list of items importable from India, a negative list of items that cannot be imported from India should be maintained.In the textile related proposal it stated that R & D support amount be given to exporters at the time of the arrival of remittances and the documentation procedure involved in it must be simplified.R & D support rate be enhanced to at least 10 percent for five years for all sectors, backlog of sale tax amount must be refunded without further delay, pending claims be paid within 90 days of submission.On the leather sector it was suggested that excluding the export of meat, export of live animals be completely banned or an export duty be imposed on the export of live animals. This measure will safeguard the dwindling leather sector of the country.Agriculture & food sector related proposals states that to encourage export of halal food and to increase Pakistan’s share in world market, government of Pakistan should establish halal food authority, need to develop mechanism to process imported un-processed moong, urid, masoor etc into daals, and then they be exported in consumers packing up to 25 kilogrammes bags under brand names, export of whole gram, moong must be discouraged. Duty free import of agro commodities should be allowed in Pakistan from Afghanistan which can be exported all around the globe and 35percent regulatory duty on export of whole pulses or processed form be removed.It also said that stern rules of D.A terms not only eliminated many small and medium sized exporters but has also blatantly affected on increase of A.U.P of basmati rice. Production of basmati rice is decreasing and it is not viable to continue its exports on D.A basis when the same quantity can be sold against L/C at sight. Export of rice should be banned on D.A basis.

Corporatisation through tax incentives

November 05, 2007

By M. Iqbal Patel

The Central Board of Revenue (CBR) constituted a task force in August 2006 to review the enabling tax environment for holding companies and formulate proposals in line with the international best practices to facilitate group consolidation of the fragmented corporate ownership.The Asian Development Bank (ADB) felt that the actual formation of holding companies is impeded by tax policy distortions that can result in double taxation of corporate income of affiliated firms within a holding company. However, its opinion that our tax policy distortions are limited to the holding companies, was not correct.In fact, our tax statute is plainly discriminatory while imposing taxes. Lawmakers manage to keep themselves and the ‘milk cows’ out of reach of the tax regime which has been the main reason of the narrowed tax net and its negative effects on the overall tax revenue generation. It is time to remove these distortions from the tax policy.According to the Sec3 of the Companies Ordinance 1984 (CO), a company shall be deemed to be a subsidiary of other company which directly/indirectly controls, beneficially owns/holds more than 50 per cent of its voting securities or otherwise has power to elect and appoint more than 50 per cent of its directors. The other company shall be called a holding company. Despite such liberal laws, only 115 holding and subsidiary companies have been formed so far.The government, no doubt, offers several tax incentives to encourage corporatisation and to sustain economic growth..In order to encourage conversion of sole proprietorship and association of persons/partnerships into companies, sections 95/96 of the Income Tax Ordinance 2000 provide that no gain or loss will arise when a resident individual or a resident association person disposes the assets of a business to a resident company subject to fulfilment of the conditions provided therein. Moreover, Sec 97 does not recognise any gain/loss on disposal of assets between wholly owned companies subject to certain conditions.The Finance Act, 2007 introduced Sec 97A for non-recognition of such a gain/loss arising of out disposal of assets of one company to another under the Scheme of Arrangement and Reconstruction. All these measures are provided to encourage individual/family owners of companies to consolidate their businesses so that a strong corporate sector is developed to meet the international challenges.Besides, the tax benefits for corporatisation, the Finance Ordinance 2002 introduces u/s (2A), a scheme of amalgamation/merger of banking or non-banking financial institutions. Subsequently, the benefit of the scheme has been extended to insurance companies and industrial undertakings. The major benefit as a consequent of merger as provided u/s 57A is that accumulated business losses of amalgamating company are allowed to be set off or carried forward against the business profits of the amalgamated company for a period of six tax years.In addition, the ordinance provides for group relief to a subsidiary of a holding company listed on stock exchange in Pakistan, owning and managing an industrial undertaking and an undertaking engaged in providing services. Accordingly, a subsidiary is allowed to surrender its losses to the holding company for a set off against its business profit subject to the conditions specified.Thus the government has been using the income tax as a tool to encourage growth of corporatisation. However the data shows that since the concept of amalgamation was introduced in 2002 till 2006, only 40 amalgamations have taken place. Similarly, till 2006 not a single company has availed the benefit of group relief. Such a scenario calls for a review of the present tax policy towards corporatisation.If one looks at the performance of the companies listed on the Karachi Stock Exchange (KSE), it is certainly very poor. Out of 653 companies, 189 are placed on defaulter’s counter while no trading takes place in another 200 companies.. Thus 60 per cent of the listed companies are dormant while only few of the rest of 40 per cent declare profit or pay dividend to their shareholders.All these companies have made public disclosures of their performance in their audited accounts in accordance with International Accounting Standards along with positive reports on compliance with corporate governance requirements duly reviewed by auditors. This scenario indicates that tax policy as a tool for corporatisation does not yield the desired objective due to ineffectiveness of corporate sector regulations, supervision and above all, their ‘culture’.The task force evaluated the impact of these incentives on corporate sector and correctly pinpointed out that the key problem was the fragmented ownership/ management in the corporate sector which has failed to achieve the objectives of creating an efficient corporate sector. However, their prescription to enforce the concept of group taxation and group relief is not a proper treatment for curing the disease.The Finance Act, 2007 substituted the provision 59B relating to group relief. The scheme permits the holding company to absorb losses of its subsidiary/subsidiaries among themselves to set off against their current profits for three years subject to fulfilment of the conditions specified. It also provides transfer of cash to the loss surrendered subsidiary company equal to the amount of tax payable on profits against the loss suffered. Such transferred cash being tax-free.The scheme is defective in being discriminatory in nature and would encourage a loss culture in the sector. Under the scheme, acceptance of loss of a subsidiary for set off by a holding company is neither subject to approval from shareholders nor the transfer of cash to loss surrendered company subject to the consent of shareholders.Moreover, neither there is a provision to the fact-finding of causes of loss sustained by a subsidiary through independent auditors nor the holding company is required to submit any plan for rehabilitation of the subsidiary company to CBR or SECP Thus the substitution in more liberal form in the ordinance to enforce group relief without any provision of check and balance would encourage loss culture in the sector rather than promote formation of holding companies.The core issue of inefficiency of corporate sector is the family and individual ownership. There is a dire need to adopt appropriate measures in the CO so that the sector would play its role in the competitive environment of the international market effectively. Presently, CO allows boards of directors--even of the listed companies the ownership of which is subscribed by the public—to appoint family members including wives/daughters/sons as sponsors. A house built on a weak foundation is bound to collapse. Similar is the case of the companies which have members on their board of directors having no business experience or required education.The main responsibility of managing a company’s affairs rests with its directors. The Cadbury Committee spells out the responsibilities of its directors to include setting up of the company’s strategic aims, supervising the business and reporting to its shareholders. Thus a company’s success depends on an effective board comprising of directors having the requisite education, experience and vision.The CO should lay down the proper conditions for becoming a director of a company and the Securities Exchange Commission of Pakistan should consider the measures which would help build the structure of a strong corporate sector.

Demand to abolish capital gains tax

November 19, 2007

By Sultan Ahmad

There has been a persistent demand from the directors of the Karachi Stock Exchange (KSE) and the far larger number of vociferous brokers that the capital gains tax (CGT) should be abolished for ever.Those who trade in shares do not have to pay any CGT on their large profits until June 30,. 2008 and the KSE directors now want that the deadline be extended and not postponed by one or two years as was done in the past.The directors and brokers met the former prime minister Shaukat Aziz at the Sindh Governor House last week and made this demand. He was sympathetic to their demand and appreciated their role in the country’s economy. He also wanted stock exchanges to play a far larger role in promoting the corporate sector.Mr Shaukat Aziz is friendly with many major brokers and listened to their demand with considerable sympathy. The KSE directors also wanted lower taxes- a minimum of five per cent-- in the income of companies listed with stock exchanges so that more private limited companies will be tempted to get listed with exchanges.The KSE also wants the cap on the continuous funding system (CFS) to go. The earlier the CFS ceiling was kept at Rs33 billion but later raised to Rs55 billion, while the total actually exceeded that. Now, the stock exchanges want the cap on CFS to be removed so that they can borrow as much from banks as they want.. The Securities and Exchange Commission of Pakistan is finalising a new CFS funding system- CFS MKII-- which should be out soon.Not satisfied with the bank funds available under the CFS, the KSE directors also want the 20 per cent limit set on the banks resources for buying shares so that brokers are enabled to get as much credit as needed. The Governor of the State Bank of Pakistan, Dr Shamshad Akhtar is not in favour of this demand as she wants the stock exchanges to mobilise money from the public which is readily available instead of using bank funds for the purpose.The purpose of the stock exchange is to attract new investment and not merely to re-plough the old investment Mr.Shaukat Aziz advised the KSE officials to send their demands to the government in writing.Meanwhile, because of the political crisis, the KSE index which was heading towards 15,000 collapsed on the black Monday following the declaration of emergency and political rumours and lost 635.08 points –the heaviest one day fall. After that $88.7 million were withdrawn from the foreign portfolio investment in three days and the KSE index shed 305.83 points on Wednesday last. And the rupee has come to its lowest parity with the dollar in three years.The Karachi Stock Exchange or for that matter other exchanges are not attracting new investment but merely re-rolling old investment in the form of spirited speculation and the brokers have made large gains.The number of companies listed on the KSE, in fact, has shrunk because of mergers and withdrawals from the exchange. Their owners say there is no incentive to be listed on the exchange as the tax relief disappeared years ago and as far as good companies are concerned they can get all the capital they need from banks.The foreign portfolio investment is going back because of the political convulsions and rising violence. The travel advisories of many governments against visiting Pakistan is not helpful to the investment climate. In such a context, those who make large fortunes on stock exchanges or through real estate deals don’t pay income tax or capital gains tax. Why should others who make a modest living pay the tax?The stock exchange directors told Mr Shaukat Aziz there is no capital gains tax in Sri Lanka, Singapore, Malaysia and Hong Kong but in India there is a two-tier tax system for those who hold the shares for a short time and those who sell the shares after a long time. And also the tax collection in Singapore, Malaysia and Hong Kong is rather strict compared to Pakistan. The tax structure in those countries is quite different from that of Pakistan.Many of these South East Asian countries have a sales tax of three to six per cent while Pakistan had a sales tax of a stiff 15 per cent and in fact it is the single largest source of revenue. So if those who make large windfall gains do not pay tax, why should any one else? , others will ask At 10 per cent of the GDP, the domestic tax collection is one of the lowest in the region, so further tax exemption should not be given to those who make large windfall.What the stock exchange in fact wants is that its members should be given all the bank funds they like to buy shares and when they sell them at a large profit they should not be taxed. Instead they should be given tax relief. Such demands will be totally unacceptable to the people who pay tax on a meagre income and suffer the privations of a soaring inflation.The stock exchanges have to help attract new capital for new industries and expand the industry instead of ploughing and re-ploughing the investment in shares to make large gains through outright gambling.

Real estate market rules may be revised

By Ihtashamul Haque
October 26, 2007

ISLAMABAD, Oct 25: Most of the rules regulating real estate and construction markets are expected to be revised to check corrupt practices and promote local and foreign investment in building industry.Informed sources told Dawn on Thursday that official planners have proposed drastic measures to ensure transparency in the real estate and construction markets.They said although both sectors related to provincial and local administrations, centre’s intervention was necessary to improve a regulatory mechanism to ensure better performance by removing distortions in the real estate business.Apart from foreclosure laws, the regulatory issues concerning the two sectors needed to be worked out afresh.The government was told that well functioning real estate markets are important for reducing and streamlining the cost of doing business for firms in manufacturing, retail, transport as well as construction.Real estate costs form a significant part of the fixed costs of doing business in Pakistan.Additionally, well functioning real estate markets that guarantee titles and lower search costs for ensuring titles also allow firms to use real estate as collateral for accessing funds from banks and other lenders.Since the formal sector financial market depends heavily on physical collateral for advancing funds, secure land titles could allow firms, especially small and medium-sized firms as they have limited assets, to acquire funds from commercial formal sector providers.Construction sector has the potential to not only be a significant contributor to the overall GDP of the country, but to be a large contributor in the year-to-year growth of the GDP as well. It is also a labour intensive industry so that the potential for creating gainful employment through construction activity is also significant.Well functioning real estate markets, planners said, are an important ingredient for allowing construction industry to take off.Pakistan faces significant shortages in availability of housing units (more than 5 million) alone, and if commercial spaces are added to it, shortages are much more severe. Needed reforms in these two sectors could have a significant impact on construction activity for all commercial sector development of housing market and on development of cities.Problems with the two sectors have been repeatedly identified as these are posing significant constraints on growth and they have also been identified.The IFC data-base on cost of doing business, maintained for more than 175 countries, points out that in terms of ease of registering property, Pakistan was ranked 68th (higher ranks are better) in the comity of nations in 2006, down from 57 in 2005, and in terms of ease of enforcing contracts Pakistan was ranked 163rd in both 2005 and 2006.The importance of contract enforcement data, for the real estate market, should be clear from the following: one survey estimates that more than 80 per cent of all civil litigation in Pakistan is related to land disputes.Pakistan does not have an efficient and transparent cadastral system for property registration.What is registered is the transfer of property and not the title (ownership right). So establishing title is a process of following up on previous transfers to establish current rights.There is a ‘search-certificate’ that can be issued by the sub-registrar’s office, saying that the title is good, but this falls well short of a government guarantee of title.Thus the cost of ensuring property title, in terms of finding previous transfers, getting the search certificate, issuing notices in papers and paying for lawyers and other mediators, and possession, can be substantial. Even after due caution, the risk of costly litigation remains.“This distorts the outcomes from the real estate markets in a number of ways to excessive litigation,” the government was told.Commercialisation fee for change of use of property (from residential to commercial) is 20 per cent of the value of the plot.In addition, there are very high development charges by water and sanitation authorities. These charges apply to areas that have already been declared commercial.About the construction, building and zoning codes regarding height of buildings, plot to covered area ratio, rules for space utilisation, etc., remain the responsibility of local governments, but there is a multiplicity of agencies involved here with multiple rules and procedures.There is as yet no realisation of possible environmental impacts of construction and expansion of urban areas into rural areas. These need explicit recognition so that the impacts can be planned for.About rental property, rent restriction ordinance continues to distort incentives for the development of property for rental purposes.The issues here have to do with a) limits on rents, b) excessive tenant rights, and c) differential taxation on rental property. Limits on rents and how much rents can go up by reducing incentives for construction of property for rental purposes as well as incentives for maintaining rented property.Tenant eviction procedures are costly and lengthy, and strong tenant rights again weaken incentives for owners to develop property for rental purposes.High rate of stamp duty and registration fee (three percent and one per cent of value of contract) also discourage registration of rental contracts.Property tax on rented property is still almost 10 times, that on owner occupied property.This differential also discourages property rentals. Since there does not seem to be any sound economic reason for the differential closing, the gap between these two rates could lower the distortion in rental markets significantly.In this regard, establishment of a transparent and efficient cadastral system for property title registration was recommended which should be a high priority (provincial responsibility).It was also proposed that stamp duties on property related transactions and registration fees need to be rationalised (provincial responsibility).Non-registered transactions have to be banned (provincial responsibility).Change of use charges need rationalisation. Development charges by water/sanitation authorities need rationalisation on the basis of costs.Building and zoning codes need to be modernised and hannonized across the province.Possible environmental impacts of expansion of urban and industrial areas need recognition. Rental property laws need to be revised.Moreover, market distorting effects of rent control, excessive tenant rights and differential taxation (registration. stamp duty and property tax) have to be rationalised.

Taxation structure and trends


October 17, 2007

By Sami Saeed

Macroeconomic stability depends to a large extent upon fiscal consolidation, particularly in the context of emerging economies. Generating sufficient government revenues for provision of public goods and designing progressive tax structures which address both efficiency and equity considerations are indeed challenging tasks.Another important dimension is the emergence of the private sector as the main source of economic activity. Providing a hassle-free environment for businesses on the one hand and catering to social imperatives of income redistribution are, therefore, equally important. These objectives require a well designed fiscal policy and an efficient, equitable and business-friendly taxation system.Despite substantial pick up in tax revenues over the last few years, fuelled by high economic growth, tax to GDP ratio remains low and stagnant. This calls for a critical analysis of the taxation structure, trends and reforms.Our analysis should start with a brief description of how the tax structure has evolved since the early years. The country, without an industrial base at the time of partition, started with a tax to GDP ratio of four per cent, with customs duties on imports and exports of cotton and jute as the principal source of revenue.By the end of the 1960s, with rapid industrialisation, tax to GDP ratio rose to 6.4 per cent, with excise duties as the major revenue source. Income tax, due to tax holidays to promote investment, as well as sales tax taken over from the provincial governments since 1951, did not show buoyancy.There was a quantum jump in tax to GDP ratio during the 1970s (14 per cent by 1979-80) mainly due to an increase of four percentage points of GDP in customs duties as well as phasing out of tax holidays. Since the early 1990s, tax to GDP ratio has remained stagnant, with decline in the share of customs duties being offset by improved performance of income and sales tax.In broad terms, 1960s was the decade of excise duties, 1970s and 1980s of customs duties, and 1990s of income and sale taxes (Hafiz A. Pasha and Mahnaz Fatima, Fifty Years of Public Finance in Pakistan: A Trend Analysis, in Shahrukh (ed.), 50 Years of Pakistan’s Economy, Oxford University Press, 1999).As Table 1 shows, tax to GDP ratio averaged at 13.2 per cent during the 1990s and at 10.6 per cent during the period 2000–07. Adjusting for the effect of re-basing of GDP in 2000-01 after a long interval of 20 years, it is evident that tax to GDP ratio has remained broadly unchanged. A comparison with tax revenue levels in developing countries reveals a relatively low level of fiscal effort Countries in a similar income bracket as Pakistan have an average tax to GDP ratio of 20 per cent.Table 2 gives a disaggregated analysis of how major taxes have fared in relation to economic growth. It shows that direct tax to GDP ratio has improved from 1.85 in 1989–90 to 3.8 per cent in 2006-07. However, it is still much lower than the developing countries standard of around seven per cent. As a percentage of GDP, indirect taxes as a whole have declined from 12.4 of GDP in 1989-90 to 5.9 in 2006-07, and within indirect taxes, customs duties came down from 5.7 to 1.5 per cent, sales tax moved up from 2.2 to 3.6 per cent, and excise duties declined from 2.2 to 0.8 per cent.Changes in the relative shares of major taxes are reflected in Table 3. The share of direct taxes in total taxes has increased from 18 to 39.4 per cent in 2006-07, while the share of indirect taxes declined from 82 to 60.6 per cent during the same period. Even within indirect taxes, the structure has changed profoundly, with the share of customs duties declining from 45 of total tax collection and 55 per cent of indirect taxes in 1990-91 to 15.6 and 25.8 per cent respectively.The share of sales tax increased sharply from 14.4 to 36.5 per cent of total taxes and from 17.6 to 60.3 per cent of indirect taxes during the same period. Central excise as a tax is being phased out; its share in total taxes and indirect taxes has gone down from 22.5 and 27.5 per cent in 1990-91 to 8.4 and 13.9 per cent respectively during the same period.This represents a structural shift in the composition of taxes on account of reforms, which were initiated since the early 1990s and vigorously pursued from 2000 onwards. The base of taxation is rightly moving from trade and investment to income and consumption. However, though the share of income and sales tax has increased, yet the quantum of increase is not so strong as to offset the reduction in customs and excise duties. The incremental tax effort should, therefore, focus on income and sales tax, which would not only enhance the revenue yield but also contribute to a more balanced, equitable and buoyant tax system.The taxation system suffered from a number of structural weaknesses. These included narrow and punctured tax bases; vicious circle of high tax rate and tax base erosion; over-reliance on trade-related taxes; multiple taxation hampering investment; complex and opaque procedures encouraging rent-seeking behaviour; and organisational efficiency and mindset. A lot of progress has been made to address these issues, but a lot more needs to be done to deepen the reform process.

Pakistan’s public debt, inflation decrease


November 01, 2007

By Ihtashamul Haque

ISLAMABAD, Oct 31: Pakistan has managed to decrease public debt and contained inflation but its health and primary education pillars showed a negative trend, says the Global Competitiveness Report 2007-08 of the World Economic Forum.The country-specific section of the report, released on Wednesday, shows that Pakistan’s public debt decreased from 53.5 to 52 per cent of the GDP and inflation from 9.10 to 7.20 per cent.Compared to last year, Pakistan improved its competitiveness position by seven ranks and now occupies 84th position in a tally for 122 countries.According to the report, Pakistan improved its key indicators after it established formal relationship with the World Economic Forum in 2006 and became a beneficiary of its Competitive Support Fund (CSF).The United States tops the overall ranking in report. Switzerland is in second position followed by Denmark, Sweden, Germany, Finland and Singapore. Pakistan has maintained its position by 92, whereas other major players lost their rankings by significant numbers.India lost five ranks on the GCI, whereas, Slovenia and Brazil lost six ranks, Egypt lost 14, United Arab Emirates and Indonesia lost five and four ranks, respectively.Pakistan remained more or less stable with respect to constant sample and not considering the countries which entered the rankings for the first time this year, above Pakistan.The report appreciated the government’s strategy based on deregulation, privatisation and liberalisation, where Pakistan realised important progress in a number of different dimensions captured in the indexes.Pakistan’s overall competitive performance is hindered by its position in some of the key pillars, mostly related to human capital: higher education and training, health and primary education, and labour markets.On education and training, the country has low primary, secondary and tertiary enrolment rates, (ranked 120th, 120th, and 116th, respectively), a poor assessment for the quality of educational system, and availability of staff training.Health indicators are also worrisome, placing the country 106th overall. This is, however, also due to the fact that the World Economic Forum used the data available prior to 2005-2006. Finally, the country receives poor marks for labour market efficiency (ranked 113th), with low female participation in the labour force, high firing costs, little reliance on professional management within companies, and wages that are not flexibly determined.Significant improvements were made in Institutions, including property right (+0.40), in institutional framework (+0.27 for diversion of public fund variable, +0.35 in the efficiency of the legal framework among other), in the level of security (+0.31). Also private institutions sub-pillar is assessed as more efficient and transparent than last year (+0.24).The pillar on Infrastructure shows improvement with respect to last year (+0.6 overall), with a notable increase in the number of telephone lines (+0.48) in line with the government’s effort to improve connectivity and infrastructure.The country has improved in important dimension, such as the extent and effect of taxation (0.32), the total tax rate, the effectiveness of anti-monopoly policies (+0.02) and the business impact of rules on FDI (+0.31).Pakistan has shown an overall positive delta of 0.15, with improvements in some variables on the pillar of Labour market efficiency.The pillar on Financial market sophistication shows a slight overall improvement (+0.03), with a positive delta (0.14) for the efficiency sub-pillar and some notable improvement in the soundness of bank (+0.18) among others.The economic reform strategy is registering gains, according to the new methodology used by the World Economic Forum for the GCR of 2007-2008. Pakistan scored relatively well for Prevalence of Foreign Ownership (72 to 64), Business Impact of the Rules on FDI (66 to 24), Cooperation in Labour-Employer Relations (77 to 70), Pay and Productivity (65 to 43) and Effectiveness of Anti Monopoly Policy (79 to 66).Pakistan ranked as follows on the overall pillars: institutions (81), infrastructure (72), macroeconomic stability (101), health and primary education (115), higher education and training (116), goods market efficiency (82), labour market efficiency (113), financial market sophistication (65), technological readiness (89), market size (28), business sophistication (79) and innovation (69). However, Pakistan maintained its overall position by 92 among the 131 countries.Pakistan’s identified competitive advantages by the GCR have been identified as the business impact of rules on FDI, protection of minority shareholder’s interest, interest rate spread, extend and effect of taxation, time required to start a business, non-wage labour costs, hiring and firing practices, pay and productivity, ease of access to loans, strength of investor protection, domestic market size and local supplier quality.In addition to these, the GCR also identified quality of railroad infrastructure, available seat kilometres, HIV prevalence and government procurement of advanced tech products as the indicators where Pakistan has competitive advantage.The CSF’s success to improve Pakistan’s key competitiveness indicators have also been recognised by the international community and in a recent meeting held at Portland, USA by the Competitiveness Institute (TCI) the Pakistan model (CSF) has been recognised as the model to be adopted for the Islamic countries.TCI will be recommending it as the model for all its new initiatives in the Islamic world.This could also be a road map for international donors, like USAID and other international institutions to implement successes made by Pakistan in their programmes in other parts of the world.