Pakistan’s 2nd to None

At a top financial institution with participants after completing a project on  . A long day can be tiring but professionally rewarding if successful.

I’ve always believed and my belief keeps on strengthening that we only need to garner the abilities of our people in a just way while focusing on education.

In terms of brilliance, hardworking people and potential,  is 2nd to none

ACCA Pakistan “Working Group on Taxation”

IMG-20160516-WA0046.jpg

Assalam O Alikum (Peace be on you),

The above is a picture from one of the events launching ACCA’s last pre-budget proposals. We’re planning for a revamp of the ACCA taxation committee and opening up to have some more competent professionals join us with their valuable contributions for the profession, country and their Alma-mater.

Below is the snapshot of a recent email from ACCA to members across Pakistan. Please feel free to share this in your circle and get in touch if you’re the right person.

Dear ACCA Members
ACCA Pakistan MNP has decided to setup a working group under the Taxation Subcommittee. The objective of this working group will be to interact with the Federal Board of Revenue initially and expand its remit to the Provincial Revenue Authorities under the leadership of Omer Zaheer Meer, FCCA, Head of Taxation Sub Committee, ACCA Pakistan and offer the following:

  • Provide regular feedback and suggestions on circulars/policy matters pertaining to taxation
  • Prepare budget proposals (initially federal and later on expand them to the provincial proposals too) and forward them to Federal and Provincial Ministries of Finance.
  • The budget proposals should be prepared in such a way that they present a holistic as well as sectoral suggestions for Pakistan’s Annual Budget
  • Discuss, deliberate and critically evaluate issues pertaining to taxation and present the critical evaluation to Federal and Provincial
  • Profile the ACCA Pakistan Members Network Panel and the subcommittee to the taxation regulators in Pakistan

This working group will consist of 3-5 members working in the taxation sector in strategic positions with considerable experience of the sector. Members with a diverse view point on taxation of different business sectors are encouraged to share their CVs and a personal statement describing their claim to merit for these position with us.

Those members who are keen to join this working group should send us their CV and personal statement by replying to this email. We will look forward to your responses by 24 February 2017.
Haroon A Jan
Regional Head of Member Affairs – MENASA
ACCA Pakistan
61-C  Main Gulberg  Lahore Pakistan

Kind Regards,

Omer Zaheer Meer,

Managing Partner,

Millennium Law & Corporate Company

Announcement of Exceptional Public Value Award by ACCA

Dear Readers,

Peace be on you!

It’s with extreme pleasure that I announce that the prestigious Exceptional Public Value Award is to be awarded to myself by Ms. Helen Brand, OBE, CEO ACCA (the largest accountancy body globally). I’ll share the details with you after receiving the award, Insha Allah.

I’m honored by this privilege and grateful to ACCA for the recognition of my:

“contributions in the field of Budget and Taxation including but not limited to

  • the drafting of Anti-Graft Legislation focused on Undisclosed Foreign Income & Assets which was later adopted by the Treasury,
  • work done on the Regional Research Study on Indirect Taxation across South Asia and UAE,
  • MOU’s with Tax Bars,
  • Collaborations with Chambers of Commerce and Tax Bars,
  • Pre & Post Budget proposals and seminars,
  • continued member education events particularly on Taxation and
  • opportunities created through R&I sessions with key employers.”

Last but not the least, I’m thankful to you all for your support and prayers particularly my parents, siblings, mentors, colleagues and friends.

acca-exceptional-public-value-award

Regards,

Omer Zaheer Meer

Budget 2016: Reforms vs Jugglery

The following is the original draft of the research article published in the renowned “Blue Chip” journal as an Op-Ed  in its July – September 2016 Edition.

Link to e-edition of Blue Chip:  http://www.bluechipmag.com/index.php/governance-234/251-reforms-vs-jugglery

Budget 2016: Reforms vs Jugglery

RI 2810 2

By: Omer Zaheer Meer

The budget for financial year 2016-17 was unveiled amidst the usual accolades from the treasury benches and criticism from the opposition. As is the norm in political debates, mostly the balance was lost to prejudices and rationale took a back seat. There were a few exceptions though.

In line with the rational expectations, this research write-up will analyze whether the shortcomings that needed to be addressed in the budget including structural reforms in the taxation system, pursuing a progressive regime, introduction of economic reforms and improvements in controversial laws hampering the economy were actually addressed. In addition to examining if that was the case, recommendations to resolve the problems will also be briefly discussed.

The Numbers:

Mr. Ishaq Dar, the finance minister, proudly announced many positive indicators from the economic survey as below:

GDP growth                                                4.71 % vs a target of 5.1%

Tax-to-GDP ratio                                     8.4%

Population under the poverty line   29.50%

Inflation                                                      2.82%

Tax to GDP ratio                                       10.50%

Fiscal deficit                                               4.30%

Budget deficit                                              3.40%

Proportion of GDP spent on Health     0.42%

Literacy Rate                                              60.00%

Per capita income                                       $ 1,561

Foreign exchange reserves (billion)     $  21.6

Public debt Rs. 19,168 billion (Rs. 5,769 billion foreign and Rs. 13,399 billion domestic)

Luck, not wisdom?

All these indicators showed improvements compared to the previous fiscal year. However, the improvements have been largely due to the significant reduction in global petroleum products’ prices and the resulting savings.

It is unfortunate that the structural reforms and/or economic policies did not come into play when they’re needed the most. The rich dividends from the massive lucky break of a crash in global petro products did not translate into effective reforms delivering relief to the masses.

Once bitten, twice shy:

Once bitten, twice shy is a reality of life. The opposition, citing the previous example of Mr. Dar’s ministry when forging the numbers resulted in Pakistan having to pay penalty to international institutions, questioned the authenticity of these numbers. For example the inflation figure raised serious eyebrows and it was queried that what were the constituents and the changes in them from last year, used to calculate this figure. Leaving this debate for now, let’s examine some key figures, policies and analyze the impact on Pakistanis.

Foreign Trust’s Status Issue – Shadow of Panama:

A controversial amendment has been proposed in the Income Tax Ordinance, 2001 by way of an explanation to include foreign trusts within the ambit of trusts.

This amendment has serious implications regarding offshore trusts involving Pakistani citizens. Currently, in case of local trusts, the beneficiary is only required to disclose the interest in the wealth statement on receipt of benefit from the trust which is then considered as a dividend and taxed accordingly on receipt basis.

It is surprising that a Government pursuing positive policy re differentiation between filers and non-filers with stated aim of documenting the economy would chose to encourage non-documentation. Some detractors and particularly the opposition benches connect this to the ongoing Panama Scandal.

Proposed Solution:

In line with the state policy of economic documentation, an amendment should be made to require disclosure of interests in all trusts including foreign and local in the wealth statement at the time of filing the return.

This should give rise to greater transparency.

Let us examine some sector specific matters before proceeding into the analyses of other general areas:

Textile and five export oriented sectors:

Let’s move forward with a positive measure. The export of manufactured goods largely drives from five main sectors – textile, leather, sports goods, surgical goods and carpets. These five sectors are proposed to be a part of the zero-rated regime with the objective of “no tax, no refund”. Local sale of the finished products shall however be charged to Sales Tax at 5%. This is a partially good move of the Government.

As exports are generally zero-rated, the proposed regime, earlier introduced in 2004, effectively provides zero rating for inputs used in manufacturing of export sector goods.

Previously, same regime was withdrawn on account of abuse of the zero-rating regime in respect of good having multiple uses. However this time no refund policy means that the manufacturers would suffer with the input tax becoming their cost of business resulting in higher costs to be either borne by them or passed onto the customers while competing in a highly cost-competitive global market.

Most manufacturers do not have an integrated unit covering all processes from start to finish in Pakistan and stuff like packing materials, e.t.c. has to be purchased.

Proposed Solution:

Appropriate checks should be put in place to ensure the system will not be abused while allowing input tax adjustment as the local sale has already been brought within the ambit of taxation.

Measures for Agricultural Sector:

Agricultural sector is vital for Pakistan’s economy as it constitutes 21% of the GDP while employing 42.3% of the workforce.

The Government has introduced some positive relief measures for the Agricultural sector which had taken a severe hit particularly the cotton sector which declined by a drastic 28% in the last fiscal year.

While the reduction in the prices of fertilizers and electricity for agricultural tube wells along-with Rs. 10 billion subsidy are good steps they do not address the root-causes of the severe decline in the agricultural sector.

There have been no reforms or steps announced to address the major issues of:

  • Import of low quality and cheap agricultural produce from India
  • Issues of availability of quality seeds and the problematic imported seeds causing infertility in various belts
  • Lack of proper crop management system resulting in a crises both in the case of bumper crops and shortfall
  • Middle-men and mills taking advantage of the farmers who often are left with little more than the costs of production, discouraging them from cultivating certain crops
  • Lack of a proper flood management system where every other year make-shift arrangements are undertaken after heavy losses by flooding (once again no properly funded schemes announced to address this issue)
  • Lack of proper water storage facilities like “Kala Bagh Dam” and smaller “shorter-term completion” dams to address the growing issue of acute water shortages particularly for the tail lands. While funds have been announced for some dams like Diamer Bhasha, they’re long-term in nature and simply not sufficient.

Proposed Solution:

Structural reforms should be undertaken to address the core issues identified above in order to support the agricultural sector.

Also some key reforms in the taxation policy are required for this sector. The proposed reform should be undertaken along-with the policies volume over margin and increased impetus on direct taxation The agriculture sector should be taxed at a reasonable rate for large landlords with holdings over 12.5 acres, say 5%-7% and the revenue raised should be used to subsidize the water and electricity for the agriculture sector. This would enhance the yield, subsidize the worst hit small farmers and therefore help grow the GDP.

The detractors’ argument that there isn’t any income for feudal having large landholdings doesn’t stand. For if there is no income, they won’t have to pay any tax and if there is, as evident from their lavish lifestyles and tens of millions in bank accounts, then the due contribution to the sector and country in form of a low tax rate needs to be collected. Moreover, the other two reforms mentioned above will ensure that net impact on the sector will be lower as more direct taxes will help reduce the inflation and cost of production, creating opportunities for increased output and thereby GDP growth.

Services Sector:

Another vital sector for the economy is the services sector which has been one of the growth areas generating employment opportunities in the country.

While the good news is that the services sector exceeded the growth target, there were still core issues left unattended. Also, providers of IT services and IT enabled services, as defined in Clause (133) of Part I of Second Schedule, are also proposed to avail rationalized Minimum Tax Regime, subject to fulfillment of prescribed conditions. However, again this should be extended to all service providers.

One good step announced was that the FED on certain services which are now subject to provincial sales tax has been proposed to be withdrawn. This was merited post 18th amendment with the provinces in charge of sales tax on services.

However the core issue of leaving the minimum tax on services un-adjustable (Section 153(1)(b) ) of the Income Tax Ordinance 2001) has been left unresolved. This minimum tax is levied regardless of whether the service provider is profitable or loss-making. In case of the later, this tax will be paid from the capital reserves, effectively becoming a loss penalty on those investing in the services sector. This is an unfair burden while already having in place a turnover tax under Section 113 of the Income Tax Ordinance 2001 has created cost-competitiveness issues for the sector.

What this does is to increase the cost of business for the service sector, discouraging new entrants and SMEs by increasing the cost of capital and thereby assisting the existing players in creating a cartel.

As if that was not enough, a proposal has been made to withdraw them adjustment of input tax paid to provincial revenue authorities, effectively converting that into a cost for the business and creating liquidity issues.

Proposed Solution:

In the presence of Section 113 already dealing with minimum tax on turnover, the minimum tax should not be applicable on companies providing services. These should be subject to the normal tax regime (by reinstating the deleted clause 79, Part IV of Second Schedule).

As a minimum, this minimum tax should be made adjustable against future tax liabilities. This would have a net positive impact on the treasury in terms of increased revenues over the long term as the business eco-system will improve resulting in healthier growth in the sector translating into increased GDP and more tax monies into the coffers of the treasury.

As mentioned before, services sector has been one of the largest growing employer and contributing to national economy as well as the treasury. This should help expand the sector leading to improved revenue collections in the long term.

Health & Education:

Societies and modern economies are built upon social structures particularly education and health services. Unfortunately both have been severely neglected. Even the developed economies of the world with adequate infrastructure continue to spend a lion’s share on these areas but not so in Pakistan.

Only 0.42% of the GDP has been spent on health in the last fiscal year. Similarly, less than 1.75% has been falling under the head of education.

This is despite a severe crisis in both these sectors within the country. The biggest testament to the dismal condition of both these core areas of the society is the fact that anyone who can afford does not rely on the public health and education systems including the ruling elite itself.

Even as per the glossy figures of the National Economic Survey 2015-16, these areas are facing the following major issues:

  • 1,038 people to be attended by 1 doctor
  • 1 bed for the treatment of 1,613 people
  • 178 women out of every 100,000 die during child-birth due to inadequate medical facilities
  • High infant mortality rate
  • The claimed 60% literacy rate practically only refers to someone being able to “write” their names

Proposed Solution:

Atleast 5% and 6% of GDP should be allocated to education and health with ensuring the funds are not re-allocated to other heads during the year and actually spent on the development of these core areas currently in an abysmal state.

Having analyzed some key sectors, let us now move onto the important policy and other general areas:

Direct vs Indirect Taxes:

Currently, there are several types of indirect taxes levied within Pakistan including:

  • Customs Duty,
  • Sales Tax,
  • Federal Excise Duty,
  • Petroleum Levy,
  • Gas Infrastructure Cess,
  • Natural Gas Surcharge, e.t.c.

The proportion of indirect taxes to total taxation revenue remained largely the same as below:

Total Taxation Revenue
2015-16 2014-15
Rs in Billions Rs in Billions
Direct Taxes
           Income Tax 1539.00 1308.00
           Workers’ Welfare Fund 17.00 14.00
1556.00 1322.00
Indirect Taxes
           Sales Tax 1437.00 1230.00
           Customs Duty 413.00 349.00
           Federal Excise Duty 213.00 201.00
           Petroleum Levy 150.00 135.00
           Natural Gas Surcharge 35.00 32.00
           Gas Infrastructure Cess 145.00 145.00
           Others 7.00 6.00
2400.00 2098.00
Total Tax Revenue (TTR) 3956.00 3420.00
% of Direct Tax to TTR 39.33 38.65
% of Indirect Tax to TTR 60.67 61.35

As evident from the above table, there is a heavy reliance on indirect taxes which are supposed to be used as a tool to expand tax base and not to be used as a cash-cow to generate lion’s share of the taxation revenues.

All this focus on indirect taxation leads to inflationary pressures in the economy as increased prices translates into increased cost of production, services and living. The resulting impacts are hyper-inflationary in nature as there is a multiplicative rather than an additive element in the inflation passed-on at every level. This results in higher costs of doing business, which leads to declining exports and GDP due to the lack of cost competitiveness and missed opportunities.

Taxing the poor, funding the rich:

Moreover, while direct taxes are levied at higher rates to the income of those earning more, indirect taxes, on the other hand actually heavily tax those earning less.

To elaborate, let’s consider a feudal lord earning tens of millions in tax exempt income who pays the same amount and a very low proportion of tax compared to his total income on daily use items such as a bottle of milk as compared to his driver who pays the same amount of sales tax and thereby a higher proportion of his income as tax to the treasury. This is effectively a system where the poorer segments of society pay a higher proportion of taxes to fund the richer segments and the state.

Proposed Solution:

This increased reliance on indirect taxation is large due to the inability of the Government to widen the tax net instead of pursuing the policy of increasing the burden of indirect taxes on those already been heavily taxed.

What is astounding is why the Government is reluctant to use the databases of various Government institutions as well as the withholding tax database showing those people who have paid higher withholding tax rates of non-filers to expand the tax base.

Consider the magnitude of such a move and we haven’t even talked about the 3 million plus people living lavish lifestyle and not paying any income tax as per multiple FBR Chairmen. The solution is simple, a serious drive to expand the tax base using various databases and not ill-conceived amnesty schemes.

High Rates of Taxes:

Pakistan’s tax-to-GDP ratio is one of the lowest in the region. Despite increase in taxation revenues, it was a mere 8.4%, in comparison to:

  • India 14%
  • Sri-Lanka 13%
  • Indonesia 15% and
  • Malaysia 14%

One of the key reasons for this is the existing high taxation rate policy in Pakistan with tax rates being one of the highest in the region. This results in increased burden on those within the tax net and a lack of incentive to widen the tax base effectively.

To elaborate this point, consider existing rate of Sales Tax at an average of 17% in Pakistan, one of the highest in the region as compared to:

  • 36% in India
  • 10% in Indonesia and
  • 6% in Malaysia

Proposed Solution:

A policy of volume over margin should be pursued. As per some studies, the cost of tax evasion in Pakistan ranges between 6-8%. The number of income tax return filers (just filing returns and not those paying some tax) is just over a million.

If the tax rates are brought down to single digit and ideally within the range of tax evasion costs, along-with the structural reforms proposed in this research article, the filers’ base can be increased to 15-20 million. The net impact would be surplus revenue with a highly documented economy.

The increase in the tax base would more than compensate for the loss from lower rates. Currently Pakistan has one of the lowest tax bases and tax-to-GDP ratios in the region. If implemented this proposal can turn this around and increase them both substantially.

In order to address the reservations of some sections of bureaucracy in this regard, this can be launched as a pilot project in industry/city with a thin revenue contribution.

Mr. Ishaq Dar’s blast from the past:

It may be worth mentioning here that during a recent pre-budget event at the Lahore Chamber of Commerce and Industry (LCCI), I was informed that this proposal of “volume over margin” was proposed by Mr. Dar during his tenure as President of the LCCI.

It may be pertinent to remind our honorable finance minister to recall and implement the reform, he himself used to support and which the majority of professionals and technocrats in the country believe to be a key element in readdressing the issues facing our economy.

Taxation policy lacking purpose:

The purpose of an effective taxation policy is not just to gather maximum revenue in the short-term but to create policies to drive a positive business eco-system where cost of doing business is reduced increasing competitiveness and creating employment opportunities resulting in expanding GDP and thereby greater taxation revenues for the treasury. Unfortunately a mirror image policy seems to be in place in Pakistan.

Proposed Solution:

A progressive tax regime where wealthy segments of the society are taxed more should be pursued with increased focus on direct taxes and volume over margin.

  • Withdrawing exemptions

Moreover large landowners and the various exempt sectors must be brought within the tax-net and the revenues raised should be utilized to subsidize the weaker segments of society and to support reforms.

  • Structural Reforms within FBR

Also some structural reforms as outlined below in the taxation system can go a long way to assist the authorities in meeting their revenue targets:

  • Resolving issues within IRIS to make it more user friendly
  • Integration of Federal and Provincial Revenue Authorities’ systems
  • Reducing the discretionary powers vested in FBR officials and shifting towards an objective criteria based approach
  • Developing the existing policy of differential tax treatments and incentives for filers while penalizing non-filers
  • Introducing impact on economic sectors (GDP development) along with collections target as a performance evaluation criteria for FBR functionaries
  • Ensuring time limits specified in laws are adhered to
  • Facilitating the tax payers
  • Resolving the outstanding refunds issue positively
  • Introducing confidence by establishing a swift response complaint resolution cell to deal with corruption and harassment of tax payers
  • Ensuring no post remains vacant for more than a week to avoid delays in resolving tax-payers issues arising out of transfers, postings and additional charges, e.t.c.
  • Tax Reforms

In addition, to restore the faith of the taxpayers a multi-dimensional tax reforms agenda which has been constantly recommended by this writer must be implemented, where:

  • Taxpayers are encouraged and incentivized for paying taxes.
  • Taxpayers are facilitated by making the process easier and fairer, focusing on maximum automation in order to stem out corruption.
  • Instead of increasing the tax rates the tax net is constantly widened.
  • More focus is given to direct taxation.
  • Meaningful tax rebates and reliefs are introduced for the less able sections of the society.
  • A system of proportionate taxation is adopted with more affluent contributing more to the treasury.
  • Certain exempt sectors are brought into the tax-net (subsidies can be given for assisting any under-pressure areas/products).
  • Tax rebates and incentives are introduced to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
  • Tax money is actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
  • The massive corruption in public contracts/projects, now routinely in the range of 40-50% of tender values, is eradicated for better and efficient use of public money through revamping the pay and accountability structures.

 

Minimum Tax on Turnover of Loss Making Businesses:

Presently, a minimum tax on turnover has to be paid under Section 113 of the Income Tax Ordinance, 2001 except for by companies having gross loss (turnover less allowable expenses before depreciation and other inadmissible expenses).

It has now been proposed to extend this to even those entities incurring gross loss. Needless to say this will discourage startups and SMEs as the cost of doing business would rise. Surprisingly, the net impact on the business eco-system and the national economy are being ignored here.

Solution:

The proposed amendment should be withdrawn and the rate of turnover tax should be reduced to facilitate the businesses. Instead the focus should be on other reforms discussed to increase the tax base and document the economy.

Legalized Money Laundering Scheme:

Section 111(4) of the Income Tax Ordinance 2001 has long been a bone of contention between the proponents and detractors. The controversial law sanctions no tax or questions to be asked about origins on foreign remittances making this route a heaven for money laundering and legitimizing black money.

To elaborate, a corporate business paying 32% (proposed 31%) tax can instead go under the radar and use illegal money transfer services to transfer and bring back the illegal proceeds under the above mentioned sections at a cost of 2-4%. This creates a huge incentive to doge the system, legally.

Traditionally the professionals have been arguing to abolish this section while the Government arguing its’ necessary to facilitate foreign remittances.

While legitimate foreign remittances are a great support for developing economies like Pakistan’s, the use of the above mentioned law for legalizing the black money actually costs more to the economy in terms of the lost revenue and the impact of black businesses on related industries.

Proposed Solution:

We therefore propose a different middle ground. An addition should be made to this section requiring disclosure of the source of income with evidence such as payslip, tax return, e.t.c.

This should not cause any concern to any legitimate business or employee; however Ayan Alis won’t find it easy to manipulate this lacuna anymore. To facilitate investment in the short-term, an exemption from source disclosure can be given for investment in some sectors. However such a provision should be a one-off and short-term in nature.

 

Pay Increments and Government Borrowing:

Furthermore the pay-rises are not proportionate to the increase in the actual costs of living. Only a 10% increase has been proposed in the federal budget compared to the massive increases the lawmakers awarded themselves shortly before.

Such imbalance between cost of living and earning forces people towards unfair means or on relying on expensive credit in order to make their ends meet. Similarly, the extensive borrowing by the Government in the local market results in lesser finance being available for businesses.

Together, these may result in a hyper-inflationary environment and decreased purchasing power that can lead to higher interest rates which negatively impacts the businesses as many otherwise viable projects become non-feasible. The declining business output results in lower employment opportunities which coupled with the limited money-supply puts recessionary pressures on the market. This ultimately results in the devaluation of the currency which in turn translates into increased foreign debt. As a result, financing costs of the foreign debts increases leading to a higher proportion of GDP being spent on debt financing. All this combined with the inflation drags the already weak economy further back in Pakistan’s case.

 

 

Harmonization Issues:

The conflicts between various provincial revenue authorities and between them and the federation resulting in double taxation of services owing to classification and jurisdiction disputes should be resolved to create a business-friendly environment and facilitate the tax-payers.

At present there are serious conflicts between the various taxation bodies in Pakistan including FBR (Federal Board of Revenue), SRB (Sindh Revenue Board), PRA (Punjab Revenue Authority) and KPRA (Khyber Pakhtunkhwa Revenue Authority) which need to be clarified in order to facilitate a friendly business eco-system in Pakistan which in turn should translate into bigger size of the cake resulting in bigger pie of revenue for the treasury.

Conclusion:

As this writer has stressed repeatedly over the years, Pakistan has been blessed with all kinds of terrains and weathers, fertile lands, valuable natural resources, a high proportion of population been young and hardworking with cheap labor availability. A fairer system of taxation coupled with some key structural reforms culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The proposals outlined above can largely resolve the current issues facing the treasury. The caveats are proper implemented with a focus to rely on and develop indigenous capabilities,

Pakistan has both the potential and the ability to stand on its own feet and become an economic hub not only for the region but the whole world with the above reforms put in place along-with the ongoing CPEC mega plan.

Let us hope that our representatives will give this all a serious thought while passing the amendments to the federal budget.

The author is Director of the think-tank “Millat Thinkers’ Forum” and Managing Partner at Millennium Law & Corporate Company. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure and can be reached at ozmeer@mlcc.pk

Privatization & Restructuring Institution

The following article has been published in Daily Nation, dated 10th August 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-08-10/page-9)

(Onlinehttp://nation.com.pk/business/10-Aug-2015/privatisation-and-restructuring-institutions)

Privatization & Restructuring Institution

Prof Dp

By: Omer Zaheer Meer

Public enterprises and organizations are those that are owned by governments. They can be governmental departments or government owned/controlled corporations. Privatization is a controversial phenomenon commonly defined as the transfer of ownership of property or businesses from a government to a privately owned entity. It is also described as the transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange.

Privatization is put forward as a solution to the economic woes of a country by a section of economists led by the likes of International Monetary Fund (IMF) and World Bank (WB). One of the main arguments for the advocates of privatization of publicly owned operations is the supposed positive change in efficiencies resulting from private ownership driven by a focus on profit maximization. While this theory has its merits, one needs to consider the local context to appraise the potential outcomes. Past experiences can always be a handful when deriving objective conclusions. Unfortunately the above argument does not seem to hold merit for Pakistan. Moreover the economic detractors of privatization argue that vital services needs to be efficiently provided by the state and the fact that privatization does not have a very bright history in third world countries.

Besides, an interesting economic phenomenon has been in the making for past few decades with public sector enterprises turning towards efficiency based corporate models while still ensuring the provision of cost-effective services/products to the local populace. They then expand into foreign territory and use their capital bases to derive profits which are funneled to grow the organization and subsidize the local population. A case in point is Etisalat, a public sector enterprise from UAE currently controlling a privatized public sector enterprise PTCL in Pakistan. This is phenomenal as it nullifies all the arguments of pro-privatization proponents in Pakistani context as a foreign public sector enterprise is now running the major section of telecommunications services in Pakistan.

Pakistan certainly has its own dynamics to consider with lessons to be learnt from past privatization experiments. The privatization of PTCL (Pakistan Telecommunications Company Limited) to the UAE based Etisalat group by the ex President Pervez Musharraf’s regime has been a disaster of sorts. Firstly the control of PTCL was transferred for a paltry stake of 26%. Moreover, PTCL which was generating profits of billions of PKR before privatization has been reporting heavy losses since despite increased tariffs and with a falling standard of customer service often complained about by masses. Moreover, the initial investment was allowed to be made in installments with a material amount ($ 800 million) still outstanding. This was perhaps a one-off badly executed privatization transaction as stated by Mr. Zubair Umar, the Chairman of Privatization Commission. So let us briefly touch upon another privatization experiment in Pakistan.

The now infamously inept KESC was also privatized with high hopes of a turnaround with substantial investments forecasted by the new private stakeholders in decaying infrastructure. Unfortunately none of the expectations have been met. The efficiency has gone down. Rather than investing in the infrastructure, the private party has sold the premium copper wires replacing them with cheap stuff resulting in increased line losses and breakdowns. Infact it has become a bigger strain on public resources then before privatization still requiring continuous rescue injections by the government. But the new private owners continue to happily remit their profits abroad.

Not only has the government of Pakistan lost revenues from the healthier dividends’ streams and resulting taxes, it has also lost by falling share prices of its remaining stake in these entities. The public has suffered a deteriorating service and higher prices. The question then is as to what could be an effective solution to deal with the loss-leading white elephants within the realms of the public sector?

In developed countries strict legislation is in place to ensure the common pitfalls of privatization are avoided, interests of all shareholders are protected and the continuation of a minimum standard of services. This needs to be done in Pakistan too in order to address the issues already facing us from past privatization ventures which effectively handed over whole of public sector enterprises (PSEs) for a paltry minority stake in ownership.

Going forward, a proper plan of action is needed for loss generating entities like PIA, Pakistan Railways, e.t.c. With a proper plan and political will there is no reason why the government cannot introduce checks and balances along with necessary incentives to induce a turnaround they expect from private investors. While some proponents of the privatization point out the previously failed attempts at turning-around of state institutions, they conveniently ignore the major reasons of failure in undue interference, political appointments and misappropriation by government officials which can be avoided.

The success stories like the successful turnaround of a loss-making steel mill into a profitable enterprise are also conveniently forgotten. The same institution is again in ruins but can revert to its’ past standards. The privatization proponents also choose to set aside the fact that if enterprises like PIA are privatized, which have the highest ratio of employees per aircraft of almost 500 compared to international standards of fewer than 150; it will still lead to layoffs and resulting backlash which can be better handled within the realms of a public sector restructuring.

Establishment of an independent and empowered restructuring institution (RI) to overhaul PSEs can make the restructuring process less resented compared to a private venture while still ensuring provision of cost-effective quality services to the masses from a revenue-generating asset of the nation. Competent professionals of utmost integrity can be placed at top positions based solely on merit to run the PSE’s with introduction of a system of appropriate checks and balances run by professionals. Performance based packages can be offered spurring motivation and ensuring excellence via improved performances.

This can be further elaborated in that all successful private businesses hire top-notch professionals at lucrative packages with performance based pays. The results are professionally run and highly profitable ventures. There is no reason why the services of similar professionals cannot be engaged by Government which can even convert PSEs into Public Corporations which while still adhering to Government regulations will be allowed to follow professionalism, efficiency and mechanics of a modern enterprise.

If for some reasons a privatization is still deemed necessary then appropriate selection of non-vital and loss making PSEs along-with stringent laws safeguarding the national interests as well as protecting the masses should be ensured. The process should be transparent and properly outlined with ground work done to attract best possible investments. This can help reduce lower efficiency by private investors, increased unemployment, inflation, loss of revenues and forced government bailouts as witnessed in the past.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Resolving the Banking Transactions’ Tax Crisis

The following article has been published in Daily Nation, dated 3rd August 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-08-03/page-9)

(Onlinehttp://nation.com.pk/business/03-Aug-2015/resolving-banking-transactions-tax-crisis)

Resolving the Banking Transactions’ Tax Crisis

Prof Dp

By: Omer Zaheer Meer

As discussed on these pages before the controversial decision of levying a withholding tax on all banking transactions for non-filers (0.3% till September and increasing to 0.6% thereafter) with the underlying aim of broadening the tax base has not been able to gain acceptance in the presence of serious flaws within the taxation system along-with prevalent corrupt practices. Even if one ignores the increase in the inflationary pressures in the economy and the penalization of ordinary salaried class, the reservations of traders alone are sufficient to make this highly controversial. The disagreement on this matter has now reached a dead-lock between traders and the incumbent Government. So exactly what are their reservations and how can they be possibly addressed? Is there any possible solution for the same?

First of all the withholding tax introduced is more of a transactional tax then an income tax. But more importantly the issue at hand is one of a lack of trust in the system. Not only do the traders fear to be targeted unfairly once they bring themselves in the system to avoid the transactional tax, they haven’t seen the remedial procedures effectively providing relief in an event of witch-hunting by FBR either. Many economists are of the view that introducing new taxes to compensate for FBR’s failures is simply not the answer to Pakistan’s economic and tax woes. The reasons for FBR’s failures are numerous ranging from dissatisfaction amongst FBR’s employees to structural inefficiencies in the taxation system. They’re however not the topic for today and will be discussed at another time.

For now the issue of the trust deficit particularly in the business community is discussed. Besides very high rates of both direct and indirect taxes, the harassment by FBR and blockade of due refunds are often used as tactics by FBR officials to meet their targets. This actually puts off many genuine businessmen who would otherwise like to contribute their dues to the society. Therefore they claim to resort to the alternate in doing charity and stressing that they evade getting within the ambit of the formal documentation to avoid the horrible experiences many of their fellow traders have endured in their dealings with the FBR. None of these issues are of a nature which cannot be positively addressed. Infact this writer has repeatedly proposed several structural reforms including the ones addressing these very issues.

For example the policy of volume over rates can be pursued. It’d entail reducing all the taxation rates to single digits making it economically prohibitive to evade due to the higher costs of engaging professionals as well as fulfilling the demands of the corrupt officials within the tax apparatus. The focus will be to broaden the tax base using indirect taxes for this purpose while direct taxes can be applied on a progressive basis, increasing with the income brackets. If tunnel vision can be shunned then the positive potential of this can be envisioned. Currently less than 0.5% of the population files a return. The number has declined over past four years despite all the “efforts” for broadening the tax base. If this number can be increased to several millions with a consequential increase in the tax base and tax payers, one can envision the positive impact on tax collections.

It’ll be interesting for the readers to know that the honorable finance minister Mr. Ishaq Dar himself used to be a proponent of this proposal during his days of serving the Lahore Chamber of Commerce and Industry. Surprisingly, now that he’s in a position to actually enforce this much needed reform, he’s shying away from it. Moreover the effective implementation of the relief mechanisms and laws can help assure the tax payer. The time limits for deciding the disagreements should also be enforced. For a change, the tax officials can be trained to respect the tax payer instead of treating them as an assumed criminal. Such measures can go a long way to win over the trust of the taxpayers in the system.

Even in the past negotiations between traders and Government officials, the issue of the undue nuances caused by FBR to genuine businessmen resulting in most businesses staying out of the system to avoid these troubles has been raised. Similarly promises were made with traders to review the exorbitantly high rates of withholding taxes deducted in advance. Some of these taxes are treated as non-adjustable even in case of a loss. Even those that are considered adjustable are extremely hard to recover as the FBR seems to have an unwritten rule regarding refusing even the genuine refunds to loss-making businesses when they need their cash the most. However the same FBR seems content to issue refunds to or defer recovery of tens of millions from influential parties. Such behavior doesn’t instill the trust in the business community.

The latest on this issue is the breakdown of the negotiations between Government and traders resulting in strikes been called and social media campaigns been setup. The reduced rate of 0.3% till September has also been turned down by the business community for the reasons discussed above. A successful strike was already observed with the traders threatening to go all out towards a civil disobedience. Government on the other hand has ordered investigations into the affairs of top leadership of traders.

Possible ramifications of this standoff can be damaging for the national economy and the issue needs to be resolved amicably. One possible solution can involve doing away with this transactional tax and reducing the withholding and sales tax rates immediately pending a review of other structural reforms in return for voluntary registration of a minimum number of businessmen. There are many other possible proposals to this effect too. The ball is now in Governments’ court to decide whether it is serious about introducing reforms to win over the tax payer and broaden the tax base or if it simply believes in coercive measures which may seem beneficial in meeting short-term targets but will surely cause damage in the longer-term.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, CFA Charterholder, experienced fellow Chartered Certified Accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk