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

R&I Session with AW Textile Mills Multan

Salam,

AllahWasaya Textile Mills is part of Maqbool group and is one of the oldest textile mills in Pakistan. I specially traveled to the historic city of Multan for an R&I session with them, where I represented ACCA. The response was phenomenal and sat a new record for ACCA in Multan.

It was a fantastic session which was highly appreciated and resulted in increased awareness of modern reporting issues for the participants. The brand recognition was enhanced with material future benefits expected to accrue for the ACCA fraternity, the profession and Pakistan, InshaAllah.

IMG-20160530-WA0045

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

Minimum & Banking Transactions’ Tax

The following article has been published in Daily Nation, dated 27th July 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-07-27/page-9)

(Onlinehttp://nation.com.pk/business/27-Jul-2015/minimum-banking-transactions-tax)

Minimum & Banking Transactions’ Tax

By: Omer Zaheer Meer

With the stated aims of supporting the entrepreneurship culture, facilitating businesses and increasing the numbers within the ambit of formally documented economy, one would expect steps by policymakers to incentivize the masses to this effect. Notwithstanding several positive developments, some recent steps have actually served in contradiction of the above aims of the incumbent Government.

Before diving into the specifics let’s briefly discuss some important building blocks. First of all, most of the modern economies have moved away from been solely or greatly based upon agriculture or manufacturing to a greater focus on service sector, then be it financial, IT, educational, telecommunication or other services within this sector. Even those with a large base of agriculture or manufacturing have modernized to include service industry as a significant part of their overall GDP. It is therefore essential for a successful modern economy to promote service sector with the underlying GDP growth and employment opportunities acting as prime motivators. Similarly in a country like ours where, as per some studies, the black monies and illegal economy outweigh the documented formal one, reforms are required to incentivize people to come within the ambit of documented economy.

With the above been clarified let us move onto some extremely important issues with serious ramifications for our economy. First up a minimum tax on service companies has been levied from fiscal year 2015-16. But what does a minimum tax mean? For our tax dilettante readers, it means that the advance tax paid by service companies will not be refunded in the event of them ending up in losses at the financial year end. This is not only unjust but would have serious negative implications for the service sector growth. Moreover it also has the potential to entice this sector towards “creative accounting” to avoid paying any more taxes then the minimum they have to since they will not be getting any refunds due to them in the past in their hour of need.

This “creative accounting” argument was actually floated as an initial reason for attempting to introduce the minimum tax on service sector several years ago under pressure from international lenders. This was done in a controversial manner despite an existing section of the Income Tax Ordinance 2001 already dealing with the minimum tax on companies. The matter led to serious misgivings from the tax payers and after long heated debates the last finance bill included a proposal to restore the original position before the controversial insertion in section 153. The original position was that any tax paid in advance was adjustable against the final tax liability. Unfortunately at the last moment the policy makers again succumbed to certain pressures and instead introduced the minimum tax. In doing so the long term impact on tax net and GDP growth was ignored in favor of the short term cash accumulation to meet annual targets.

Several responsible officials have shared in private that this amendment was based on the underlying assertion that all mobile companies, a sub-sector within the service industry, were preparing falsified accounting records to avoid due tax and thereby causing losses to the national exchequer. Even if we accept the notion, this observation was based upon a sub-sector only and it was therefore inherently unjustified to “punish” an entire sector for that. Moreover this was equal to declaring that since some- murderers are able to deceive with the judicial system therefore all accused from now on would have a body part amputated as a presumed minimum punishment. Not very just, is it?

Instead an overhaul of the system with effective implementation along-with introduction of stringent penal clauses would have served the purpose more effectively. Last but not the least, even the existing audit provision, if implemented properly was sufficient to deal with the problem. We therefore propose and expect the policy makers to review this matter positively with a strategic view of expanding the GDP and broadening the tax-base rather than diminishing it. Volume over margin is the way forward for a progressive taxation regime.

Next up is perhaps the most controversial issue of the imposition of advance tax on banking transactions by non-filers. After a lot of uproar from the business community, the negotiations with finance ministry officials resulted in the concession that the levy of 0.6 percent withholding tax was reduced to 0.3 percent till end of September 2015. Any non-filers after that date would be liable to the rate of 0.6 percent again. However, a section of business community has rejected this and is planning to force a change by strikes and protests.

While the underlying aim seems fairly positive in that the non-filers are incentivized to come within the ambit of documented economy, there are certain qualifications to that. Firstly many individuals particularly salaried ones get their tax deducted at source and as such do not file income tax returns. This is despite them paying more than their due shares of taxes if all the indirect taxes on their consumption are taken into account. A lack of awareness and the bureaucratic difficulties within our taxation apparatus are the biggest reason for this trend. Secondly the lack of trust in the authorities and Governments by the business community is a big barrier.

Some of the concerns leading to the lack of trust are seemingly genuine and warrant corrective actions. A case in point is the undue relief given to influential tax payers while the ordinary one having to waste material resources in order to get their genuine rights like refunds due to them. Moreover the undue nuances caused to even genuine businessmen by certain elements within the taxation apparatus cements the belief that it’s beneficial to stay out of the system to avoid these troubles. Moreover taxing every transaction over Rs. 50,000 at 0.6%, when aggregated, takes the total cost to inexplicable levels making it attractive to avoid banking channels for those not bound to. The crux is that trying to impose a reform like taxing banking transactions without addressing the inherent limitations and problems of the taxation system may not be the most effective way to address the issue of widening the tax-net and should be re-considered.

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

Budget, Taxation and Reforms – Blue Chip July 2015, 11th Anniversary Edition

The following article has been published in the renowned “Blue Chip” journal as an exclusive Op-Ed on Economy in its 11th Anniversary Edition published in July 2015.

Online Version Link: Blue Chip Article on Economy

Budget, Taxation and Reforms

Prof Dp

By: Omer Zaheer Meer

There were many positive indicators announced by the honorable finance minister, Mr. Ishaq Dar in his latest budget speech. The first one was the growth rate of 4.24% in 2014-15. Despite missing the target growth rate of 5.1% in last fiscal year, it is still a healthy sign when compared to the mere 3% from 2008 to 2013. The significant drop in inflation from 12% to 4.6% was also phenomenal. Fiscal deficit is expected to be brought down to the level of 5% of GDP from the previous level of 5.5%. However, all these were largely due to the significant reduction in global oil prices and the resulting deflation effects rather than the structural reforms and/or economic policies of the policy makers.

Furthermore, the foreign remittances to Pakistan showed an extravagant increase of 16.14%, which is the highest in the region and should be exceptional by any standards. However it would warrant further examination into the origins of the funds as the controversial law sanctioning no tax or questions about origins on foreign remittances has long made the foreign remittances route a heaven for money laundering and legitimizing black money. 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.

In view of the above, it was rational to expect the shortcomings 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. Whether that was the case is examined below along-with some recommendations

As for the reforms in the taxation system, the proportion of indirect and direct taxes has not changed substantially. This alone though is not sufficient as indirect taxes lead to a regressive system where not only are the rich and poor paying equal amount but unequal proportion of their incomes as taxes but it also causes inflation. This results in higher production costs, which leads to declining exports due to the loss of cost competitiveness and missed opportunities.

The government, in its defence points out to the existing trust deficit between the taxpayer and the taxmen which has created a tax avoidance culture in Pakistan. However there is a reason that all developed economies rely more on direct taxes to negate the disadvantages of indirect taxes which far outweigh the benefits to the national exchequer. The approach of using indirect taxes to fill-up government’s coffers has serious negative ramifications.

To make this clear, take the example of fuel. Upto 30% had been routinely charged as an indirect tax on every liter compared to only 13% in the USA. 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. 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.

Furthermore the pay-rises are not proportionate to inflation. Only a 7.5% increase has been proposed in the federal budget. This forces people towards unfair means or rely on expensive credit in order to make their ends meet. Similarly finance requirements of businesses also increase. The resulting hyper-inflationary environment and decreased purchasing power leads 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 hyper-inflation drags the already weak economy further back in Pakistan’s case.

It is therefore recommended that the policy makers should seriously consider pursuing a progressive tax regime where wealthy segments of the society are taxed more. 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. For example, it’s been suggested to the authorities before that the agriculture sector should be taxed at a reasonable rate, 5%-7% for landowners with holdings over 12.5 acres and the revenue raised should be used to subsidize the water and electricity for the agriculture sector. This would enhance the yield and therefore the GDP. To summarize, the proportion of direct taxes should be increased and reliance on indirect taxes should be minimized. While some exemptions have been withdrawn in the finance bill which is commendable, more needs to be done in this regard.

Also some structural reforms in the taxation system can go a long way to assist the authorities in meeting their revenue targets. One good step is the current budgetary proposal to allow computerized national identity card (CNIC) number to be used as the National Tax Number (NTN). However the proposal for using the CNIC number as Sales Tax Registration Number (STRN) for all citizens has been ignored. Together both these steps could not only make it extremely easy for any Pakistani to start a business having the requisite tax registrations and thereby promoting a culture of entrepreneurship but would also help broaden the tiny existing tax base as the number of filers and ultimately taxpayers are forecasted to increase with the increasing documented nature of the businesses.

Another key reform could have been to decrease the tax rates to make it more feasible to pay taxes with stringent penalties and cost of avoidance acting as a deterrent. 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 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.

Similarly the controversial law allowing foreign remittances to be brought to Pakistan without having to declare the source of origin or pay any taxes has more disadvantages than the benefits it brings. Let’s elaborate this further. As mentioned before, Pakistan saw an increase of 16.14% in foreign remittances from $12.89 billion to $ 14.97 billion in the last fiscal year. What’s interesting is that the remittances in the entire region have seen a much humble growth. Also, the work profile and the resultant pay scales of ex-pats Pakistanis have not been changed drastically. Furthermore, the inflation and cost of living has actually declined for the relatives of ex-pat Pakistanis as per the figures revealed by the finance ministry. Considering all this and the various studies conducted in the past, it can be safely said that a huge chunk of the foreign exchange remittances are actually the black money laundered and then brought back to legitimize the funds and that too tax-free. Now infamous model Ayan Ali is a case in point. We don’t know for sure how many Ayans are currently doing what she was caught for. It is therefore high time that the finance ministry officials give this a serious thought and atleast consider introducing checks about origins of finances to control and curtail the illegal economy hampering Pakistan’s economic development rather than actually assist it for some short-term gains at the cost of longer-term losses.

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 reforms culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The key reforms outlined above, if properly implemented with a focus to rely on and develop indigenous capabilities, can resolve the current enigma facing the treasury. With the above actually implemented, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world. Let us hope that our representatives 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”. 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

Education: The neglected step child?

The following article has been published in Daily Nation, dated 15th June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-15/page-9)

(Onlinehttp://nation.com.pk/business/15-Jun-2015/education-the-neglected-step-child)

Education: The neglected step child?

By: Omer Zaheer Meer

For almost four decades after independence, Pakistan was economically ahead of its’ arch-rival and estranged neighbor India despite the huge market and mass of the latter. 1990’s brought about the reversal with India leaping ahead and now reaching a situation where it has placed itself much ahead of Pakistan economically. While we often refer to the economic exploits of India and commonly cover reasons such as the IT boom and missed opportunities by Pakistan, have we ever thought that perhaps the real reason was education?

Yes, education that has been neglected by every succeeding Pakistani government. On the other hand, the Indian policy makers realized the importance of quality education and ensured appropriate steps were taken to develop their huge human resources, on the basis of which their current economic apparatus is booming. Their continuous investment in education bore fruits and placed India as a leader in IT outsourcing from where it really took off. Rather than becoming stagnant, Indians continued to invest in education with substantial results in bio-technologies, medical and education industries besides others.

On the other hand, while Pakistanis continue to outshine Indians and most of the world on an individual level, the overall state of affairs of its education sector, particularly public sector education, remains dismal. While we often criticize the rising unemployment levels, the lack of quality human resource availability remains a concern for local businesses. Most business owners complain that even the available human resource is not up to the international standards they’re competing against. Add to this the high illiteracy and we are faced with a dire situation demanding immediate corrective measures.

Infact, if you look at all major economies, with the exception of most Gulf countries relying on oil, they’re based on educated and trained human resources. Gone are the days when hard labor alone could turnaround national economies. Without continuously developed and upgraded education, no nation can hope to compete on the modern global stage. What’s more inspiring is that being a Muslim seeking education is mandatory even at the cost of hardships.

Furthermore as the right to education is a fundamental right of every human being recognized by the United Nations, perhaps the member countries should sought to deliver this key right to their citizens. The good thing is that the decision making circles in Pakistan have started saying the right things about education, of late. The problem is the lack of implementation.

All major political parties in Pakistan acknowledge the above facts and affirm their commitment to improving the human resources development in the country via education to ensure less disillusioned youth are attracted to extremism fuelling law and order problems for the nation. Similarly owning to political competition when Mian Shahbaz Sharif led Punjab government proposed substantially increasing the education budget, a feat it did not actually achieve, the PPP’s federal government proposed a budgetary allocation of 7% which was again something of a political statement which was not implemented.

However, it were the high hopes from the electoral promises of Mian Nawaz Sharif led PMLN in the 2013 general elections campaign with promises of 4% allocation of the GDP (not the budget) to the education sector that made segments of intelligentsia excited. Unfortunately it was again not to be. While the 14% increase for education in the 2015-16 budget proposed through the finance bill is a positive step in the right direction, the promised height of 4% of GDP still remains a dream.

Infact the manifestos of all major national parties including PTI and PPP committed to increasing the budgetary allocations for education. The upcoming Sindh and KPK budgets would reveal how much of those promises would be kept. Moreover, post 18th amendment the education sector has largely been within the ambit of provincial governments. This is not to make light the significance of a proper federal allocation to education sector setting a precedent and direction for the provinces to pursue.

What’s tragic is that although it is an established fact that investment in education lays the long-term foundation for economic prosperity and reduction in acute poverty, none of the parties in power have been able to meet their promised increases for the education to date. Unfortunately, election promises have become wish lists. Revenue constraints are almost always cited as a major constraint despite under-utilized budgetary allocations in several sectors including developmental. While one can respect the genuine constraints, perhaps better management of available resources can free up additional revenues for the neglected education sector. Similarly the ever increasing allocations to political gimmick based schemes can serve the nation well if utilized in educational sector.

Rightly or wrongly, some argue that given the improved quality of life, political awareness and a demanding populace resulting from a higher outlay on education, the traditional political class particularly from the rural belts across all political parties, ensure that the declared goals to invest in education by their respective parties are not met. Their common interests in this case ensure an unwritten alliance across the board. It is upto the policy makers and top leadership of these parties to take corrective measures to dispel this notion.

One thing is for sure, if we want to develop Pakistan into a sustainable and independent modern economy, there is no other option but to invest heavily in education and human resource development. This in due time will rid Pakistan of the both extremes it is currently facing as a properly educated nation would realize and implement the way of balance being the best course, as told to us by the greatest leader of all times, Prophet Muhammad PBUH.

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

Pakistan’s Automotive (Car) Assembling Industry

The following article has been published in Daily Nation, dated 30th March 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-03-30/page-9 )

(Onlinehttp://nation.com.pk/business/30-Mar-2015/car-industry-needs-transfer-of-technology )

Car industry needs transfer of technology

Prof Dp

By: Omer Zaheer Meer

WTO changed the global attitude towards business competition and generally opened up markets globally as compared to before. However some countries still choose to protect certain local industries in view of supporting local populace and enhancing regulatory protection of consumers. Pakistan’s automotive (car) industry has also been amongst such industries, protected from outright direct competition in some ways by the Government. The question then is whether this industry has passed on the desired benefits to the populace in Pakistan?

The automotive sector in Pakistan is not your typical manufacturing or technology based but rather focused on local assembly. The sector has seen growth for quite some time with exponential growth in 2006 and 2007 fuelled by low-interest auto-loans from the banking sector. The growth slowed and did not reach the same levels again. It employs between five to seven thousands people and has been amongst the leading sectors of indirect taxes for the treasury. The annual turnover is claimed to be PKR 300 billion with a contribution of 2.8% to GDP.

The sector has great potential for growth as not only does Pakistan possess one of the largest proportion of young population with an urbanization trend, the car to people ratio of approximately 1/100 is still one of the lowest in emerging economies. Despite this huge potential, there are some serious issues hindering the sector from realizing its full potential which needs to be addressed.

Despite a lapse of sixty two years since the start of the automotive industry in Pakistan, no significant transfer of car manufacturing technology has taken place. The local manufacture of car components is minimal with that of the vital components virtually non-existent. To make matters worse there are only three major car assemblers in Pakistan namely Pak Suzuki Motors, Honda Atlas Cars and Indus Motors with only Pak Sukuzi Motors focusing on smaller cars.

Some of the most worrying issues facing the automotive sector are as below:

  • Weak regulations governing the sector
  • Lack of attention to international standards of safety particularly in the small car sector
  • Failing to meet the demand possible with available capacity
  • High prices with illegal premiums charged for newly assembled cars
  • Price fixation practices amongst the cartel of the three major players
  • No real progress towards car manufacturing technology transfer to achieve the goal of self-reliance
  • Extensive barriers to entry for new aspirants
  • Lack of ability to compete with cost-effective and high quality products from neighboring countries, should open trade was to take place

What’s most worrying is the undocumented cartel system that seems to be operating amongst the three major assemblers resulting in exorbitant prices as well as lower quality products. Pakistan shares economic pressures, a large middle class and high demand for small economical cars with its’ arch-rival India. While in neighboring India cars have long been manufactured locally, we’re still priding ourselves on mere assembly.

Perhaps what’s more relevant is that while TATA India has successfully provided economical cars like TATA Nano, initially launched for just one hundred thousand Indian Rupees, the most economical in Pakistan is still costs almost 5 times that price. Initiative like Nano attracted the burgeoning middle class in India particularly families, away from the two wheelers with significant growth in market demand for cars. The importance of volume and expanding the market is apparently missed on the major players in Pakistan with extreme focus on excessive margins at the peril of the ordinary consumer already hit by a lack of sufficient competition.

Pak Suzuki Motors which holds the lion’s share of almost 60% of the four-wheeler industry sells smaller cars with despicable security features despite sky-high prices as compared to smaller cars in neighboring India. Similarly the quality of bigger cars manufactured by all three leaves much to be desired with “Pakistan assembled” still being a symbol of lower quality instead of the prestige that should be associated with it.

All this is happening despite the favorable Government policies of the past and present like reducing the age limit of imported used cars from 5 to just 3 years as well as imposing other restrictions on imports of used vehicles. Such restrictions resulted in a massive decline of almost 62%in the import of used cars in just the first half of the last fiscal year (2014) alone.

This obviously helped the local automotive assembly sector to grow sales volume but instead of passing some of the benefits to the consumers, they choose to increase the sales prices too despite the strengthening of Pak Rupee and reduced input costs. To make this point clear, consider that just during the first quarter of the last fiscal year (2014) all three local car assemblers reported solid growth. The smallest of the three, Honda Atlas Cars with approximately 17% market share reported a strong increase in profitability of 170% to PKR 632 million. Similarly both Indus Motor (assemblers of Toyota) and Pak Suzuki Motors registered growth of 29% and 22% respectively. As outlined above, the increase in sale volumes, the increased sales prices and the exchange gains were the main factors for this high growth.

The truth is that the automotive (car) assembly industry is heavily concentrated with consumers paying a substantial sum for cars that are not worthy of their costly price tags. High custom duties and import restrictions strengthen this monopoly of the prevailing cartel, leaving the consumer with very few options. To improve the situation and grow the automotive sector in Pakistan, the Government should undertake the following major steps:

  • Strong regulation to protect consumer interests
  • Legislation against cartels
  • Remove regulatory barriers to entry
  • Promote and encourage transfer of technology to Pakistan
  • Tax breaks and incentives for new investors to enter the market
  • Lesser restrictions on import of vehicles including used ones to allow greater competition and hence better deals for the consumers
  • Stronger legislation regarding cars safety and emission standards

The automotive sector has the potential to rise from the current state of a purely assembly operation to an indigenous manufacturing one while increasing the market demand many folds. With the above recommended steps and a strong political will the dream of self-reliance and earning foreign exchange through quality exports of cars can become a reality.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow 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

The automotive sector has the potential to rise from the current state of a purely assembly operation to an indigenous manufacturing one while increasing the market demand many folds. With the above recommended steps and a strong political will the dream of self-reliance and earning foreign exchange through quality exports of cars can become a reality.