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

The Cherished Dream of Budget

The following article has been published in Daily Nation, dated 1st June 2015

(E-Paper (Print Edition)http://nation.com.pk/E-Paper/lahore/2015-06-01/page-9)

(Onlinehttp://nation.com.pk/business/01-Jun-2015/the-cherished-dream-of-budget)

The cherished dream of budget

 (Budgetary Dreams)

Prof Dp

By: Omer Zaheer Meer

“I have a dream”. These were the famous words uttered at a junction of history which saw a drastic change in the United States of America. With the budget looming around the corner, this scribe too has a dream to share with the readers.

The dream starts with the federal budget of Islamic Republic of Pakistan having just been announced. There are widespread celebrations across the country, for many of the promised reforms have been delivered with path for a longer term change laid down. Pakistan Muslim League’s government has fulfilled its commitments despite some very challenging circumstances. Some of the major reforms and steps taken along-with their justifications, as outlined by the finance minister Mr. Ishaq Dar are detailed below.

Tax Facilitation: Several steps have been taken to reform the taxation system and structures. Firstly the computerized national identity card (CNIC) has been declared as the National Tax Number (NTN) and Sales Tax Registration Number (STRN) for all citizens. This has not only made it extremely easy for any Pakistani to start a business having both the NTN and STRN, hence promoting a culture of entrepreneurship but is also expected to 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.

Corporate and Agricultural Exemptions: Furthermore exemptions on various businesses as well as the agricultural sector have been withdrawn. This is expected to generate substantial additional revenue as these sectors constitute 30 to 40 percent of national economy as per various studies. These sections have previously been out of the tax net without any substantial benefit to the GDP despite the relaxation. Therefore the Government has now decided to instead facilitate the farmers to increase the productivity as outlined below while ensuring the agricultural sector is brought within the tax-net.

Tax Volume over Margin: Moreover to make taxation less cumbersome and support the initiatives aimed at broadening of the tax base, the strategy of volume over margin has been pursued in that the tax rates have been drastically cut for both individuals and businesses to the lowest level in the entire region. This has not only positioned Pakistan as one of the most tax-attractive destinations in the region with substantial forecasted investments expected to create job opportunities in the country particularly in the power, agriculture and textile sectors but has also created an incentive for businesses and individuals to pay their due taxes, being less cumbersome than the cost of avoiding it with the threat of stringent possible penalties.

Free electricity & water for Agriculture: Another long-awaited major reform to turnaround the ailing economy in an agricultural country has also been taken. Keeping in view of the fact that the Indian Punjab’s output and productivity has been surpassing Pakistan’s and contributing materially to the Indian economic strategy, the Ministry of Finance has given its strategic vision to place Pakistan as the agricultural leader in the region. Water and electricity are declared free for agriculture for those farmers having small holdings or renting the land. The taxes raised from agricultural sector are mostly reserved to fund this initiative.

Further Agricultural Reforms: Furthermore a new body has been created to buy all crops from the farmers at the Government approved rates and supply them to various industries and markets, thereby ensuring the farmers will get their due while the stockists’ induced shortages and inflation can be stemmed out. Furthermore all seeds, fertilizers and other necessities can be brought through this body at discounted rates which has already listed all major quality suppliers in its approved lists. The volume of potential business has motivated suppliers to offer discounted rates in the hopes of additional business increasing their profitability and helping them expand, in turn creating more job opportunities.

HR development & Educational Reforms: To promote the culture of learning and human resource development, the listing criteria of stock exchanges now includes a requirement for the companies to annually spend atleast 1% of their total revenue on the education and/or professional trainings of their workers. Also, new non-corporate businesses spending more than 2% of their turnover on the education and training of their workers are offered tax rebates. These steps are topped up by an increased budgetary allocation of 5% to the education. The impact of this allocation is not very drastic post 18th amendment but is a strong signal and precedent for the provinces to pursue.

Further reforms to support HR development, Education & Entrepreneurship: Supporting the drive for education and entrepreneurship, Government has required all banking institutions to lend interest-free, atleast 5% of their total business to students and startups without any guarantees. To provide assurances to the banks, a fund has been launched backed by insurance to provide monthly returns to the banks to compensate for the loss of interest income while the fund along-with the insurance serves to act as a guarantee for abnormal bad debts in this sector.

Short-term Energy Reforms: Besides the CPEC and other energy projects, to address the severe energy shortage in the shorter term, the solar energy sector has been given a tax-break for five years with a requirement to cap margins at 15%, in order to ensure the benefits of the cost reduction will be passed on to the masses. This step is expected to assist in resolving the severe energy shortage problem in the shorter term as the cost of setting up solar energy systems has been one of the biggest hindrances in its widespread use despite Pakistan’s climate been extremely conducive for it. Furthermore windmill energy sector has also been extended the same favor to capitalize on its potential for cheap electricity generation with minimal initial investment and running costs.

It was here, that this writer woke up. The sadness on missing many more positive reforms engulfed me but the realization struck that this is the same sadness that engulfs every Pakistani post budget every year. Let’s hope and pray that this year will be different.

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.