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Over the last few decades, Pakistan's maritime shipping sector has been on the precipice; an endangered species at risk of vanishing into the void. This has been the consequence of an economy which has failed to live up to its promise, with its marginal productivity consistently declining over the years. Put simply, we do not sell anything in meaningful volumes nor are we self-sufficient in any key area; therefore, we do not have the financial resources to pay for the necessities we end up buying from the international market.

As a result, the domestic shipping industry does not partake in exporting much of anything from Pakistan; and it is importing a limited number goods to our shores. It is not a sound business model in the long term, to say the least. Sadly, a sizeable Pakistani flagged fleet with the ability to cater to the demand for merchant shipping emanating from our homeland remains an achievable yet distant dream. This is primarily because Pakistan's shipping industry has been unable to expand and has devolved to a point where there is only a single, government owned shipping company active in the market, i.e. Pakistan National Shipping Corporation (PNSC).

Although Pakistan has tried, on several occasions to undertake reforms in the maritime sector, as well as for the economy in general, these have seldom been successful, with the country's finance gurus being a regular feature at the IMF (International Monetary Fund), worriedly pacing its lobbies every 5 years or so. This economic frailty has severely impacted Pakistan's ease of doing business and has prevented significant foreign and domestic investment from materializing for the shipping sector. Despite recording improvements in various international publications on a number of fronts, the truth is that 'ease' whilst doing business remains an elusive concept, far removed from the reality most Pakistanis face every day.

It all boils down to two factors: high costs associated primarily with high taxation rates and extensive paperwork and approvals which stem from our national anti-corruption priorities and the need to maintain transparency. While good intentioned, both these factors breed inefficiency which slowly crumble organizations from within and can be the death of private enterprise.

Unfortunately for Pakistan, our shipping industry suffers from both high taxes and onerous paperwork; with the last bastion of indigenous shipping too under threat from the government's own policies. With one arm the government attempts at shielding the domestic shipping industry while the other arm seeks to supplant and terminate any concessions given.

The government has notified the Pakistan Merchant Marine Policy 2001 (last updated in 2019), which is its most recent and forceful attempt to rectify the problems in the local shipping industry. The Merchant Marine Policy 2001 specified a number of measures for reviving the shipping industry and inviting participation from the private sector. The said measures included exemption from import duties and surcharges for ships and all floating crafts purchased by a Pakistani entity or flying the Pakistani flag, prescription of tonnage tax in lieu of income tax, extending tax breaks to shipping concerns until 2030, no federal tax (direct or indirect) on resident ship owning companies, reduced fees and berthing rates for Pakistan flagged vessels, cargo preference for PNSC (being a strategic asset and national flag carrier) and Pakistani flagged vessels having preference for transportation of cargo and passengers in voyages restricted to coastal operations only.

However, the implementation of the Merchant Marine Policy 2001 remains in letter alone, with most of these incentives awaiting implementation in spirit. Pakistani flagged vessels do not get their due share of cargo as enshrined in the Policy. Furthermore, the government, which is under pressure to increase its revenue, has resorted to withdrawing the aforementioned tax exemptions and has instead proceeded towards placing a 17% sales tax on acquisition of vessels as well as taxing the salaries of seafarers. While one can understand the need to increase revenue during these challenging times, it should not come at the cost of hamstringing an entire industry.

It may be pertinent to add that the incentives offered by the Pakistan Merchant Marine Policy 2001 are but a few when compared to numerous incentives being offered by other countries that continue to successfully attract large numbers of vessels for registration, aptly known as flags of convenience. Vessels having owners scattered worldwide continue to flock towards flags of convenience primarily due to the numerous incentives that are offered by them. The said international incentive primarily related to low taxes and ease of doing business, thus, being conducive to the business of international shipping. Had our tax authorities paid attention before imposing 17% sales tax on acquisition of vessels, they would have discovered that the opportunity cost of such a knee-jerk decision is too high. The maritime industry remains a small but growing industry, with few seafarers and even fewer vessels, contributing valuable foreign exchange to Pakistan. By imposing this tax, they will not gain much (if any) revenue growth but they will have ensured that vessel acquisitions, the cornerstone of any major shipping operation, will stop and the shipping industry will die a slow and painful death.

Before the patriotic amongst us jump up to say that paying taxes is our national duty and that we owe it to our nation, it should be noted that the shipping industry, even in the best circumstances, is operating on razor thin margins and in order to stay competitive, countries around the world make exceptions for their shipping industry to maintain their strategic advantages. In the parlance of financial economics, the rate of return for the industry is barely above that of what is known as the risk free rate, i.e., the maximum guaranteed rate of return with zero risk, one can receive by investing in fixed deposits/government securities. With the burden of additional taxation on the primary asset of the industry, no feasibility can allow investment into the sector.

Registering vessels is no mean feat either. New owners have to run from pillar to post, trying to register their vessels. Pakistan should accede to an international Memorandum of Understanding (MoU) on Port State Control (PSC) inspections, with Pakistani flagged vessels along with the flags of other signatories being subject to inspection at our ports as well as ports abroad. An international MoU on PSC will give Pakistan more credibility as an attractive destination which prioritizes health, safety and rule of law. Vessel operators will gain the confidence to register their vessels under Pakistani flag as investors, insurance companies, banks and other lending institutions view countries with PSC more favorably. A number of additional measures can also be taken towards making Pakistan more competitive.

(The writer is an advisor to the Karachi Chamber of Commerce and Industry)

[email protected],

Copyright Business Recorder, 2021


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