Large scale manufacturing (LSM) registered negative 0.52 (cumulative) July-January 2024 against negative 2.67 percent in the comparable period the year before though inexplicably LSM grew positively during the pandemic years - in 2021-22 by 11.7 percent and in 2020-21 by 11.2 percent - while it plummeted by negative 10.3 in 2023-24.
LSM contributes 9.7 percent to GDP and dominates the overall manufacturing sector accounting for 76.1 percent of the sector’s share, with small and medium manufacturing accounting for only 2.12 percent of GDP and 16.6 percent of the sector share.
The question is why did LSM plummet last fiscal year and continues in the negative territory even though the rate of negativity has declined? One variable is of course the rate at which credit is available to this sector, which is a function of: (i) the policy rate. In September 2021 the rate was 7.25 percent, rising to 9.75 percent in January 2022, 15 percent on 10 October 2022, 16 percent on 25 November 2022, and effective 27 June 2023 it has remained unchanged at 22 percent - a prior condition of the International Monetary Fund’s (IMF) Stand By Arrangement (SBA); and (ii) there has been a massive rise in government borrowing from the domestic commercial banking sector, thereby crowding out private sector borrowing, a key LSM input, due to the failure to realize the 6 billion dollar budgeted external financing from the commercial banking sector abroad as well as through issuance of sukuk/Eurobonds as the rates on offer were too high due to the prevailing poor macroeconomic conditions. Private sector credit in July-March 2024 declined by 54.1 percent against the comparable period of the year before and by 98.2 percent from July to 1 June 2021-22 compared to the same period in 2022-23.
Secondly, the industrial sector continues to lament what it claims is disproportionately high reliance for revenue generation on industry, at around 60 percent, while its contribution to the Gross Domestic Product (GDP) is around 20 percent.
Two observations are critical in this regard. First and foremost, the industrial sector is subjected to one of the highest corporate taxes in the world - 29 percent – with a banking company liable to 39 percent corporate tax (applicable on normal profits payable by the LSM sector) with UK rate a lower 23 percent and the US at 21 percent.
There is a 17 percent alternate corporate tax on gross profits and 1.25 percent tax on turnover, payable for certain categories of manufacturers (accounting for 90 percent of corporate entities). To put this in perspective on the corporate front around 44700 companies filed their returns and deposited around 497 billion rupees as tax however 600 companies paid 81 percent of this amount (with financial and oil and gas contributing 51 percent of collections) while 55 percent of companies paid no tax and 20 percent paid less than 100,000 rupees as tax. In addition, it is relevant to note that around 28 percent of corporate tax collections were from the banking sector, 23.3 percent from the petroleum sector, 11 percent from automobiles, construction nearly 8 percent and food and beverages 7 percent.
The government imposed a 10 percent super tax in the 2023 finance bill on companies and high net worth individuals for those with income above 500 million rupees; those with an income between 450 and 500 million rupees are liable to pay 8 percent, those with an income between 200 and 250 million rupees are to pay 2 percent while those with an income between 150 and 200 million rupees are liable to pay one percent.
However, Finance Minister Aurangzeb recently stated that he is not in favour of a super tax, and it is widely expected not to be part of the 2024-25 budget proposals.
And finally, there is a standard 18 percent sales tax on manufacturing sector and a further sales tax at the rate of 4 percent applicable on supplies to the unregistered. Withholding taxes in the sales tax mode (on electricity) is also in the sales tax mode.
And there is excise duty/customs duty on import of raw materials. Sales tax under section 8 of the Act is also payable by the LSM, but it is not allowed to adjust input tax in excess of 90 percent of output tax for any tax period that necessitates payment of 10 percent sales tax.
And there is provincial sales tax on services (from between 13 and 15 percent). These taxes are an indirect form of tax and passed on in entirety to the consumers so technically at the end of the sales cycle these taxes are not payable by the manufacturing sector.
Provincial taxes include workers’ welfare fund/workers participation fund as well as municipal corporate tax, professional tax, labour levies and employees’ social security.
Technically the taxes that are not reimbursed or passed on to end consumers are the corporate taxes and therefore the actual taxes payable by the corporate sector are not as high as claimed. Be that as it may, there are justified complaints against the lack of synchronicity between the provincial tax collections agencies and the Federal Board of Revenue (FBR) which need to be resolved on an emergent basis as well as to deal with the stay orders by numerous payees granted by the courts with judgment that is pending for years’ in many instances.
It is also critical to note that LSM has been mollycoddled in terms of access to cheaper credit as well as utility rates by subsequent governments (on 6 October 2022 a mere week after taking oath as the finance minister Ishaq Dar announced a 110 billion-rupee cheaper electricity package for the exporters) – an incentive withdrawn as per the agreement with the IMF under the ongoing SBA. It is therefore baffling why Prime Minister Shehbaz Sharif directed his power sector team to propose special rates for the industrial sector because any such proposal is almost certainly going to be opposed by the Fund, which is scheduled to begin negotiations on the next programme in May.
Copyright Business Recorder, 2024
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