Abysmal tax-to-GDP ratio: there should be no sacred cows, says Tarin

Top economic experts on Saturday emphasised introduction of culture of ''No Taxation, No Representation'', to enhance the tax-to-GDP ratio and said that payment of taxes should be the basic criterion of eligibility of the people to be elected as public representatives from local to federal level.
They said that declaration of assets and submission of returns every year should be compulsory for all elected public representatives from local to federal level and high government officials to promote tax culture in the country. They were of the view that tax culture could be promoted only when it is started from top to bottom.
They suggested that all sectors, including agriculture, real estate, services and retail sectors and foreign exchange business should be taxed to enhance the tax-to-GDP ratio from 9 percent to 15 percent. "We should rely only on our own home resources rather than getting more loans from foreign donor agencies, and this is the only way to end the country''s economic woes", they added.
These views were expressed at the "Economic Summit 2011" on ''Unlocking True Potential Boosting Pakistan''s private sector'' organised by the American Business Council of Pakistan at a local hotel on Saturday. A former finance minister and noted banker Shaukat Tareen said the stable economic growth is must for development and poverty reduction.
He said that the private sector was performing well in Pakistan. It is the pillar for future growth, as 100 percent of the telecom sector, 77 percent of banking sector and a substantial share in cement, textile and some other sectors are in the hands of private sector. "It is the biggest job provider in the country," he added.
He pointed out that the corporate sector was contributing 93 percent of total taxes while other sectors, including retail businesses, were paying only 7 percent of total tax revenue. He said that the country''s entire retail sector was paying only Rs 75 million as taxes. "The basic issue is lack of home resources as we depend on foreign aid", he said, adding that the lowest tax-to-GDP ratio forces the government to borrow from banks and it affects growth rate.
He said that there should be tax on all incomes, without any exemptions, and there is need for creating political consensus for imposing income tax on all incomes in the country across the board. He advocated imposition of tax on agriculture, real estate, services and retail businesses and said that "there should not be any sacred cows" and every income must be taxed.
He also discussed loopholes in the tax collection system and said these were encouraging tax evasion. He said there was need to transform black economy into regulated economy through incentives. He suggested investing more in education and health sectors.
Leading tax consultant, partner of A F Furgosan & Co and chairman of the committee dealing on behalf of FBR for implementation of ''Value Added Tax'' with the IMF, Shabbar Zaidi, said that except for a particular action in 1970, Pakistan''s economic policies have ''in principle'' accepted and promoted the role of private sector in economic development. However, such policies have not been completely successful to actually translate it into a ''vibrant environment'' for the development of organised private sector.
He pointed out that the main causes for disconnection between policies and practices are ineffective regulations; abuse of discretion, corruption and political interference. There is no effective check on cash economy and there is failure in producing socio-economic and human capital development environment, so essential for development of private sector.
He said that in spite of limitations and problems, the private sector still plays a vital role in the economy of Pakistan. It sill provides employment to over 85 percent of the employable population, except agriculture. However, the organised private sector contributes over 70 percent of taxes, he added.
He said that the primary problems and difficulties for organised private sector are uneven playing field against unorganised sector; frequent unnecessary amendments in trade, monetary and fiscal policies; non-availability of trained human capital and complete absence of government support and role in this field and bureaucratic and political interference in regulatory authorities like Ogra, Pemra, SECP, SBP, FBR, etc.
He said that sustainable growth of private sector requires corporatisation to a certain minimum level. He suggested that there should be medium- and long-term ''political consensus'' on fundamental economic policies. Economic policy should focus on poverty alleviation, full employment, maximum output from agriculture, sustainable manufacturing sector and public social security network.
There should be larger role of the government in providing education, health, infrastructure and security and least government involvement in businesses and regulations. There should be transitional extensive support mechanism and participative role of government in supply of energy, transport and infrastructure.
It should have dedicated and focused approach to improve competitiveness, corporation and confidence building, decentralisation and minimisation of regulatory frameworks; decentralisation of tax collection system; investment on internal security and infrastructure and local administration for big cities being engines of industrial growth.
He said: "The organised private sector, operating independently, working in conducive economic environment with long-term economic vision is the only prescription for growth." He said that the country needs to focus on four sectors including agriculture, real estates, retail and services sectors for broadening tax base.
He pointed out that the large textile sector contributes only 3 percent to national exchequer, while telecommunication, oil and gas and banks and financial institutions pay more than 90 percent of total taxes. Giving some examples, he said that Turkey has enhanced its tax-to-GDP ratio from 13 percent to 33 percent in last few years during the tenure of Prime Minister Tayyip Erdogan. Similarly, Brazil has expanded its ratio to 37 percent in last 15 years, he added.
He pointed out that out of total tax collection, Rs 500 billion goes to defence, Rs 900 billion towards debt payment, Rs 120 billion on war against terror, Rs 350 billion towards public sector enterprises and Rs 200 billion in subsidies payments.
He said the business community has only two options--either contribute to national exchequer, or pay bhatta to mafias. It has been experienced that some time bhatta is more than the tax liability, he added. Chairman of the Board of Investment (BoI) Saleem Mandviwala, said that despite the global economic slump Pakistan received over $18 billion in foreign direct investment since 2006. This signals investor confidence in this region and points to a trajectory of future investments as the global crisis abates.
He said that the international investors appreciate the fact that compared to other countries in Asia; Pakistan was the first to liberalise its economy. They also appreciate that no investment has ever been nationalised in the country, ever.
He pointed out that two Korean giants, Lotte and POSCO, with a combined turnover of $100 billion, entered the Pakistan market after two years of efforts from BoI. POSCO has recently entered into joint venture with Tuwarqui Steel and would invest $200 million to expand capacity of Tuwarqui Steel.
He said Yamaha is in advanced stage to invest in Pakistan and plans to invest $150 million, which would create about 45,000 jobs. Foton Group is working on a project to bring 2000 CNG Busues in different phases in Sindh province. BOI is in active negotiations with many other companies from China, Korea, Turkey, Germany, and other countries to come and invest into Pakistan.
"Beginning in the early 1990s, the Government of Pakistan pursued a strategy of privatisation, deregulation, liberalisation and good governance to promote private sector development", he said, adding that in 1999, major structural, governance, and economic reforms were implemented with a focus on generating macroeconomic stability and creating an environment to encourage the private sector to become the growth engine in the economy. In particular, the introduction of the Privatisation Act 2000, and the creation of a Ministry of Privatisation, legislative changes to the State Bank of Pakistan (SBP) Act. One of the most significant steps was the setting up of a Board of Investment. This important step helped create a transparent legislative framework to support a conducive business environment in the country, he added.
He said that the government realises the importance of greater private sector participation in key areas of infrastructure development and delivery of services. He pointed out that Pakistan has improved five ranks on the Global Competitiveness Index (GCI) securing the rank of 118 out of 142 economies. "Although this rank is not laudable, still we feel that we are in the right direction and we must work hard to improve our standards across the board", he added.
In 2007, Goldman Sachs had included Pakistan in the ''Next 11'' emerging economies of the world that after the BRIC economies, (Brazil Russia India and China) would be a big part of the global GDP by 2050. According to the World Bank ''Ease of Doing Business Report'' for 2011 Pakistan ranks higher than BRIC countries in most categories. In Ease of Doing Business it ranks better than China; in Enforcing Contracts it stands better than China, Russia and Brazil and in Registering Property it ranks better than all 4 countries.
He said Swiss-owned Nestlé Company has been a satisfied investor in Pakistan for over 22 years and has its largest milk intake plant in the world located in Pakistan. In the auto manufacturing sector, Pakistan is the highest producer of Toyota Corollas in Asia. At the time of the Corolla launch in March 2002, the company was producing 57 vehicles per day. Today, it produces 200 vehicles per day. ENGRO has grown phenomenally in these years due to availability of demand and inputs. Pakistan has one of the biggest fertiliser industries in the world with about 8 million tons of installed capacity. This includes the world''s biggest urea plant. Similarly, Pakistan is the third largest milk producer in the world according to IFCN and is well positioned to becoming a major supplier of milk to the world. The FMCG leader, Unilever has recorded 88 percent of average returns in Pakistan.
Services Sector has been the most important contributor to Pakistan''s economic growth. Services sector grew 4.6 percent in 2010-11. Reforms introduced by the Government have been influential in developing the Banking and Financial Sector of Pakistan. Pakistani banks are among the most profitable in the region. Standard Chartered in 2000 had only 7 branches in 3 cities across the country. Today it has over 180 branches across 41 cities and has ambitious growth plans.
In the Telecom sector, Telenor Pakistan is the fastest growing mobile operator in Pakistan and represents the largest foreign direct investment in the country from Europe, in any industry, ever. The telecom sector has increased its penetration from a mere 3 percent to a 53 percent. With 108 million mobile subscribers in April 2011, Pakistan has the highest mobile penetration rate in South Asia. According to the Information Economy Report, published by the United Nations Conference on Trade and Development (UNCTAD), Pakistan is among top five dynamic and developing economies in Asia in terms of increased penetration and usage of mobile phones.
Managing Director of Karachi Stock Exchange, Nadeem Naqvi, called upon corporate sector to set up high skill training facilities in Pakistan and to offer scholarships to outstanding students for higher education. This would help in producing skilled workforce for local industry as well as for services export. He suggested promoting clustering, marketing strategies and corporatisation in the country to tap the existing potential.
The President of ABC, Humayun Bashir, said that whenever the government was facing difficult economic challenges, the private sector always came forward and provided its support. He said that the role of private sector is important for economic growth, as the private sector is the biggest employer in the country. Over 77 percent of banking sector, 100 percent telecom sector and a significant share in cement, textile and other sectors is in the hand of private sector, he added.
He pointed out that in spite of many challenges, many companies are doing well and investing more to enhance their businesses in Pakistan. ABC Vice President Saad Amanullah highlighted the importance of the summit and gave an overview of the overall economic situation in the country.