Budget proposals 2012-13: government must focus on urban economy: KCCI

The government should shift its focus from rural to urban economy and take necessary measures to provide stimulus to industry and trade, this was suggested by the Karachi Chamber of Commerce and Industry (KCCI) in its proposals for 2012-13 budget.
Because the government's focus remained static over the past few years, urban economy, encompassing large-scale industries, SMEs, trading houses, wholesalers, retailers and a vast services sector, suffered badly. President of the chamber Mian Abrar Ahmed said it was necessary to restore the private sector's confidence by taking these decisive steps:
Curtail domestic borrowing from private sector banks as well as the State Bank. Citing high rate of government borrowing, he said that it had crowded out the private sector for credit, resulting in very high interest rates and restricting availability of credit.
Countries across the world, he said, brought down interest rates to cushion the economies from recession. In Pakistan, he said, it was the opposite. Over the past two years, interest rates in Europe and the United States had been brought down close to zero to save these economies from collapse. This is the right time for interest rates to be brought down to a single digit to spur growth.
Rates of GST and income tax, the KCCI said, should be brought down to a maximum of nine per cent and 25 per cent, respectively, to provide relief to trade and industry. Customs duty and taxes on capital goods, such as machinery and basic raw materials, be brought to zero-rate. High rates of customs duty, sales tax and withholding tax on import of raw materials, intermediate and finished goods must be brought down to curb smuggling and illegal imports under the guise of Afghan Transit Trade (ATT).
Terming ATT a wound bleeding Pakistan's economy, the chamber called for a more thorough regulation of the flow of goods through ATT. Another proposal regarding the ATT was also included among the recommendations. Fuel, electricity and gas tariffs, the chamber said, should be kept in check and reduced whenever possible to reduce the cost of production.
Stressing the need for removing major flaws in the GST system of revenue generation, the chamber said it should be done to remove taxpayers' hardships. Online computerised system of filing tax returns would take time to evolve and streamline. FBR should not expect taxpayers to show perfection in understanding and follow the system. Discrepancies, errors and other issues should, therefore, be sorted out by taking taxpayers into confidence.
Sales Tax Act of 1990 and Income Tax Ordinance of 2005 should be comprehensively amended to repeal draconian laws governing the tax policy and curtail unbridled discretionary powers to officers of Inland Revenue. To achieve revenue targets and offset deficit, loopholes and avenues for evasion should be closed and exemptions withdrawn.
DTRE scheme should be replaced with export promotion schemes, which has been explained in the proposals. Today, the biggest drains on resources are PIA, Pakistan Railways and the Steel Mills. The government should take difficult and unpopular decisions and offload the three institutions to the private sector or foreign investors, plugging losses of billions of rupees lost through these loss-making ventures.
Stressing the need for restoring the law and order situation in Karachi, Pakistan's largest city, the chamber said that the city contributes 65 per cent of tax revenue. Karachi, it said, had become a battleground for all kinds of political and ethnic forces. Stressing the need for evolving a national consensus on measures to be taken to extricate this once-thriving city from shackles of violence, crime, arms and various mafias. Political patronage of mafias has to be ended, the chamber said.
BROADENING OF TAX BASE ISSUE: FBR continues to burden existing taxpayers with more taxes each year, instead of making a serious effort to broaden the taxation base and bringing new segments of economy into the tax net. Harsh provisions of tax laws and unbridled discretionary powers to revenue officials are also a disincentive to register potential new taxpayers.
IMPACT A large number of sectors where substantial income is being generated are not contributing a penny to tax revenues. As a result, taxpayers, who are already paying taxes, have to bear the brunt of all efforts to increase taxes.
PROPOSALS:
1. Untaxed sectors should be brought into tax net.
2. Exemptions under various pretexts and schemes be withdrawn.
3. Multiple Tariffs rates under the same H.S. Code should be abolished, making a single rate of tariff applicable for all sectors.
4. Rates of taxes, including GST, income tax, FED and customs duties, should be rationalised and brought down to prevent smuggling and imports under the guise of ATT.
5. Presumptive tax regime and minimum value-addition concept should be eliminated gradually to document the national economy
6. To increase the number of registered taxpayers, national tax numbers should be mandatory for all sectors where income is generated and any economic or business activity is conducted.
7. Colossal amounts of money are spent on the weddings in Pakistan. If documented, Wedding Industry will turn out to be the single largest industry in this country. Various businesses (B2B services and supplies) are associated with this sector which is untapped. The industry has a potential to not only generate substantial amount of GST and Income Tax but also bring a large number of new taxpayers into the net.
8. A deduction of WHT of minimum 3.5% be made on all procurement of agricultural commodities by the government.
OBJECTIVE: These measures will result in broadening of tax base, promote documentation of economy and increase the number of taxpayers and help motivating taxpayers to pay proper tax.
EXEMPTIONS
ISSUE: Exemptions and disparity in tax rates is among major causes of revenue shortfall and leakages. Exports under DTRE via land route to Afghanistan are a source of abuse, evasion and corruption in refund process. Hardly a meager volume of exports $300 million is achieved through the DTRE Scheme while a disproportionate amount of revenue is lost through refunds.
PROPOSAL: Exports under DTRE are no more than $300 million while the loss of revenue through this scheme is disproportionately high.
A significant part of exports declared from Afghan border are overvalued and fake. Therefore, the exports under DTRE via land routes be taken out of the scope of DTRE.
A more effective and verifiable mode of incentives may be devised for such exports whereby No Refund is involved which is a source of corruption.
EXPORT PROMOTION SCHEME: As an alternative to DTRE, an Export Promotion Scheme is proposed.
OBJECTIVE:
1. Saving on account of refunds will be to the tune of Rs 3 to Rs 4 billion
2. Genuine and value-added exports will be promoted.
3. Revenue losses will be plugged on account of various heads and exemptions
4. New sectors for export will be opened up and export of non-traditional items will boost as a result of Export Promotion Scheme/Export Vouchers as proposed. The additional export volume will more than offset the minor loss of export under DTRE
EXPORT PROMOTION SCHEME/IMPORT VOUCHERS AGAINST EXPORT
ISSUE: Over the years, government has introduced various schemes and incentives to increase exports, but these schemes have been misused by unscrupulous elements by means of mis-declaration, under-and over invoicing, fake exports by land routes and unlawful concessions. Duty and Tax Remission for Exports (DTRE) has also been misused and the scheme has failed to produce the desired results.
PROPOSAL: As an alternative to DTRE, a new scheme is proposed. The scheme will be called Export Promotion Scheme. It does not have loopholes, which are part of the DTRE. This scheme has the potential to save substantial amount of refunds and will help boost the exports by a significant volume.
Under this scheme, duty and sales tax-free import of specified raw materials equivalent to 5% of total value of the export of specified value-added items and finished products would be allowed, not exceeding, in any case, the incidence of taxes and duties paid on actual imported inputs used in such exports.
After verification of physical exports and receipt of remittance against such exports, import vouchers should be issued to the exporter. The export vouchers may be transferable and saleable in the open market to registered importers.
OBJECTIVE:
1. Prevents the abuse and corruption in the current incentive scheme DTRE.
2. Enhance the export of non-traditional items and finished goods.
3. Enables and facilitates the export oriented industries to import the processing chemicals, raw materials and intermediate goods without customs duty, sales tax and income tax.
4. Quantifies incentives against actual exports to prevent misuse.
5. Facilitates exporters to purchase raw materials from local markets for use in their exportable goods but still be able to avail the benefit of the incentive scheme.
6. To limit and curb the scope of misuse and corruption in export incentives.
GENERAL SALES TAX (GST)
GST - SYSTEM FLAWS IN A MAJOR SOURCE OF REVENUE GST is expected to be the number one source of revenue, but flaws in the system, its selective implementation, coercive methods of collection and very high rates of tax will impede the success of the GST mode of revenue generation.
Following are the major issues related to GST and proposals to rectify the same.
HIGHEST RATES OF GST IN THE REGION
1. Sales Tax rates in Pakistan are among the highest in the region with highest slabs at 22% (26% after value-addition). With such high rates of GST, there is a limited scope for new investment in industry and trade.
For the GST mode of revenue generation to succeed, the rates of GST have to be brought down and rationalised while having more focus on expanding the base by encouraging new registrations across the supply chain.
PROPOSAL:
1. Multiple rates of GST should be phased out and replaced with a uniform single rate of GST to ensure the system's success.
Persons registered in the GST regime should not be subjected to other innovative forms of taxes such as turnover tax, additional tax or FED.
2. A rational rate of GST at source will encourage value addition across the supply chain and encourage more units to come within the tax net.
HIGHEST RATES OF GST ON INDUSTRIAL RAW MATERIALS
ISSUE: Current rates of Sales Tax on import of industrial raw materials are ranging from 16% to 26% increasing the cost of materials for legitimate imports and promote smuggling from land routes as well as ATT. Even raw materials, which are not produced in Pakistan, are subjected to high rates of GST, which is charged on duty-paid value.
IMPACT:
i. Industries using raw materials imported by them cannot compete with those using smuggled raw materials.
ii. Commercial importers paying up to 45% incidence of taxes on raw materials are mostly out of business because they cannot compete with imports under multiple regimes and smuggled materials, resulting in loss of substantial amount of revenue.
iii. A recent example is the large volume of Polyethylene H.S. Code 3901.1000 / 3902.2000 smuggled from Iran by mis-declaring quantity and description.
iv. Major beneficiaries of high rates of GST are elements involved in import of large quantity of tea, plastics, chemicals and finished goods under the Afghan Transit Trade regime but for sale in Pakistan.
PROPOSAL: The rates of GST may, therefore, be rationalised with lowest slab on raw materials up to but not exceeding 8%, and progressively higher slabs on intermediate and finished goods. GST on industrial raw materials not produced in Pakistan should not exceed 9%.