PBC hails budget as ‘manufacturing-friendly’

The Pakistan Business Council (PBC) welcomes the proposals put forward in the Federal Budget 2018 to initiate fundamental structural changes in the economy. The PBC believes that measures such as doing away with the full & final tax regime along with the proposed restrictions on the free flow of untaxed incomes into foreign exchange and real estate are measures which will lead to greater documentation of the economy.

These are courageous steps which need to be supported in the interest of a strong and documented economy. Reduction in the tax rate for individuals should lead to greater compliance while a gradual reduction in corporate tax to a 25% destination rate in five years will make Pakistan a more competitive investment destination. Whilst a phased reduction in super tax and the relaxation in retention of profits and removal of tax on bonus shares are welcome steps, PBC believes that conceptually these remain anti- capital formation especially in a global environment where scale is of paramount importance.

Extension in the tax credit period for BMR to June 2021 will help industry plan ahead but the limitation on the use of the depreciation allowance in determining the loss carried forward is retrogressive. This is short-term revenue seeking step rather than one that supports investment. PBC also advocates that tax credit should include investment in industrial buildings.

The PBC welcomes the decision to remove the legal impediment to enforcing Regulatory Duty (RD) on imports. PBC hopes that RD will be removed from raw and intermediate items to encourage local manufacturing and that import tariffs will be reviewed to ensure that finished goods are subject to higher duties than raw and intermediate items. Offsetting many positive measures for industry, the budget has failed to address energy cost that renders both import substitution and exports uncompetitive.

Whilst correction in exchange rate has strengthened exports, energy and other input costs need to continue to be reflected in export rebates. The expiry of the export package in June is a source of concern, as is the continuing failure to refund taxes due to exporters. With a challenged external account, Pakistan can least afford uncertainty on exports, which have just started responding to stimuli.

Though a reduction in the tax rate for individuals will reduce the incentive to evade, the growing disparity in taxes between corporates and individuals, especially between shareholders of companies and sole-owners of businesses will work to discourage corporatization. Reduction in tax on dividends would be one way to address this.

Deindustrialization cannot realistically be addressed by the fiscal policy alone, even if tax policy making is separated from tax collection and administration, which the PBC recommends. PBC has for some time been advocating a high-level review of all government policies to ensure total alignment.

A trade policy that pursues trade agreements to the detriment of industry, an energy policy that fails to prioritize industry over domestic users, an agricultural policy that encourages cultivation of wheat and sugarcane at higher than global cost and which displaces much-needed cotton and edible oilseeds are just a few examples.-PR

Published in Business Recorder