PBC Letter to Governor Sindh – Issues Impacting Pakistan’s Economy

Mr. Mohamed Zubair
Honorable Governor of Sindh
Governor House

Dear Governor,

Issues Impacting Pakistan’s Economy

Thank you for meeting us today and for the opportunity to appraise you of our view on the economy.

Pakistan Business Council is a think tank and business advocacy body that is committed to nurturing growth of Pakistan. Its members’ sales account for every 9th Rupee of GDP and together they contribute every 5th Rupee of export earnings and tax revenue. Composed mainly of large Pakistani business groups, our member include 24 multinational companies from 12 countries. With thirteen private sectors of the economy ranging from manufacturing to services (including banking), represented, PBC takes a wider and longer term strategic view of the economy. This is supported by research and evidence. Recently the PBC has established a Centre of Excellence in. Responsible Business which is committed to raise the level of governance and transparency, promote inclusive growth through creating livelihoods and correcting the gender balance, as also to decouple growth from the impact on the environment. The aim is to help Pakistan meets its commitment to the United Nations Sustainable Development Goals.

PBC’s focus is on three key imperatives for the economy around which we wish to develop a national consensus with the main stakeholders:

  1. Creating employment
  2. Encouraging value-added exports
  3. Broadening the tax base and levelling the playing field for the formal sector

In the context of recent political developments in USA and UK on the one hand and the global recession impacting trade on the other, PBC strongly recommends that Pakistan adopts a “Pakistan First” approach through a “Make in Pakistan” campaign by strengthening domestic industry. A country of 200 million consumers should provide scale for industry to be competitive domestically and globally. The consensus we strive to build would address the fundamental issues undermining domestic industry, some of which are:

  • 30+ years of liberal imports, compounded by poorly negotiated FTAs esp. with China
  • Smuggling, misuse of Afghan transit trade, under-invoicing, “full and final” tax regime
  • Narrow tax base, uneven playing field vs. the informal sector
  • Many units are shut due to energy shortfall and need to be revived
  • Labour, Industrial, Agricultural and Trade policies are currently made in silos; the need is to integrate and align
  • Focus on value-added exports needs to be sharper and we must discourage exports of commodities and low-value added items. High cost of inputs, especially labour and energy need to be addressed to incentivize value added exports
  • Concessions to CPEC projects/zones must not be allowed to undermine existing industry
  • An inherent part of CPEC should be the relocation of labour intensive industries from China to boost exports from Pakistan, both to China and elsewhere. (20 Mn jobs likely to be displaced in China due to rising labour cost)

We have made some conceptual recommendations to Mr. Haroon Akhter Khan for the forthcoming budget, which aim to:

  • Promote capital accumulation by discontinuing Super Tax, tax on bonus issues and retained reserves
  • Encourage consolidation by restoring group relief to FA 2007 basis for holding companies already established. Remove cascading tax on inter-company dividends
  • Promote investment. The Alternate Corporate Tax (ACT) regime works counter-purpose. Restore ability to avail initial allowance for investment in machinery and buildings
  • Encourage incorporation: companies making up to Rs. 20 Mn profit pay more tax than individuals and AOPs
  • emove disparity between import levies on finished goods and on raw and packing materials to
    encourage local industry and employment
  • Oblige every business to file tax returns. “Full and final” tax regime allows many to get away
  • Strengthen physical checks: many shops and markets deal brazenly in smuggled goods
  • Revise and tighten the weight/ quantity based valuation system for import
  • Make WHT on banking transactions of non-filers a tougher deterrent than the current 0.4%
  • Resolve federal/provincial and inter-provincial anomalies on sales tax jurisdiction
  • Stop misuse of audits to harass tax payers; exclude taxes collected in advance and tax refunds
    outstanding from FBR’s performance against targets; likewise for measuring fiscal deficit
  • Empower FBR through better talent and technology; rationalize number of taxes, simplify returns
  • Make the amount of taxes collected from new tax payers the main KPI for the FBR,
  • Allow businesses to deploy WWF to improve lives in a more efficient manner than the government.

Pakistan’s economy is on the cusp of a unique opportunity. Guided properly, the trajectory of growth can be sharpened and sustained. You had kindly offered to facilitate a forum to bring all stakeholders together to develop a national consensus. We would like you to pursue this further. As a prelude, we would also appreciate your help to secure an appointment with the Prime Minster and the Finance Minister for the PBC to share its views.

Yours faithfully,

Ehsan Malik