OPINION
Cutting the cost of doing business is the only viable solution to the economic woes of Pakistan that needs action by both the government and the private entrepreneurs. The government needs to remove the bureaucratic hurdles and the private sector must upgrade the technology.
Bureaucrats feel they are immune from any accountability, and apply different sets of rules on the same issue, depending on the entrepreneurs they are dealing with. In case of ‘obliging’ entrepreneurs, no objections are raised, while for those, who want to go by the book, the decisions are delayed by raising various objections.
In both cases, the cost of doing business increases as greasing the palms costs money and the delays not only increase the cost but also deprive the entrepreneur of the opportune time to dispose the goods or services. Those who pray a bribe are however at an advantage, because they usually save government levies that are much higher than the amount of bribe they had to pay.
Entrepreneurs know that the main cost of doing business in Pakistan in many cases is not the high cost inputs. Input cost is a global phenomenon. Pakistan buys raw material from the international markets at globally competitive rates. The energy and the gas prices are also competitive. What Pakistan lacks is the governance level. Poor governance is what increases the cost of doing business in most of the cases. They point out various factors that increase the cost of doing business.
On paper, the import regime of the government by and large is meant to provide advantage to the local manufacturers. However, in practice the advantage turns into a big drawback when the imported items are under-invoiced or entered the market via illegal means or smuggling.
A point worth noting is that the same government machinery, which regulates the import of industrial raw materials, also clears the finished products that are imported in the country. The customs department at the same time has also the responsibility to curb smuggling. It has powers to confiscate all those foreign goods that are not supported by import clearance documents. However, smuggled goods are openly sold in the market and customs do not conduct any raids.
A number of raw materials and accessories are subjected to import duty of 5-10 per cent. The duty impact increases as they have to pay 17 per cent sales tax on duty paid value of imported raw material. On a raw material valued 100 they have to pay Rs10 as duty and Rs18.70 as sales tax. The total cost of the raw material under government levies increases to Rs128.80. The other import expenses are in addition to this cost.
The rate of the raw material is determined by the customs through internet on the basis of its rates on the day of clearance. The under-invoicing thus is not possible. The local importer pays 17 percent sales tax on this cost which comes to Rs22. The total cost jumps to Rs150.
However, in case of a finished product made from the same raw material there is a no criterion to determine its rate on daily basis, although finding these rates is possible through the same technology with which the rates of raw materials are determined.
Some importers declare the rate of the finished product at only 25 per cent of the price at which its main raw material is imported by a local manufacturer for producing a similar product. Still the customs clear the finished products at the very low value declared by the importer.
Thus, when they import a product worth Rs130 (Rs100 cost of raw material and 30 per cent production charges) at Rs25 per unit (at 1/4th the cost of raw material) they eliminate the local manufacturers from the market. Even if the duty on finished product is 20 per cent they end up paying Rs5 as import duty and Rs4.8 as sales tax.
So, on the import worth of Rs130 their total cost of product comes to Rs139.80 (Rs105 they paid outside Pakistan plus Rs 25 declared import price and Rs9.80 government levies). Had actual price of the product been evaluated by the customs that product would have cost Rs157.36. This price is only 5-6 percent higher than the price of a similar local product and provides fair competition.
Manufacturing in Pakistan will grow to unprecedented levels if only the menace of smuggling and under-invoicing is controlled. Bad governance is the reason for higher production costs in Pakistan starting from customs to law and order and over regulation of industries through various federal, provincial and local departments.
Many experts say that Pakistan is losing hundreds of billions of rupees due to smuggling and under-invoicing. This is partially true. If actual duties were collected on smuggled and under-invoiced items, government could have added hundreds of billions in its kitty. But we neglect the impact of these unethical practices on the domestic manufacturing sector.
If the imports are made on their actual international value, almost 70 percent of the finished products would never be imported in the country. These items would then be supplied by the domestic industry. The tax collection would not suffer much as the domestic manufacturers would be paying the actual sales tax and then income tax on increased profits.
The full operation of industries operating much below their capacities would ensure additional jobs and additional investments as well. Currently, there is only one large tyre manufacturing unit in Pakistan which has a capability to fulfil 25 per cent of the demand of tyres in the country, whereas the rest are imported at under-invoiced value or are smuggled in the country.
The tyres produced by the Pakistani manufacturer are of global standards, but the manufacturer operates below capacity as it cannot compete with under-invoiced or smuggled products. If smuggling and under-invoicing of tyres is curbed, Pakistan would attract a lot of investment in this sector.
The country has the potential to quadruple its tyre manufacturing capacities that will create jobs, add huge revenues and with economies of scale Pakistan may well start exporting car and bus tyres.
Almost 70 percent of the artificial leather industry of Pakistan has closed down due to the menace of under-invoicing and smuggling. Thousands of jobs have been lost. Many of the closed industries may not be able to revive, but new investors would step in if they are convinced that these malpractices in Pakistan would stop.
Tile industry of Pakistan is on the verge of collapse because of the under-invoiced imports from numerous countries. With the construction boom going on in the country, we are creating jobs in foreign tile industries and shedding jobs at home.
The writer is a staff member
