Local entrepreneurs continue to face roadblocks

LAHORE: Despite improvements in Pakistan’s ease of doing business ranking, soaring costs are hindering local entrepreneurs’ ability to compete domestically and internationally, experts say.

Bureaucratic hurdles in the way of trade force impassioned entrepreneurs away from this field. By improving governance and transparency, the government can help businesses reduce unnecessary costs they face. Cutting the cost of doing business is the only viable solution to the economic woes of Pakistan. Instead of repeating the past mistakes of providing undue protection to the local manufacturing sector to reduce the import burden, it is time authorities shifted their attention to other areas.

The high cost of inputs is not solely responsible for the ever-increasing cost of doing business. In fact, high input costs are a global phenomenon. Pakistan buys raw material from international markets at globally competitive rates. Energy and gas prices are exceptions, mainly due to unchecked bureaucratic practices in these sectors.

While the import regime announced by the government is by and large to the advantage of local manufacturers ‘on paper’, in reality this advantage turns into a big drawback when imported products enter local markets through either underinvoicing or smuggling. The same government machinery that regulates the import of industrial raw materials also clears finished products.

Customs officials adopt different strategies in clearing raw materials and finished products. Several raw materials and accessories are subject to an import duty of 5-10 per cent. The overall impact of this tax increases as importers have to pay an 18 per cent sales tax on the value of imported raw material, including the amount of the duties.

On a product valued at Rs100, businesses pay Rs10 as duty and Rs19.8 as sales tax. The total cost of the raw material then increases to Rs129. Other import expenses end up inflating this cost. The rate of raw materials is determined by the customs based on their global rates on the day of clearance. Underinvoicing thus is not possible.

In the case of a finished product, the criterion to determine the rate is different. Some importers declare the rate of finished products, which is only 25 per cent of the price at which its main raw material was cleared by the customs. Thus, when they import a product worth Rs130 (Rs100 cost of raw material and 30 percent production charges) at Rs25 per unit (at one-fourth of the cost of raw material), they eliminate local manufacturers from the market.

Even if the duty on finished products is 20 per cent, they end up paying Rs5 in import duty and Rs40 in sales tax. Thus, on imports worth Rs130, their total cost of product comes to Rs140.4 (Rs105 is paid outside Pakistan). In reality, the importer pays only Rs10.4 on the import of the product worth Rs100. The importer of finished goods thus pays a rate in duties, which is one-third less than what a local manufacturer pays on the import of raw materials.

If this cost is eliminated, it could boost local production. Smuggling is even more injurious for domestic manufacturers. This has made Pakistan basically a trading country. Its industrial base is shrinking.