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March 1, 2018

Ease of doing business helps reducing cost

Business

March 1, 2018

LAHORE: It may not be possible for a state to lower the cost of doing business if local wages and rates of imported commodities are high, but it can always improve ease of doing business through prudent reforms.

For instance, if international rates of crude oil increase the government has no option but to pass on the impact of this increase to the consumers. The best it could do is to reduce the quantum of government levies on petroleum products to keep prices low.

In the same way if it wants to reduce the rates of imported gas it will have to give subsidies. Again the option is with the state whether it wants to spare its resources for subsidies or has the courage to go for weighted average rates of local plus imported gas. The choices are limited and difficult to exercise. Ease of doing business, on the other hand, relates to transparency in government policies. It is on the strength of these policies that both foreign and local investors decide to invest in a country. Ease of doing business, in fact, relates to reducing the unaccountable costs that an investor has to unnecessarily bear with due to ambiguity or absence of rules. Foreign investors commit their resources in an economy where the ease of doing business is easy and fast.

The cost saved by the investor on fewer, simpler and transparent government rules is substantial. Cumbersome rules and procedures provide space to the corrupt to charge some price at each step where the investor has to get into contact with the bureaucrats.

The first step in establishing a manufacturing facility is the time and money needed to register a property. A latest World Bank report said it takes on average 56 days to register a property, involving seven different procedures and cost of registry is 5.2 percent of the property value. On the other hand, there are only two procedures to register a property in New Zealand and the time required is only two days while the cost of registration is only 0.1 percent of the property value. This is a reason that Pakistan ranks 170 out of 180 economies under this head while New Zealand ranks first.

Domestic credit to the private sector is the major source of project finance around the world. Unfortunately, government is the major aspirant for bank loans in our country. This is the reason that domestic credit to private sector as percentage of GDP in Pakistan is only 15.4 percent. It is 51.1 percent of GDP in India, 131.5 percent in Singapore, 141.8 percent in China and 146.2 percent in New Zealand. Due to low credit to GDP ratio investors hesitate to invest in Pakistan. Nowhere in the world is private sector expected to operate on its own resources only. Private sector is forced to borrow informally at a very high cost.

A corporate entity is required to make 47 tax contributions every year under different heads in Pakistan. These includes five payments to income tax department, 12 to provincial social security departments, and one each for education cess, property tax, professional tax, vehicle tax, fuel tax and stamp duty.

A taxpayer has to file sales tax returns every month. The World Bank estimates that it takes 311.5 hours every year to fulfill and deposit 47 taxes. Comparatively, total numbers of tax payments in Hong Kong are only three and the time consumed in tax compliance is only 72 hours. Hong Kong ranks 3rd under this head by the World Bank in Ease of Doing Business Index. In India total number of tax payments a year are 13 that consume 214 hours of the taxpayer; this country ranks 119 under the head. Pakistan ranks 172.

It is difficult for any government to reduce costs of inputs that are either globally controlled or are based on supply and demand but there are numerous government procedures that have been adequately eased by developed economies to reduce speed money spent to please corrupt bureaucrats. There is no need to reinvent the wheel but simply emulate them.