Rising power costs, uncertain tax regimes annoy exporters

ISLAMABAD: Exporters have asked the government to put a cap on gas and electricity prices, removing tax distortions, expansion of exporters finance and long term finance schemes, revision of free trade agreements and further downslide of exchange rate for reversing downslide of Pak made up exports in different destinations.

A policy think tank Sustainable Development Policy Institute (SDPI) has done study titled “Boosting Pakistan’s Export Competitiveness; Private Sector Prospective” states that it aims to help the government for preparation of Strategic Trade Policy Framework (STPF) for 2018-2023 in consultation with the World Bank for which total 254 private sector representatives participated in four separate events organised in different provinces of the country to suggest how the exports could be promoted.

The exporters stated that there needs to be a policy to put a cap on the gas and electricity tariffs faced by exporting entities. The frequent changes in rates of utilities have adversely affected the forecasted cash flows and result in reduced competitiveness vis-à-vis peer economies.

The current exporters suggested that gas and electricity tariffs should be in-line with the competitor economies e.g. Bangladesh, India and Vietnam. The potential exporters explained that while the supply of energy has improved over the past 12 to 18 months, however cost per unit has not come down.

Distortions in taxation: The tax regime faced by exporters and importers of raw materials and machinery also requires certainty in the medium term. Recent changes in tariffs and regulatory duties, without a comprehensive discussion in the Parliament or with the business community have increased the cost of trade across the country. The current exporters suggested that the General Sales Tax (GST) and other tax related rebates must be provided on all exports through an automatic adjustment (as per the report of Tax Reform Commission) and exporters should not have to repeatedly knock on the doors of Federal Board of Revenue (FBR) to settle refund amounts.

The ‘potential exporters’ group in Lahore came up with specific tax-related interventions which could help bring down cost of compliance for SMEs. They explained that there is a need to reduce GST, tariffs and regulatory duties on imported intermediate goods.

Furthermore, the total number of taxes faced by SMEs at the federal, provincial and local level currently stands at 56 as per a 2015-16 exercise by the Board of Investment (BoI). These may be consolidated to bring down compliance costs. To encourage formalisation of SMEs in Balochistan and Khyber Pakhtunkhwa, it was suggested that documentation-related complexities (at the time of registration and renewal with Securities and Exchange Commission of Pakistan, FBR, provincial tax authorities, and municipal regulatory bodies) in the current company incorporation and taxation regime may be rationalised.

The manufacturing sector exporters, particularly from Lahore and Karachi explained that the mandate of Tax Reform Commission may be expanded to see how the role of FBR can be transformed into an entity which helps manufacturing sector’s exports. Currently over two-thirds of the overall burden of government revenue collection falls on the industrial manufacturing sector. The tax exemptions to large agriculture and agro-processing businesses may be revisited. The lack of adequate banking channels with neighbouring countries (e.g.·Afghanistan, Iran, and India) and non-traditional export destinations e.g. central Asian economies is not letting exporters realise their potential. Also, the existing banking system of Pakistan must be made compatible with key export destinations in order to ensure that there are no undue financial barriers to trade.

An entity employing up to 250 employees is termed small and medium enterprise. The business community from disadvantaged and conflict-hit areas of Balochistan and western Khyber Pakhtunkhwa highlighted the lack of tax-free raw material imports and tax holidays to restart industrial growth. The micro, small and medium enterprises (MSMEs) in these areas have demanded a policy of preferred purchase across government procurement, however this may require changes in the rules being currently followed by Public Procurement Regulatory Authority of Pakistan.

It may also be difficult of MSMEs to complete the traditional compliance requirements of financial institutions for accessing credit for working capital and fixed investment. Examples from ASEAN economies were highlighted where banks were encouraged to customise their credit products, simplify the process of application and offer flexible payback options for MSMEs. However, it was noted that such customisation should also include guarantees by the government which can save MSMEs from collateral requirements. Similarly, the central bank will need to consult MSMEs, many of whom may be potential exporters, before introducing any new financial services in order to ensure appropriate inclusion and uptake.

The past exporters explained that the financing under State Bank of Pakistan’s Export Finance Scheme and Long Term Financing Facility (LTFF) should be expanded for past exporters currently failing to regain their market. The services sector and potential exporters from this sector explained that the Central Bank regulations on lending procedures for services sector exporters need to be updated in view of the current difficulties faced by this sector. The SBP’s ‘Prudential Regulations for SME Financing’ requires more detail on support to services sector start-ups with a view to enhance their exporting capacities.

Customs processing: The time taken for custom clearance must be reduced in order to facilitate exports, especially for perishable items. In the case of delays in clearance of perishable items, there must be a mechanism of public-private risk sharing. The automated system being used by the customs department until now has shown mixed performance. The customs software at land route trading posts often suffers due to lack of efficient internet connectivity. Currently there are varying views within the government regarding the overvalued exchange rate. The current exporters suggested that an overvalued exchange rate should be allowed to gradually adjust to its equilibrium value. This will benefit the key export-oriented industries in the longer run. The management of exchange rate policy should also take in to account the fast changing value of currencies in the competitor economies. The trade offices in embassies of Pakistan may also aid in identification and promotion of potential exports in their respective regions. The business community was not satisfied with the outreach of commercial and trade officials posted in Pakistani embassies abroad. They should be given annual targets, failing of which a replacement should be considered.

Transport and warehousing: There needs to be a policy to put a cap on the transporting and warehousing costs faced by exporters. One way to achieve this may be through lowering the burden of taxes (and other levies) on transport and warehousing sector in return for certainty and lowering of price by private operators.

Currently, several dry ports across the country are not effectively operational. Furthermore, the travel and dwell time faced by consignments is uncertain due to bottlenecks in in-land- and border-related trade infrastructure. The current exporters suggested that there is a need to review and lower (through policy changes) costs of transport and transit fees faced by the exporters.

The provincial and local toll taxes also contribute to higher costs of moving the consignments. Several such taxes or levies can be consolidated. In this regard, this group was concerned regarding weak consultation around National Transport Policy 2017. This policy may be amended to include specific provisions which bring down the costs in transport and warehousing sectors.

Fiscal support for exporters: All fiscal incentives or subsidy packages provided to the exporters should be evidence-based. There should be a careful evaluation of past textile export packages provided by the prime minister – to see how much such packages have delivered in the past. Most export packages suffer from weak targeting.

It was suggested by current exporters in Khyber Pakhtunkhwa that a scorecard method at the Securities and Exchange Commission of Pakistan could lead to a clearer identification of new and potential exporters. Fiscal support should be strictly targeted towards these groups.

Furthermore, such support should be time bound and with clear role of FTAs and evaluation of GSP+: An evaluation is also required to see why Pakistan has not been able to achieve export targets in volume or value (of exports) the benefits at a scale envisaged after the awarding of the European Union’s GSP+ arrangement. The representatives of FPCCI emphasised that all FTAs and preferential trade agreements (PTAs) may be carefully reviewed in the interest of local manufacturing industry and services sectors. This is particularly important at this stage as Pakistan is negotiating the next phase of China-Pakistan FTA.