Fear of higher taxes, removal of concessions make manufacturers jittery

LAHORE: Manufacturing sector is having nightmares on expected fresh wave of taxation in the next budget and withdrawal of concession granted by the incumbent government this fiscal. Going will not only be tough, but for some it will be a death knell.

The government hopes to collect taxes worth Rs4,000 this fiscal. It has committed to IMF to take the tax collection to Rs5500 billion in 2019-20.

The Federal Board of Revenue (FBR) has never succeeded in increasing tax collection of this magnitude in a single year. Yet the government has itself agreed to enhance revenue by Rs1,500 billion to avail the IMF facility.

It seems that the economic planners want to achieve this target at any cost; even at the cost of deindustrialisation and job losses. This would though surely stabilise the economy provided other parameters synchronise with the government plans.

These parameters include sustained surge in exports, lower imports, stable rupee and stable inflation. The government plans to impose new taxes (or enhance tax rates) worth Rs750 billion.

The remaining Rs750 billion would be raised through better tax governance, bringing in new taxpayers in the system, eliminating concessions and subsidies and through revenue collected from amnesty scheme. This is easier said than done.

In case the government felt that the actual revenue targets would not be achieved it would go for further taxation. The political cost of these measures would be very high.

Will the government be able to withstand public pressure? The tragic reality is that after what has been done in recent weeks there would be no going back. The tough measures would have to be implemented to get the IMF package.

The dilemma however is that the road to economic independence has to be led by exports. Without increase in exports the rupee would remain vulnerable even if we succeed in controlling inflation, cutting expenses, and lowering interest rates.

Increased taxation would lower demand and production. Prudence demands that the exporting industries should operate without any subsidies or undue government support.

However, if we see at the current ground situation in Pakistan, it is like a state that is trying to establish its industrial base. It needs same concessions that are needed in states that embark on an industrialisation process.

A sad reality is that in more than 70 years we have failed to create a stable and dependable industrial base.

We always looked for the easy way out, which was to keep all our eggs in one basket that is textiles. Unfortunately, the textile sector failed to scale up.

New entrants like Bangladesh and Vietnam have 2.5 times stronger textile sectors than Pakistan and that too at 80 percent less cost than investment made in the Pakistani textile sector.

In our endeavour to support textiles, we neglected all other industrial sectors. Instead of emphasising on exports, we went for import substitution by establishing industries that were protected from imports.

Our efforts from day one should have been to establish industries that were globally competitive. These industries would have entered the export arena while catering to the needs of local demands.

We allowed import of used machines to establish import substitution units. We never realised that the old units were discarded in foreign countries to make way for better technology.

The inefficient industries did reduce imports but on protection provided by the government. When the economy started opening up these inefficient industries had no place to hide. Pakistan’s industrial sector now is in complete mess.

We are in a catch 11 situation. By awarding concessions to the five exporting sectors the government simply ensured that the decline in exports would stop.

It was naïve of the planners to expect that there would be a surge in exports as a result of these concessions. However, if the government now withdraws these concessions like subsidy on power and gas in Punjab and zero rating on five exporting sectors, the exports would immediately crash.

Can we afford to let the exports go down? It would further aggravate our balance of payment crisis.

We will have to swallow the bitter pill of supporting these sectors for the time being. The pill is as bitter as the deal with IMF where we had no option.

These concessions are worth around Rs40 billion a year. The government is collecting only Rs15 billion from the sales tax on domestic textile.

The domestic market for fashion textile alone is Rs700 billion and tax collection at five percent sales tax should be Rs35 billion.

The tax rate could be enhanced to eight percent to generate Rs56 billion revenues. This will provide the cash needed for providing subsidy to the five exporting sectors.