The fallouts of tax-and-borrow frenzy

LAHORE: In its obsession to generate revenues government has kept tax compliant sectors on their toes as levies on cars and cement are perhaps higher than the profits these sectors make after hectic efforts and taking great risks.

There is a need to revisit the tax impact on domestically produced goods if we want to grow industrially. The total impact of taxes on the retail price of cars is 38-40 percent. Devaluation of rupee has forced the manufacturers to increase the prices because of impact of imported parts.

The consumers had to bear this burden because of the government-consented rupee devaluation. However, since the taxes are levied on the retail prices of cars, the consumers have to bear additional Rs40,000 on an increase of Rs100,000 in the price of a car.

Two years back a 1,300cc car was retailed at Rs1.6 million and at that time the tax impact was 35 percent of retail value that amounted to Rs560,000. Now, when the price has increased to Rs2.3 million the tax impact after 5 percent additional levy imposed this year comes to Rs920,000. This amounts to a staggering increase of Rs360,000.

This increase in additional duties does not impact the overall revenue of the government even if the car production declines by 30 percent. Nevertheless, with a decline in production of over 40 percent currently, its revenues would also go down.

The prudent way to keep the activities growing is to negotiate with the manufacturers to bring the total levies on cars to the pre-devaluation level and ask the manufacturers to give a discount of 5 percent on their prices. In fact many are offering cars at a discount of Rs125,000.

If this amount is added to Rs360,000 duties that the government should wave, the current price of Rs2.3 million would come down to Rs1.8 million and trigger the auto sector growth. The government revenues would remain the same. The new entrants have been devastated by the devaluation and the high government duties have doubly impacted their entrance in the domestic market.

Cement is another sector where the planners have not evaluated the impact of levies. The government had not taken into account the post production expenses. The levy on Rs500 cement bag is Rs148 and the post production expenses are Rs100/bag (it includes freight charges, dealer commission, and retailer margin).

The manufacturer is left with Rs252 in which it has to cover the production charges and its profits. Any sane person would vouch the cement-makers are certainly not earning as much as the government earns through its levies.

Why the government duties can’t be reduced to improve growth in construction industry. These are not the only issues. We also have others like high power prices. We still are not vigorously pursuing the cheap power projects that require no foreign exchange.

The fuel is our own. We are seeing many wind projects in the pipeline but Pakistan is one of the most suitable place for solar energy and the fact that it is the cheapest source of energy production among all the power generating options in the country. Investors are ready to install solar projects at 4 US cents per unit, which is cheaper than even coal.

The efficiency of the solar system has increased from 18 percent to 38 percent. Many industrialists are even prepared to install solar power projects for their own use. They want that solar power produced by them be allowed to be wheeled to their different factories.

They are prepared to pay the prescribed wheeling charges. Wheeling is permitted by the government of Pakistan but some government-owned distribution companies have taken stay orders against wheeling.

The government should ask the public sector companies that instead of hiding behind stay orders, they contest the case seriously. Solar power concept should be promoted in private sector for their own industrial uses. The government would not have to pay the capacity charges even. Residential solar power generation is also on the rise in the developed countries where sun is scarce.