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December 2, 2020

Unfair games not a level playing field

Business

December 2, 2020

LAHORE: In liberated economies like Pakistan, industries catering to the local needs require the same facilitations that are provided to the exporting sectors.

This is particularly essential in the current corrupt culture prevailing in the country. Government facilitates exporters with various concessions to lower their cost and make them competitive in the global economy.

Its aim is to generate maximum foreign exchange for the country. Globally, the norm is to make exports zero-rated.

Exporters are not required to pay any taxes on their consignment. Apart from this concession the exporting industries are treated at par with non-exporting industries.

They pay the same power and gas rates. There is no distinction between exporters and non-exporters. In the current globalised world, the logic is that domestic sectors face competition from imports.

Therefore, domestic industries are protected through import duty, while they have to pay the same rate of sales tax as levied on the importers. This duty protection works well in comparatively transparent economies.

However, in economies infested with high corruption the importers find ways to not only nullify the impact of protective duty, but also save on income tax by managing to import their goods at highly reduced rates (they pay the balance to the suppliers through unofficial channels).

There are many economies where the vested interests do not even bother to go through the import process and smuggle the goods with the connivance of officials.

Both these practices are in vogue in Pakistan obviously with tacit support of the authorities. In case of imports, Pakistan is a rare country where duties on most items are much less than the sales tax.

Under-invoicing is common in even products that are allowed free of duty, but are subjected to sales tax. Domestic suppliers in Pakistan operate with this handicap.

Under such circumstances, they start losing share to imports when they are subjected to very high power and gas tariff (because of corruption and inefficiencies of distributors).

This government offered subsidised power first to the five major exporting sectors and later to all exporting industries. It was done because the authorities realised that gas and electricity rates in Pakistan are much higher than its competing economies.

However, other industrial sectors have been excluded from this subsidy. If level playing field is provided to the non-exporting industries as well, it would also save huge foreign exchange by taking back its market share from the importers. This will also create new jobs and numerous investment opportunities in the country.

Interaction with trade and industry reveals that none of the sectors is happy. Government’s expectation to achieve its revenue targets was illogical in the absence of industrial growth.

Industrialists have expressed concern over the withdrawal of tax on builders. They allege that successive governments have shown a lenient attitude in taxing the property business. Real estate has become a safe haven for parking black money.

Government is hard on industry and soft on traders. It has given the traders a free hand to avoid taxes, while it continues to squeeze the manufacturing sector by periodically increasing taxes.

It promises the International Monetary Fund (IMF) that it will increase taxes by increasing the tax base, but when it fails to achieve this, it is forced by the IMF to further increase tax rate.

It promises reforming the power sector. It also claims it will purge it from corruption, but instead of following through the promises, the government succumbs to pressure and instead increases the already high power tariff (next increase is on the cards).

Shabbar Zaidi, the former FBR chairmen identified under-invoicing and smuggling as the two greatest threats for our economy. Despite this realisation, no measures have been taken to curb smuggling or under-invoicing. Smuggling and under-invoicing marginalise domestic manufacturers and reduce job opportunities in the country.

As a result the entire SME sector of the country has been severely damaged. The toy making industry of Pakistan exists no more.

Small shoe making plants in the country have closed down due to the Chinese under-invoiced imports. China now even supplies traditional gents Shalwar Kameez at lower cost compared to local garment producers.

The local garment industry has already lost the gents shirt and trouser market to smuggled or under-invoiced garments from Thailand and Indonesia. It is now fighting to retain the market for traditional Pakistani garments.