1 / 26

PAKISTAN ECONOMIC POLICIES FOR 2008-2009 SPECIAL EMPHASIS INDIRECT TAXES BY

TABLE OF CONTENTS . -Economic Policy

mansour
Download Presentation

PAKISTAN ECONOMIC POLICIES FOR 2008-2009 SPECIAL EMPHASIS INDIRECT TAXES BY

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. 1 PAKISTAN ECONOMIC POLICIES FOR 2008-2009 SPECIAL EMPHASIS INDIRECT TAXES BY Syed Shabbar Zaidi Partner, A.F. Ferguson & Co. Former President, The Institute of Chartered Accountants of Pakistan Karachi – April 10, 2008

    2. TABLE OF CONTENTS - Economic Policy & Tax Management - Growth in Indirect Taxes in Pakistan – Sustainability - Review of the Taxation Policy (indirect Taxes) in the Past Decade – Effects & Consequences - Custom Duty - Administration Issues - Policy Issues - Role of Tariff Commission - Sales Taxes Retailers & wholesalers sector - The Missing Link Imports - Presumptive Taxation Manufacturing - Burden of Tax - Services Taxes - The Fundamental Issues – Tax to GDP - Federal vs. Provincial Government - NFC Award & Allocation of earnings

    3. ECONOMIC POLICY & TAXATION MANAGEMENT (1) In the post cold war era, we are living in unipolar system of economic policy. Communism is burried in Tienmann Square and capitalism is dying with ‘Subprime’ scandal in this Wall Street. The solution is welfare state. Government efficacy is judged by its governance of employment, poverty alleviation and quality of services of health, education and other amenities. Collection of taxation revenue from all sources ‘equitably’ is the ‘only’ mechanism that can provide resources to the government for welfare. There are numerous studies and empirical evidences that availability of reasonable resources (at least 10 to 15 per cent of GDP) is necessary to sustain the society. In the developing country the need is even more. Thus, economy cannot survive unless we are ready to pay equitable taxes.

    4. ECONOMIC POLICY & TAXATION MANAGEMENT (2) The unfortunate part is that we in Pakistan, are now lagging behind, even the people around us. I reproduce the extract from a recent speech of P.Chidambaram the Finance Minister of India: “In the last four years, we have increased the tax to GDP ratio from 9.2 per cent to 12.5 per cent this year and next year it will be 13 per cent. This allows us to do what we have to on health, education, etc. Secondly, our government has been extremely prudent fiscally. We inherited a fiscal deficit of 4.5 per cent; this year we have reduced it to 3.1 per cent, and next year we will reach a fiscal deficit of only 2.5 per cent. On the revenue side, we inherited a revenue deficit of 3.6 per cent, this year we have brought it down to 1.4 per cent, and next year we will bring it down to 1 per cent. Now what does this mean ?

    5. ECONOMIC POLICY & TAXATION MANAGEMENT (3) This means that I have more revenues, I have created fiscal space for the government to borrow more, if necessary, and I have created space for the Government in Parliament to spend on what they think are desirable objectives. The desirable objectives are, of course, education, health, rural infrastructure, drinking water, sanitation; You might ask what is there for industry. Well, infrastructure of industry is important. I believe we have laid the conditions for high growth and we have laid the pre-conditions for making this growth more inclusive.” Can we in Pakistan, be able to provide such facilities with less than 10 per cent Tax to GDP ratio ?

    6. ECONOMIC POLICY & TAXATION MANAGEMENT (4)

    7. GROWTH IN TAX COLLECTION – INDIRECT TAXES (1) Over the last ten (10) years there has been a phenomenal increase in the taxation revenue of the country by way of Indirect Taxation. We were around Rs 200 billion in all indirect taxes in 2000. Now the expected collection for 2007-2008 is around RS 625 billion. This increase has resulted from: Increase in the size of GDP Increasing in the range of taxation Effective tax administration

    8. GROWTH IN TAX COLLECTION – INDIRECT TAXES (2) Another important factor is that over the period reliance on “Import Duty” has substantially reduced. Now the question is “Sustainability” of growth in such taxes. The size of GDP is now expected to grow by 6 per cent as against 7.2 per cent therefore a conservative and prudent approach has to be adopted whilst projecting revenues. The estimate should not exceed Rs 640 billion. Indirect taxes are directly effecting the consumer prices of the product. I reiterate my comments made earlier that incidence of indirect taxes that effect: the product prices of goods used by lower strata of society; cost of industrial raw materials; be reduced and examined.

    9. GROWTH IN TAX COLLECTION – INDIRECT TAXES (3) The projected break up could be: Rs in “billion” 2007 2008 Custom Duty 154 150 Sales Tax 375 380 Federal Excise 91 100 Other 2 - 622 640

    10. REVIEW OF THE TAXATION POLICY (1) There is no dispute that in post WTO period the word “Protectionism” has been taken out from the dictionary of fiscal management. However, for countries like, where employment promotion and alleviation of poverty remains a major issue; there has to be ‘facilitation’ for local manufacturing industries that can boost exports, and provide employment. Increase in the number of mobile connections, expensive motor vehicles and increase in KSE Index do not represent that we are having a sustainable growth.

    11. REVIEW OF THE TAXATION POLICY (2) The State Bank of Pakistan’s quarterly report of this quarter states about the manufacturing sector as under:: “Pakistan’s large scale manufacturing (LSM) has been encountering headwinds since the start of FY08. Domestic as well as external factors are responsible for the relatively slower growth in this sector compared to the stellar performance of preceding years. These factors include: the continued strong increases in international commodity prices, domestic energy woes and dampened demand (Particularly for textile exports). Economic losses in the aftermath of December 27, 2007 have further weakened the chances of meeting the annual target.

    12. REVIEW OF THE TAXATION POLICY (3) “Overall, the slowdown in LSM during HI-FY08 was broad based and was seen in 11 out of 15 industrial groups. Of these, paper & board, metals, fertilizer and electronics industries registered a decline in production. In contrast to these under-performers, pharmaceuticals POL, cement, engineering and wood industries depict reasonably strong growth.”

    13. REVIEW OF THE TAXATION POLICY (4) Facilitations will be required by way of indirect taxation for such sectors. These are: Removing all kinds of taxes and duties from energy; be it fuel, petrol, electricity etc. Levying “Regulatory Duty” on all items of luxury nature; mobile phones, expensive cars, imported foods etc. Reducing sales tax to 10 per cent; the objective being creation of differential against imported products to boost local manufacturing and agriculture.

    15. CUSTOM DUTY (1) In the developing economies, industries and businesses in the past were run with reference to ‘Custom Duty’. In our country we call it a ‘SRO Culture’. In post WTO regime that ‘paradigm’ has changed. With reference to ‘Customs’ the issues are: - Administration Reforms - In clearance of exports, speedier clearance, least time and effort for clearance of raw materials - Discrimination for sectors, regions, persons and influences - Policy Issues - Cascading - Proper identification of products required for local industry

    16. CUSTOM DUTY (2) - Role of Tariff Commission - Tariff Commission is a body to settle the issue of tariff imbalances and to settle the issue of unnecessary pressure of local industry. This institution is required to be revisited

    17. SALES TAX (1) Retailers & wholesalers – The Missing Link: Over the last 10 to 15 years. We as a country not been able to repair the missing link in the VAT system. There is in short-cut solution. This requires coordinated efforts for income tax and sales tax. Primary problem for the traders is not sales tax. This represents an issue of documentation and taxability of the service sector.

    18. SALES TAX (2) Import – Presumptive Taxation The major issue for the sales tax for imports is again documentation the trail. We have used various modes to charge sales tax on imports and at present, we are in principle on presumptive basis of taxability. This presumptive basis of taxation for imported products is in effect increasing the cost of materials by 15 per cent. We cannot attain efficiency in cost of input for industry. This distortion has to be removed.

    19. SALES TAX (3) Manufacturing sector in Pakistan is suffering due to: Higher incidence of sales tax on inputs; Competition against unregistered local manufacturing sectors; Cheaper imported products where sales tax is presumptive in nature. This situation is not sustainable. The solutions are: Reducing sales tax to 10 per cent; Improving tax administration to that all manufacturing sector is brought within the tax net; Imposing a regulatory duty of 10 per cent for facilitation of local manufacturing sector.

    20. SERVICES TAX (1) The State Bank report talks about the Services Sector as under: “Most of the indicators for the services sector suggest robust growth in this sector during the first half of FY08. Wholesale and retail trade seems likely to perform well given a significant increase in imports (which accounts for more than half of the value addition in this sub-sector). This sub-sector is also likely to benefit from expansion in the network of domestic and foreign chain stores. In the transport & communication sub-sector, a relative weakness in transportation sub-sector could be offset by a strong growth in the electronic media and telecommunication sub-sectors on the back of government’s liberal policy as well as large FDI in recent years. In particular, expansion in cellular services is impressive as cellular density has more than doubled during July 2006 to December 2007.

    21. SERVICES TAX (2) The combined impact of a likely improvement in the profitability of the overall banking sector, coupled with some improvement in value-addition by other financial institutions is expected to support the high growth momentum in finance & insurance sub-sector as well. In addition, growth in value addition by public administration & defense as well as community & social services (other services) is likely to be strong.” In all the other countries, including India, the contribution of indirect taxes on services is commensurate with their contribution in the GDP. We cannot improve tax to GDP ratio unless indirect tax contribution by services sector is improved. There is a need to shift the burden from the manufacturing sector to other which are primarily used by upper strata of the society.

    22. SERVICES TAX (3) The sectors which consideration are: Transportation Tele communication services Media & Communication Professional Services Services provided to higher income brackets such as beauty parlour, property dealers, sliming, saloons etc. There has to be either non-adjustable services tax of 5 per cent on such sector or adequate adjustment for sales to cater for the same.

    23. SERVICES TAX (4) Federal vs Provincial Taxes The constitutional impediment for the charge of sales tax on ‘services’ by the Federal Government be removed. There cannot be any system of VAT with Provincial Collection of taxes. There is a need to re-align the National Finance Commission Award for distribution rather than disturbing the collection mechanism

    24. CONCLUSION There is a need for serious debate on economic affairs specially taxation management of the country. We do not have too many options. The solution ties in building confidence, hope and passion for integrity and equity in the society. Thank you

More Related