National and International Issues

The New “Economic Package”: An Assessment

The Government of Pakistan has introduced a second amendment in the Finance Supplementary Bill on January 23, 2019, which is labelled as an 'Economic Package'. The main aim of the package is to improve business environment in the country for increasing investment by removing various distortions being faced by the businesses and industry. Using a pro-growth and pro-investment macroeconomic framework, it is claimed that this package will reform the economy from trade and consumption-based current state towards export-oriented industrialization.
The government has adopted a ‘gradualist approach’, rather than a ‘big-bang approach’, for adjustment and stabilization of the economy. The package essentially is a base-point on the roadmap for revival of the economy, aiming at promoting businesses by reducing their tax burden, trade facilitation via upgradation of customs clearance and end-to-end solutions for traders. It is expected that with effective implementation of the package the industrial production capacity will improve, leading to export expansion and employment generation.
Let us specifically assess the impact of the package on the economy.
Key Tax Measures Announced and their Likely Impacts
•  Tax on undistributed profits of companies. Current tax rate of 5% on profits, if distribution is less than 20% of after-tax profits, will be abolished from 2020 and onwards. This measure will especially encourage foreign companies to reinvest their profits in Pakistan in new activities and modernize their existing capital assets. Of course, the measure will not have an immediate budgetary impact.
•  Taxation of banking companies. Currently, the income of all banks is subject to a uniform tax rate of 35%. Now 'income' from advances to the following will be subject to reduced rate of 20% for the tax years 2020-2023: a) Micro and small enterprises; b) Low cost housing finance; and c) Farm credit. Upon implementation in 2020-2023, this measure will encourage the banking sector to provide additional credit to these sectors that are currently experiencing low investment.
•  A declining rate on non-bank corporate companies introduced earlier. The government has decided to continue with existing declining rate to come to 25% by 2023. This measure will not have any immediate budgetary impact.1
Super tax on non-banking companies. For persons having taxable income of Rs. 500 million or above, the existing rate of super tax of 1% will be reduced to 0% in the tax year 2020. This measure will reduce the tax burden on companies and will promote investment activities. It will not have an immediate budgetary impact.  
Provisional assessment for undeclared offshore assets. The process of provisional assessment, which was earlier limited to confiscated assets, has been extended to undeclared offshore assets. The government has established Directorate of International Operations to exclusively deal with such cases and to interact directly with foreign tax jurisdictions for exchange of information. This measure will cut delay in the recovery of taxes due from the offshore assets that are discovered by the government. 
Advance tax on banking transactions. Advance tax on cash withdrawal and certain banking transactions is removed for filers, while on non-filers it remains unchanged at 0.6%. It will reduce the tax burden of filers and would encourage the non-filers to become tax filers. This measure will improve the growth of documented economy. 
•  Relaxation of restriction on purchase of motor vehicles by non-filers. The restrictions on purchase of locally manufactured motor vehicles having engine capacity not exceeding 1300CC is relaxed for non-filers. However, the withholding tax rate is increased by 50%. This measure is clearly a discouragement to filers. Moreover, this measure is introduced in response to pressure from local automobile industry, which is already benefiting from extreme policy protection despite their perpetual inefficiencies.
•   Restoration of presumptive tax regime for commercial importers. Now the commercial importers will be taxed under a final tax regime. This measure will facilitate commercial importers.
•  Withholding statements. The requirement to file monthly withholding statements has been replaced with bi-annual statements with immediate effect. The banking companies have also been absolved from the requirement of furnishing certain particulars of customers in relation to withholding tax statements in respect of cash withdrawals and profit on debt. This measure will ease doing of business.
•  Carry forward of capital losses. This will now be allowed on disposal of listed securities in subsequent tax year. This measure will improve the liquidity position of stock market players for the growth of stock market volumes and valuation.
•  Commission income of stock brokers. Tax now deductible on brokerage and commission income will be final tax. This measure will facilitate business of stock brokers, consequently stock market activities will flourish.
•   Levying advance tax. Advance tax is levied on import of mobile phone, purchase, registration and transfer of motor vehicles, and functions and gatherings. This measure will adversely affect the business of those engaged in these activities but will raise tax collection. 
•  Payment of refund through promissory note. The persons entitled to sales tax refunds can opt for acquiring sovereign negotiable instruments in the form of promissory notes (bonds) instead of cash. The government has decided to clear the backlog of accumulated refunds by issuance of the bonds at an annual profit of 10% with a maturity period of three years. FBR Refund Settlement Company (Pvt.) Limited is being established for issuance of bonds. These bonds can be freely traded in the local secondary (security) market. 
•    Increase of duty on imported motor vehicles. The rate of federal excise duty (FED) on the imported vehicles of 1800CC to 3000CC has been increased to 25%, whereas the rates on imported motor cars, sports-utility vehicles (SUVs) and other vehicles of 3000CC or above cylinder capacity, barring vehicles as designed for the transport of 10 or more persons, has been increased to 30%. On the other hand, FED on locally manufactured cars and SUVs with engine capacity of 1700CC and above has been fixed at 10%. These measures will discourage import of completely knockdown cars and promote domestic automobile industry.
Rationalization of the tax structure for mobile phones. Taxation structure on mobile phones is complicated, which includes regulatory duty, sales tax, mobile levy, and withholding tax, etc. This structure creates extra burden on low-end mobile users and is regressive in nature. Keeping this problem in view, the tax structure is rationalized through collection of all duties/taxes on C&F values in terms of US Dollar instead of Pakistani Rupee and using uniform slabs.  
•  Reduction of duty on imported industrial raw materials/inputs. Customs duty is reduced/abolished on the import of 45 industrial raw materials and inputs. This initiative would help reduce the cost of production, especially for export-oriented industries and is thus a good measure for economic growth and employment generation.
•  Exceptions to restrictions as non-filers. These are given to a person holding a Pakistan origin card (POC), a national identity card for overseas Pakistani (NICOP) or non-resident Pakistani citizens holding international passports provided they produce a certificate from a scheduled bank of the receipt of foreign exchange remitted from outside Pakistan through normal banking channels during a period of 60 days prior to the date of booking, registration or purchase of motor vehicles. Or, in case of immovable property, prior to the date of registering, recording, or attesting transfer; or a legal heir acquiring immovable property in inheritance. As a result of this measure, diasporas will be encouraged to invest and maintain strong links with the home country.
Moreover, the provisions relating to advance tax collection on cash withdrawals are now inapplicable on filers and non-filers with respect to a PKR account if the deposits in the account are made solely from foreign remittances credited directly into such an account. This measure will encourage remittances through official channels.
Incentives for special economic zones (SEZs). The government has introduced new sales tax incentives on import of plant and machinery by greenfield industrial enterprises in SEZs. To provide further incentives to the industrial companies set up in the SEZs, exemptions from customs duty and advance income tax on import of firefighting equipment are also given. This is an important first step to attract foreign investment in SEZs.
Revamping of duty & tax remission for exporters (DTRE) and manufacturing bonds schemes. The government has shown its intention to revamp these two schemes for the promotion of SMEs’ exports. Besides, DTRE and Duty Drawback Schemes are being automated for fast clearance of imported raw materials and inputs. Once these schemes are revamped exporters’ liquidity and transaction-related problems will be resolved.
The analysis above suggests that the measures introduced in the ‘Economic Package’ will have no significant immediate impact on the economy. Many of the tax adjustments will not be made during the ongoing fiscal year, they at best show the direction in which the government intends to take the economy in future. Therefore, businesses which are currently planning to invest may get influenced from the announced measures. There are other measures in the package that will ease and facilitate the doing of business but that would depend on their effective implementation.
Advance tax on filers has been withdrawn that will surely facilitate them. Withdrawal of advance tax of non-filers on deposits receiving remittances through banking channels will reduce tax revenues, in any case this measure will attract remittances through banking channels.
Currently, sales tax exemption on imported plant and machinery is available to specific sectors while other sectors have to pay sales tax, which, of course, is adjustable against future production tax. But this adjustment normally takes some time, causing unwarranted delays and work as an impediment to investment by pushing up initial costs. Therefore, to encourage investment in the country, the government has taken a commendable step for greenfield investment by providing exemption from payment of sales tax on imported plant and machinery to be used for setting up new industry for production of taxable goods. This welcome measure will stem deindustrialization that has been taking place since 2007.
Whereas relaxation of restrictions on purchase of automobiles by non-filers and increase in duty on imported cars will increase tax revenue collection, reduction/abolition of customs duty on some raw materials and inputs will reduce revenue collection. So, all in all, there may not be any significant revenue impact on these accounts.
Export-oriented SMEs may directly benefit from DTRE scheme as and when it will be revamped and indirectly through reduction in tax on banking sector’s loan income from SMEs, provided banks shift some of their benefits to SMEs in the form of lower interest rate.
Pakistan has no two choices; it must fast document its economy to eradicate the menaces being faced by the country. The government needs to resist pressures, as all credible governments do, from non-filers and business lobbies and pressure groups. Creation of discrimination between filers and non-filers in case of advance tax on cash withdrawal is a right step but much more needs to be done to document the economy. 
Pakistan has a porous border attracting smuggling of goods through illegal channels and lax enforcement of laws that encourages under-invoicing of imports through legal channels with the connivance of customs department. The intention of the package to promote import-substituting industrialization may not be realized in the presence of illegal trade practices, because they will erode protection to industries. Needless to mention, illegal trade is both a policy and administrative problem. The package is silent as to how these menaces will be eradicated. 
The future of Pakistan’s economy depends on export-oriented industries, they need to be encouraged and promoted because, as compared with import-substitution industries, they are more productive, competitive, and innovative, and a bigger source of growth and employment generation. The government, therefore, needs to develop a well-planned program for the promotion of export-oriented industries. Give them a level playing field by not penalizing through policies, facilitate them, raise their profit margin, etc., to make exports the most attractive activity. If investment in the real estate sector is most attractive and investors can make large profits without much effort, then who will invest in export-oriented industries where they have to work really hard to earn a buck. Therefore, market and policy distortions that are hurting the growth of export-oriented industries must be removed at all costs.
The government has designed the Bill as a package of reform policies to stimulate the economy and as a tool to address the needs of the people. Its critics describe it as a tax break for the rich, which is going to increase income and wealth inequalities and may not alleviate poverty any time sooner. Probably the government believes in the trickle-down effect of growth, which does not take place automatically; supplementary measures would be needed for this to occur.


The writer is a Professor of Economics at the School of Social Sciences and Humanities at NUST, Islamabad.
E-mail: [email protected]


1 Note: The super tax was introduced in the backdrop of military operation Zarb-e-Azb for rehabilitation of temporarily displaced persons (TDPs).

Read 267 times


Share Your Thoughts

Success/Error Message Goes Here
Note: Please login to your account and leave your thoughts on this article.

TOP