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
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Advance tax on filers has been withdrawn that will surely facilitate them.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).
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