LAHORE   -   The Chambers of Commerce & Industry of the country at a convention on “Revitalization of Economy” have expressed reservations on taxation system and called for fixed taxation regime and revival of self-assessment scheme.

LCCI President Almas Hyder presided over the meeting and gave a brainstorming presentation on economic issues, their causes and solution. On the occasion LCCI Senior Vice President Khawaja Shahzad Nasir, Vice President Faheem-ur-Rehman Saigal, President Faisalabad Chamber Syed Zia Alumdar Hussain, President Islamabad Chamber Ahmad Hassan Mughal, President Sahiwal Chamber Ch Rashid Hameed, SVP Kohat Chamber M Shahid, President & Vice President Gujrat Chamber Amer Noman and Muhammad Altaf, Ahsan Sarwar from Sahiwal Chamber, President Sialkot Chamber Khawaja Masud Akhter, President Khanewal Chamber Habib Ur Rehman, Adil Farooq Khan from Khanewal Chamber, President Gujranwala Chamber Asim Anees, President Haripur Chamber Atta Ur Rehman Yousafzai and representative of Vihari Chamber, Mian Muhammad Ashraf, Iftikhar Ali Malik, Bashir A Baksh, Mian Anjum Nisar, Sheikh Muhammad Asif, Shahid Hassan Sheikh, Irfan Iqbal Sheikh. Khawaja Khawar Rasheed and LCCI EC members also expressed their views.

The participants said that Pakistan’s economy is at a critical juncture. The legacy of misaligned economic policies and the decision to enter IMF package recently, have resulted in significant economic challenges including devaluation, hike in policy rate, soaring inflation and shrinking economy in FY 2019. They said that the structural weaknesses like burgeoning fiscal deficit, weak tax administration, loss making state owned enterprises (SOEs) and difficult business environment remain largely unaddressed. The federal budget does not talk about jobs, growth and the vision of a large economy. This scenario has created an environment of uncertainty for businesses and deterred them from working freely. Without urgent policy action, economic and  financial stability could be at risk, and growth prospects will be insufficient. In this context, it is imperative to discuss reasons of uncertainty in the economy and recommend viable policy actions to the government for removing this element of uncertainty and letting businesses work freely.

They said that rupee devaluation, policy rate, inflation, taxation system, elimination of SRO 1125 and refunds to exporters, SOEs, investment and regulatory environment and gap between revenue and expenditure are the most important areas to focus on.

Participants of the convention said that government has to come up with a clear plan about outlook of economy, especially the exchange rate to remove uncertainty among the businesses. They said that the plan should also include projections for next four years about size of economy, per capita income, exports, investments, inflation and policy rate etc. An announcement of exchange rate band in advance for current fiscal year would help in curtailing dollar hoarding and stabilizing the exchange rate market.

They said that government should take steps (through State Bank Interventions) to reduce the interest rate to a single digit. They said that instead of tackling inflation through depressing aggregate demand (by increasing interest rates), best way to reduce inflationary pressures is domestic supply expansion, industrialization and export growth.

They said that all raw materials must attract zero or low custom duties. Government must eliminate Regulatory Duties (RD) and Additional Custom Duty (AD) on raw materials, so that local industry is able to compete with smuggling and mitigate the effect of low tariff FTAs. They said that custom duties (CD) on intermediary products should be reduced so that industry is able to import quality materials, components and machinery from the rest of the world at the same duty rate at which it imports through different FTAs.

They said that measures should be taken to make sure that tax collection from all sectors is commensurate to their contribution in GDP. The agriculture sector which is around 19pc of GDP contributes just 0.6pc to tax collection while services sector which is around 70pc of GDP contributes only 30pc to tax collection. They said that the Sales Tax Rate of 17pc is exorbitantly high and must be reduced.

“Overall, there is a need for overhauling of taxation system with competitive tariff regime that promotes industrialisation, tax holidays for new entrepreneurs, tax exemptions for BMRE, reduction in frequency and  number of taxes and equality in taxation system where all incomes are treated and taxed equally”, they added.

The participants further stated that the decision of the elimination of SRO 1125 should be put in abeyance till an efficient system of refunds is made, tested and implemented.

The government must lay down a clear plan about SOEs as they are eating up over Rs400 billion annually and this huge amount is being paid by the taxpayers.

They said that there is a need to review old regulations with a regulatory guillotine and replace them with smart/prudent regulations for facilitating investors in overcoming persistent business regulatory environment challenges e.g. registering a company, getting industrial electricity connection, getting construction permits, resolving insolvency and registering property etc. The potential sectors for attracting foreign direct investment are sports goods, textiles, IT, surgical, leather products, ceramic and cutlery.

There should be benchmarks for expenditures and revenues. A mechanism has to be devised to measure the effectiveness of specific expenditures and determine that which expenses are unnecessary and can be shifted to private sector. Participants of the convention said that devaluation of around 27percent has taken place since August 2018 and 11percent since May 2019. This massive devaluation has resulted in confusion in private sector as it is not aware of the extent to which government would interfere to stabilize the exchange rate, especially after entering IMF program. In this scenario, future planning is difficult for businesses. They said that if the exchange rate is left on the market, it would have negative repercussions for the economy. They said that if the government does not plan to stabilise exchange rate, then there is a need for investment to gear up exports which is highly unlikely given the current fiscal constraints (8.9percent fiscal deficit). In this scenario, the only option left is to curtail imports.

According to the budget documents, inflation rate in the next financial year is projected to grow which means there would be more devaluation and hike in interest rates.

The hike in interest rates, by next year, would push up borrowing cost to around 18-20percent which would retard investment, capacity generation and hence exports. This scenario will trap economy in a vicious circle.

They said that the Inflation rate has increased exorbitantly in recent times i.e. from 5.8percent in July 2018 to 10.3percent in July 2019, owing majorly to hike in electricity and gas tariff, devaluation and surge in fuel prices.

They said that the taxation system is complicated where even the salaried people need advice to fill out their returns. The number of tax filers is around 2.5 million which is just 4percent of the total employed labour force of 61.71 million, 6.5percent of the non-agriculture employed labour force of 37.95 million and 23percent of the non-agriculture employed Labour force working in formal sector (10.62 Million). They said that the tariff structure is not competitive owing to exorbitant duties on raw materials/industrial inputs. This promotes de-industrialisation and also hampers export competitiveness. As a result, the businesses community struggles to keep their nose above water.