Recommendations for Promoting Economic Growth in Pakistan

Pakistan’s economy has continued to grow steadily with an upward trajectory for most of the economic indicators. Major impetus was witnessed due to improved performance of services and the agriculture sector, with a moderate level of recovery of the industrial sector. The business and private sector side also got a boost as a result of low interest rate environment. Average inflation also remained under check and well-below the set target for FY2017-18 and the Tax Revenues of the FBR also saw a slight increase.

However, parallel to the modest performance in the agriculture, industrial and services sector, the macroeconomic imbalances have been widening, posing a risk to the near-term economic outlook. In order to cope with the external as well as domestic imbalances, it is pertinent for the Federal Government to take several short-term measures coupled with implementation of sound medium-term reforms.

Proposals for promoting Economic Growth

• Several measures are required to sustain farming community and revive the Agriculture Sector:
a. Easy access to credit for farmers must be ensured to revitalize agriculture sector. The government should encourage specialized and commercial banks for increase on lending to small-farmers, in return, the banks should be entitled to tax credit of the increased lending by 2 percentage points.
b. Cheap loans for agriculture sector, in particular for small farmers, are necessary to offset the input costs and timely provision of seeds and fertilizers. State Bank regulations regarding lending should be investment
friendly.
c. Immediate actions are required to address limited water availability combined with low user charges and limited water storage that is leading to significant water stress. Priority has to be given to the Water sector. It is recommended that 25% of the Federal PSDP should be focused towards uplifting the sector.
d. The Gas Infrastructure Development Cess (GIDC) on Gas Feedstock into the production of fertilizer needs to be reduced. GIDC, which has been charged at a high rate of Rs. 300 per MMBTU on Feed Gas is recommended to be reduced to Rs. 100 per MMBTU.
• Despite breakthrough achievements, Pakistan is still behind several developing countries in e-commerce. The IT firms in Pakistan lose a significant amount of their revenues due to the unavailability of certain online transaction facilities. The Government should take immediate steps to remove the longstanding frictions, which are obstructing this sector to reach its full potential. It is also recommended to withdraw the presumptive Income Tax on the export of services.
• Housing industry feeds into more than 30 local manufacturing sectors and can provide significant boost to growth and jobs. The following actions are proposed: –
a. Federal Excise Duty on Cement needs to be abolished to enhance cement consumption at reduced price and enable the sector to grow.
b. Tax incentives to low cost housing development projects should be provided.
c. Government should support lowering the capital weightage against bank loans to the mid-lower income housing programs.
d. Government should support establishing unified collateral register for all
immovable assets for getting credit.
• In Pakistan, the share of private finance in infrastructure development is significantly less than the global average. The government should reform the legal framework to encourage and promote Innovative Financing and Public- Private Partnership arrangements to draw in more private investment in critical infrastructure projects. The Government should also create special credit lines through State Bank of Pakistan’s Long-Term Financing Facility (LTFF) and support 10-year tax holidays, to give public private partnerships a boost.
• Incentivized exports through tax rebate schemes should be introduced. Tax rebates should be given in cash to the exporter, at the time of the export receipts, through commercial banks, which the State Bank may reimburse later. (Policy currently followed by Bangladesh).
• Exports of Pakistan should also be analysed in the context of the GSP Plus , status and corrective measures must be taken to improve the market of Pakistani goods in the European Union (EU). Access to EU additional export incentive of 5% is recommended to also be extended to China and emerging markets.
• The textile sector specifically requires focus as the exports for textile have been declining persistently. The textile sector should enjoy a tax-free regime on exports, including relief from para tariffs. Government should also ensure availability of raw material at competitive prices. Moreover, the regulatory burden the sector faces in annual renewal of over permits, licenses and NOCs should be rationalized.
• Cash Margin requirements on Imports have only been extended to luxury items, which should now be more broad-based and extend at the rate of 10-30 percent. Petroleum products, fertilizer, basic food imports and medicines are proposed to be given margin exemptions.
• Ease of Doing Business Reforms Agenda should get a big push in the coming year especially considering the fall back on the ranking in 2018. Punjab is working rigorously to improve its performance against the Doing Business; indicators that fall in provincial domain (enforcing contracts, registering property, starting business, and dealing with construction permits). The Federal Government must work towards improving its rankings against the six indicators that fall under its domain i.e. Paying Taxes, Getting Credit, Trading across Borders, Resolving Insolvency, protecting minority investors and starting a Business.

Proposals for Budgetary & Taxation Reforms to generate Additional Revenues

• The existing rate of Sales Tax at 17% is one of the highest in the region with an average of around 12% in Asia (15% in India and Bangladesh, 10% in Indonesia and just 6% in Malaysia). Sales Tax should be used to broaden the tax base and not as a replacement of direct taxation. It is recommended to bring down the rate to 15%. Under the 3rd schedule of Sales Tax Act, GST has been charged on retail price rather than the ex-factory price. There should also be uniformity and certainty of an affordable GST on services rate.
• All provinces currently have different rates of sales tax on services. There is a strong need for harmonization between provinces.
• After eighteenth constitutional amendment, capital gains tax has effectively fallen in the provincial domain. It is strongly recommended that the capital gains tax should be made a provincial subject in its entirety to avoid any ambiguity and also an attempt, to harmonize the DC rates with the rates set by FBR should be made.
• The initial depreciation allowance in Income Tax on new investments must be raised from 25 % to 50%.
• The tax credit available in Income Tax law on Balancing, Modernization and Replacement (BMR) and energy efficient machinery may be doubled. This will not only encourage investments in modernized and energy efficient machinery but will also aid in raising the potential of investments in energy, textile and agriculture sector.
• To encourage domestic production and consumption, the Government should (i) increase Specific tax on import of palm oil by 25%, (ii) increase custom duty on import of pulses, (iii) adopt a strict regime for cotton import, levy the minimum import duty of 3% on imported cotton.
• It is strongly recommended that the Federal Government should withdraw the advance income tax on fee payable to the educational institutions. Education is a provincial subject and the Federal Government should not encroach upon this provincial tax base. Moreover, education is principally a social service and should not be subject to taxation.
• The taxation framework needs to be revised in favour of manufacturing industry in particular. Government may choose to introduce tax benefit packages and concessions to encourage the domestic investors to establish or expand their businesses within Pakistan. Tax incentives should be provided for investment units, which bring in massive capital investment, are energy efficient, environment-friendly, engaged in CSR activities and operate at maximum capacity.
Recommendations have been prepared in consultation with the leading economists and industrialists including:
1. Dr. Hafiz A Pasha
2. Dr. Nadeem ul Hague
3. Dr. Ali Cheema
4. Dr. Vaqar Ahmed
5. and eminent members of Public Private Dialogue Council