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News / Event Detail
Posted on: Monday, May 16, 2016

Afull day Pre-Budget Seminar on “State of the Economy & Federal Budget 2016-17” was organized on May 3, 2016 at Serena Hotel Islamabad by Centre for Policy Studies, COMSATS Institute of Information Technology, Islamabad. The objective of the seminar was to evaluate the state of the economy and suggest policy recommendations for the federal budget 2016-17 which would be helpful in setting policy direction to improve the performance of the economy.  Around 125 participants from academia, civil society and government attended the seminar.

The chief guest was Mr. HaroonAkhtar Khan, Special Advisor to Prime Minister on Revenue.  Dr. AshfaqHasan Khan,  Dr. Talat Anwar, Dr. Vaqar Ahmad,  Dr. AbidAmanBarki, Mr. SaqibSherani, and Dr. AtharMasood Ahmad, Senator Syed ShibliFaraz, Major General ® Dr. Zahir Shah, Dr. Khalid Riaz, Mr. Khalid Mehmood, Ambassador Syed HasanJaved ,Dr. Javed Ashraf, Mrs. Zahra Fatimi, Mr. Qaisar Ahmad Shaikhwere the speakers, panelists as well as the chairpersons.

Inaugural Session                 

Ambassador FauziaNasreen,Head, Centre for Policy Studies, CIIT presented the welcome address and said that today’sPre-Budget Seminar is second year in a row and focuses on the state of the economy and public debt, investment, fiscal and tax policy, and poverty and social sector challenges.The general assessment of the state ofPakistan economy has been positive.  But serious long term challenges such as security, environment and those related to macroeconomic sectorremain. In social sector we have serious challenges that have an impacton the capacity of the nation. With growing urban population, dwindling exports and slow industrial activities our difficulties are growing.With stunting in children,under nutrition, coupled with inadequate health and education facilities, we are heading towards serious social sector crisisasthe capacity of our manpower is eroding.

 

Unless these challenges are sufficiently addressed,we will not have a robust economy.Human Development progress has been far from satisfactory. Social sector has an enduring impact on security of Pakistan. In past we are not able to meet all MDGs. We must now take a realistic approach to achieving SDGs. The fruit of all these initiative must accrue to the people of Pakistan,and those that have been blessed with resources must show their responsibility by sharing the burden. I hope that development aspects of the Budget will be a step in this delineation.

The chief guest, Mr. HaroonAkhtarKhan, Special Advisor to Prime Minister on Revenuespoke off the major challenges that Pakistan facesincluding the law and order situation in Karachiand major separatist movement in Baluchistan and energy shortages. The chief guest expressed his appreciation to the Centre for Policy Studies, COMSATS Institute of Information Technology for organizing this important event at a time when the government is in the process of preparation of FederalBudget 2016-17. He addedthat when the present government came into power, all the economic indicators were deteriorating and dismally low but the Zarb-e-Azb operation led to revival of economic indicators and now the inflation is low at2.5%during the last 9 months ofthis year, interest rate has declined to 6.5%, the fiscal deficit has been brought down from 8.8% to 4.3%, the country has managed to get some of loans at less than 2% per annum withan overall average interest rate of 3.5% per annum on all loans, the country’s forex reserves which declined to $ 11billion are now at the highest level at $21 billion, debt to GDP  ratio has gone down from 64% to 63.5% and GDP growth whichremained 2-3% during the last few years is around 5 percent.The power load shedding which was12-14 hours has now come down to 4-6 hours. The government is on the path of adding 10,000 MW to meeting energy shortage by March 2018 and will add another 15,000 MW by 2025.  Imported LNG has started to cover natural gas shortfalls in Pakistan. Textile industrywhich was hardly getting gas in the winter is now getting gas supply for 24 hours a day in 7 days a week.

Theinternational credit agencies including Modis and World Bank and IMF have applauded the achievements of the government. An IMF Directorhas recently said that Pakistan does not need another IMF program. These institutions have recognized that Pakistan growth rate is one of the highest in the region and there has beena fiscal consolidation because of 20% growth in the revenue this year.

Pakistan’s retail sector is booming with opening of Mega Malls in major cities.Electricity production was11% more thanthe last year. The net rate of electricity of Rs14 per kwhhas declined to Rs10.50 per kwh because of fuel adjustment allowance.   Our stock market has gone up by 62% and market capitalization gone up by 35% in term of rupee and 27% in term of US dollar—one of the best performing markets in the world. Private sector credit which was negative three yearsago is up at Rs 360 billion and agriculture credit has grown up by 18% reaching to Rs 385 billion. The purchasing managing index by MCB bank increased from 63.25% to 64.54%.Credit Swiss ranked Pakistani banks as one of the best banks in the world. We are now moving from stable a macroeconomic environment platform to a vibrate growth trajectory. All this has been made possible due to the economic vision of Prime MinisterNawaz Sharif and untiring efforts of Finance Minister, Ishaque Dar.

Gwadar port is very important for the country’s growth. CPEC is a reality and a game changer. In CPEC projects, the single largest investment is made by China in any country.  China has trust and faith in the current government that its massive investment will be used transparently by providing foolproof security to the Chinese. As a result, Chinese investment has gone up to 120% in last three months.

BRICS countries that include Brazil,Russia,India, China, and SouthAfrica are in turmoil. Their currency crashed by 170% and inflation rose by 11% in one year. Braziliancurrencydeclined by 70%, Russian by 50%, and Euro by 25%. Taiwan exportshavedeclined by 13% in January, 2016 because of weak demand in China.China’s forexreserves fell from $ 3.2 trillion to $ 4.0 trilliona yearago while exports declined by25% and imports by 18.8%. All thecountries that do trade with China have been affected. But in this hostile environment, Pakistani currency remained stable and inflation remained at low levels.

Highlighting the progress at FBR, the Special Advisor to Prime Minister on Revenuesaid that during the last 10 months our revenue has gone up by 20% in an environment of low inflation. We started a low tax-to-GDP ratio at 9% and will probablyclose at 12% this year which is a phenomenal growth. Though FBR hascorruption and efficiency problems, but mind set of people isnot to pay the taxes. We have found great discrepancies in our records as people under report their transactions. For example, when the turnover is Rs 100 billion,our record showsRs 1.0 billion. As a result, billions of rupees are evaded in taxes.  Wehave introduced voluntary tax scheme because people do not want to pay taxes. It was a scheme to bring non-documented working capital into the tax net.Only 9000 filed the returnas one element of deterrence was missing. We have avoided deterrence but unfortunately we may have to do it.

When I came to FBR 10 months ago, there is a lot of pilferage. China saysits imports were $13 billionwhereas record says Rs9 billion. In Afghan transit trade we have serious pilferage. We are trying to control smuggling with help of ADB. Smuggling does not only affectrevenue but also the industry. We now have a great FC Commander at the border andas a result smuggling has come down by 80%. In the last eight years, we were not able to start audit process.We are in the process of monitoring system with help of WB as there is a lot of pilferage in various industries.We are trying to develop capacity to build a forensic audit ability and documentation.Not only all this will bring revenue but also reduce pilferage.

Another area where revenue is lost isthe sales tax. We have system of cross matches invoices. We are also developing electronic monitoring system with help of the WB. There is a Benami transaction bill in the parliament that will soon become an Act and as a result, therewould be no place in Pakistan to park dirty money. He said that the government would encourage investment in the country to boost growth and added that the government has got the record of all those who are paying very nominal or no tax but are living a luxurious life and are frequent travellers abroad. 

He concluded that we have a policy of merit in FBR. Nobody is anybody’s favorite and we enforcemerit in the institution. I really encourage seminar like thisas we need to interact with each otherfor budget-making. The budget isgoing to be pro-growth pro industry and pro-poor. But until and unless, investment is increased, GDP and industrial growth is accelerated,jobs will not be created. 90% of jobsare created by the private sector. The forthcoming budget will take care of people. Eachone of us has to work hard. People should be given a free hand. However, deterrence is a necessary part of the tax system but it must be done judiciously.

Session II:  State of the Economy and Public Debt

Dr. Ashfaq H. Khan, Dean, NUST Business School, Islamabad spoke about relation of IMF of Pakistan,painted a different picture of the economy and said that stabilization occurred by reducing expenditure.He said, we have a nervous private sector, declining Investment –both domestic and foreign, loweconomic growth (averaged 3.0 percent per annum), rising unemployment and poverty, growing income inequality, large fiscal deficit (averaging 7.2 percent of GDP), declining exports, a looming debt repayment crisis with country heading towards external debt default, and severe power sector crisis.

Dr. Khan strongly contested the government's claim of bringing down fiscal deficit from 8.8 percent to 4.4 percent and said the figure was achieved by: (i) holding back refund and commercial entities were made to pay income tax in advance; (ii) by not releasing resources to the provinces; (iii) giving pervasive incentives to the provinces against spending which led to deterioration in social indicators.  Moreover, he said, those items which were historically treated as surcharges have been renamed as non-tax revenue, circular debt has not been shown in the budget and if still the desired fiscal deficit target was not achieved the head of fiscal discrepancy was used to achieve the desired figure. 

We have weaker key economic institutions than before (MoFin, the SBP, Planning Commission, and various regulatory bodies like OGRA, NEPRA etc).The government has changed the data. Therefore, it is difficult to draw conclusions about the state of the economy. Only an accountant can make such changes in the data, not an economist. Investment is declining. The projects should have positive development if there are moreinvestors.We have parliamentary participation on CPECwhich has a contentious stance. China and Pakistan projects are happening steadily. China-Pakistan corridor is very important for us but we have to work together as a synergy to improve.

Dr. AshfaqueKhan also gave a presentation on public debt and said that Pakistan’s external and public debts are growing at a threatening pace for the last eight years (2008-15) owing to fiscal carelessness and substantial decline in non-debt creating inflows as well as a decline in exports. The speed with which the governmenthas been borrowing causing concerns and posing a threat to the national security.   Pakistan’s debt and liabilities will increase from $ 65.2 billion to $ 95 billion in 2018-19 whereas debt servicing will go up from $ 6.6 billion to $ 9.1 billion which would be unsustainable and the future government would be in a difficult position to manage it.

Dr. Khan recommended that macroeconomic policies should not focus narrowly on reducing budget deficit, debt stabilization and reducing inflation. Polices should be supportive of growth and employment generation. Such policies do not in any way advocate lax fiscal policy or encourage fiscal indiscipline.Rather they give greater emphasis to domestic resource mobilization and quality of expenditure. Domestic resource mobilization can be done through tax administration reform, broadening tax bases, improving efficiency of tax administration through training and retraining, and tightening regulation on tax heavens.

In the end, Dr. Javed Ashraf, Vice Chancellor, Quaid-e-AzamUniversity, the chair of the session thanked the speaker as well as the participants and said the government has delivered in some areas. Inflation has indeed come down, no question about rising stock market and forex reserves and coming down of terrorist activities.As a result, the economy has got some boost. I have observed in USA that when economy is not doing well people vote against the government. We have heard two different versions of the economy.  If economy is doing well, people will vote in favor of the government.It is the state of the economy that determines what kind of government gets electedin future.

 

Session III: Panel Discussion on “China Pakistan Economic Corridor” (CPEC)

In this panel discussion on CPEC,Mr. Khalid Mehmood, Secretary, Parliamentary Committee on CPEC said that it is a game changer and will bring 15% FDI in the country which will impactour economy and the region. More than $34 billion will go to the energy sector. We have designed an industrial zone in Gwadarin 9 KM area.We need to careful as some regional and international powers do not want this projectgetsdeveloped.

The chair of the session, Senator Syed ShibliFaraz, Member, Parliamentary Committee on CPEC expressed his political concerns over the route of the CPEC. We do not have democratic mind set to develop this project by making it inclusive. Planning Commission has a nonflexible attitude on addressing some issues. The sprit should be to develop smaller provinces to address the sense of deprivation that can affect the federation. KP and Baluchistan has not been given the due importance in the project. Western rout of the corridor should have been completed by 2016. Government has failed to develop political consensus on Western route. We have reservations on joint parliamentary committee. Where there is no transparency doubts are created.  He added that we do not want to dispute the project but we have to show our concerns in order to save federation. He said priority should be given to Western route to address the backwardness and underdevelopment in smaller provinces which is essential to reduce terrorism and extremism but unfortunately the current government has not allocated enough funds to develop this route. As a result, Western route is unlikely to be developed in near future. We want this project to be inclusive of GB, KP and Baluchistan. We are all patriotic and want to create a consensus. He supported the Saleem Safi’s (a journalist) suggestion for establishing an authority for CPEC with the participations and oversights of all provinces. The chair left the session early because of an urgent commitment, the rest of the session was chaired by Dr. Talat Anwar.

Maj Gen ® Dr. Zahir Shah, Project Director, CPEC, Planning Commission said that CPEC is future of Pakistan as it is going to be a driving force to boost the economy. We have listed down $ 46 billion projectsof which $ 34 billion would go to energy whilethe rest will be allocated to infrastructure. Oncethe industrial part is established, it will boost the economy.Essentially CPEC is a project of regional connectivity and it is going to be a win-win project for both China and Pakistan. We are going to address the concerns of all provinces. We want to generate synergy and we have parliamentary committee to develop consensus. CPEC is proceeding steadily and by mid of the next year, many projects within CPEC will start working.

The former Ambassador to China,Syed Hassan Javedsaid that we have been discussing CPEC for the past 20 years but it has recently become known to the public. It is a winning paradigm.  China plan to connect 65 countries in the initial stage but later it will connect 88 countries. Ninety percent of the investment in CPEC will be made by China. China is 50 years ahead of Pakistan.China and Pakistan will hopefully make CPEC a success. We have to do reforms to benefit from CPEC. We need to create an environment for research focusing CPECin universities so that awareness is further created in the new generation. There areimplications on CPEC routes. By 2050, I see Pakistan rising as a prominent country in the world.

Dr. Khalid RiazDean, Faculty of Business Administration, CIIT spoke about two aspects of CPEC—the regional integration trade and energy security. He said that when looking at the trade imbalance between China and Pakistan, we need to realize the impact of it. There are a several product lines where Pakistan has comparative advantage and China has demonstrated comparative disadvantage. These products need to assume higher priority in trade promotion.There is a need to integrate into the Chinese supply chain and without this the required degree of regional integration will not take place. CPEC will just remain a bridge across Pakistan and the country will not fully benefit.We also need to seriously consider trade with India. Pakistan is facing severe energy crisis. CPEC is not about hardware alone but it is a software also. The software is holding us back from getting what we can. The expensive imported energy can be injurious to our macroeconomic health.The high share of coal based power projects relative to hydel is a threat for environment.Hydel is more cost effective and has built in mitigation as well as adaptation potential. We need to be careful about environmental concern asa few years down the road, the intended commitment would become binding and we would have trouble in meeting our mitigation obligation.

Session IV: Poverty and Social Sector Challenges

In this session, Dr. Talat Anwaremphasized that measuring povertyis essential to monitor and this enable us to examineimpact of policies on poverty. For thispurpose an unbiased poverty measurement is essential which has been lacking by the successive governments. This is reflected by the official poverty estimates that show a rapid decline in poverty even when country’s income growth in terms of GDP growth is declining. It is widely established that poverty is inversely correlated with economic growth rate, if we want to reduce poverty we need to have a high economic growth rate. He said that new official poverty line of Rs 3030 per capita per monthby the current government ignores the consumption patterns of the poorest 10% households in the country and poverty decline is not consistent with rising malnutrition and declining social and economic indicators.Government and the World Bank did not address the fundamental issue of underestimation of inflation which was raised by the experts during the technical group meeting in the Planning Commission.Ignoring underestimation of inflation does not explain the poverty decline, leading to an inconsistent relationship between poverty and economic growth and drawing misleading conclusions about evaluation of policies. This is evident from the new official poverty estimates that suggest a decline in poverty from 51% in 2004-05 to 29% in 2013-14. However, this decline is not consistent with declining economic activities and growth, rising food and energy prices and unemployment in the country. Correcting downward inflationary bias, poverty will increase in 2007-08 and give a higher level of poverty than the official estimates in 2013-14. The rise in poverty could be explained by increases in food and energy prices coupled with a decline in economic growth which is not captured by the old and new official CPI adjusted poverty linesof the government and the World Bank. He recommended that if we have to reduce poverty, we need to achieve 6% economic growth rate which is not happening for the past 8 years in the country. In addition, we need to strengthen the social safety nets and take policy measures in the forthcoming budget to protect the poor and the vulnerable groups.

Dr. Vaqar Ahmed highlightedthe three key interventions required for the social sector. He said that we need to focus on how do we govern the social sector; how canwe improve the social sector framework; and how can we establish the job link in social sector programs. He suggested the chair to push the New Public Finance Act in the parliament which is pending for the last 3 years.  Medium Budgetary Framework is also pending for the last 8 years. Government should also pursue its commitment to achieve SDGs by taking policy measures and initiating programs.

In the aftermath of 18thamendment, there are duplications between federal and provincial governments for monitoring of social sector framework. The duplication needs to be avoided to protect the taxpayers’ money.Social insurance program does only disproportionately benefit the non-poor but also gender insensitive.Greater amount of money needs to be implemented in skilled development in particular for the women. Social sector development should translate to job creation with increased women participation. In Malaysia, increasing women participation led to doubling of GDP. We need to ensure that women inmarginalized groups must benefit from social sector safety nets including BISP.Women business program can be increased through targeted interventions.

Mrs. Zahra Fatemi, MNA PML-Nwhile giving comments as chair said that we are trying to encourage women to actually start a business. The government has created youth loan programs for our new generation. Prime Ministerwants to create a vibrant environment for the youth. Talking on the concerns raised by smaller provinces on CPEC routes, she said that PM wants to develop the whole Pakistan not just one province. Government’s health program is for the under privileged people. We need to do more legislative work to implement social sector projects. To reduce poverty, we need to control population which is rising rapidly.

Session V: Energy Sector Issues and Challenges

In the post-lunch session, Mr. Akhtar Ali, Member (Energy), Planning Commission, gave an overview of the issues and challenges in the Energy Sector. He highlighted that electricity transmission & distribution losses in many countries in the Europe were 2% and 4% respectively. In comparison, electricity transmission losses in Pakistan were 3% percent until 2011 which declined to less than 1% in 2014. But electricity distribution losses in K-Eletric and PEPO were respectively 35% and 20% in 2010 which laterdecreased to 28% and 18% respectively in 2014.On the other hand, Natural Gas (UFG) Losses in Europe were less than 1% in many European countries whereas UFG in Pakistan grew from 8% in 2002 to 11% in 2014.  The UFG losses can be reduced byinstallingsmart meters network for large consumers and gas accounting and reducingleakage loss bydevelop CDM projects.

He said that the issues related to financing of projects include, weak financial position of the government, underdeveloped and poor private sector, excessive relending rates in public sector, generally higher interest rates except the recent comedown, underdeveloped banking sector and poor liquidity, longer construction periods, inadequate financial planning—open financial start-up, sovereign guarantees and provinces, and foreign exchange and trade imbalances.Institutional issues include, inefficient public sector, generalist vs specialist controversy, underdeveloped and greedy private sector, poor creditworthiness: unreliable balance sheet, limited equity, black money, upcoming but not fully mature regulating agencies, and fragmentation between NEPRA and OGRA.

Highlighting reform opportunities, he said that there is a need for integration of the sector by a unified ministry of energy, unified regulator through merger of NEPRA and OGRA and bringing competitionthrough tariff based bidding along with privatization and streamlining of provincial 18th amendment issues. There is great potential for reform opportunities in Oil and Gas sector in particular in the Gas Market and Pricing through diversion in sources and use, reducing UFG losses, restructuring and privatization (Gas, DISCOs, andPower sector), promoting local E&P vs imported LNG or Pipeline Gas and resolving provincial issues.

In the end,Dr. Javed Ashraf, Vice Chancellor, Quaid-e-Azam University who chaired the sessionexpressed his thanks to the speaker for providing a detailed overview of the challenges for the Energy sector.

 

Session VI:     Investment, Fiscal Policy and Tax Policy Challenges

In this session, Dr. AbidA. Burki, Professor of Economics, Lahore University of Management Sciences(LUMS) spoke off on ‘Improving Business and Investment Climate. He said that the country has the highest corporate tax rate in the region at 33% whereas the sales tax rate in Pakistan is also at the highest in the region. The corporate tax burden can be reduced by reducing statutory corporate tax rates, labor contributions, other taxes, or a combination of these.

Pakistan needs to attract more internal and external investors, and tax incentives can play a vital role in retaining existing investors and attracting new ones. We needevidence for informed policy making. To get the evidence, LUMS conducted a study. The simulation results indicate that on average, FDI inflows would increase by almost 9% for every percentage point decrease in corporate effective tax rates.On average, FDI inflows would increase by almost 5.5% for every percentage point increase in trade openness.On average, FDI inflows would increase by almost 2.1% for every 0.01 unit increase in political stability index.

Evaluating the past policies and foregone FDI, Dr. Burki said if the effective corporate tax rates had been 30% over the 2005-2014 period, FDI inflows to Pakistan would have been higher by almost 42% per year. The forgone FDI Inflows is $7.6 billion during this period. If trade openness had been 40% over the 2005-2014 period, FDI inflows would have been higher by 18% per year. The forgone FDI Inflows is $4.5 billion during this period.If political stability had remained at its 2005 level of -1.75, FDI inflows would have been higher by 82% per year. The forgone FDI Inflows is $19 billion in this case.

While giving recommendations, he said thatPakistan’s tax system is 25 years old and needs a complete overhaul. In this age of globalization, firms have become brilliant at exploiting the tax rates.A global treaty is urgently neededto address issues of tax heavens in the wake of Panama Leaks.At least, tax rates should be revised downwards to 25%. Currently, there are negative incentives to small firms and consequently they never grow and remain small. Disincentives to small firms should be eliminated.Reducing tax rates to 25% will not only introduce tax competition within the region but also attract foreign firms since they take advantage of lower tax in other countries.

Mr. SakibSherani, former Economic Advisor, Ministry of Finance and now a Freelance Economist gave a briefing on Pakistan’s Tax Crisis. He said that Pakistan is facing an existential crisis.Revenue as % of GDP has been around 15% which is very low compared with India at 19% and Turkey at 35%. Pakistan’s rank in Human Development Index was very low at 147. Spending on education as % of GDP has not been above 2.7% whereas health spending as % of GDP remained at 0.7%. Five million children are out of school. Persons per hospital bed were 1600. The challenge is that only 0.24% of Pakistanis or 534,000 citizens pay income tax. A few professionals pay taxes. There are 14,000 doctors out of 650,000 registered and 5,000 lawyers out of 450,000 practicing who pay taxes.

Tax system is highly inequitable. Agriculture sector which contributes to 21% to GDP collects only 1% taxes whereas Industry which contributes to 18% to GDP collects 73% taxes. As a result, the tax system is unsustainable because it under-funds the state, chokes development, mortgage the future, unfair and inequitable and stops growth and investment. He added that currently public debt as % GDP is 65% if tax to GDP ratio is not increased it will potentially increase to 88%.

The low tax to GDP ratio impacts economic growth adversely through different ways. Uneven tax burden is compelling formal sector firms to re-locate, de-industrialize or informalize and informal firms are unlikely to achieve economies of scale or attract FDI. The tax burden for Pakistani firms is high, while ease of paying taxes is low. The non-payment of refunds by the government affects availability and pricing of bank credit.Any reform effort will have to work along three axes: tax policy; tax administration; and tax culture.  Eighty percentof the general public will feel motivated to pay taxes if all parliamentarians were paying taxes, 86% of informed respondents feel that their tax money is wasted by the Government and 72% believe that FBR is corrupt.   

Strategic Interventions are required by building moral authority of political system to tax citizens, creating equity and fairness in tax system, bringing transparency and accountability in public sector expenditure, improving transparency and accountability in policy setting and tax administration. On tax policy, we need to establish principle: all incomes above threshold subject to tax improved visibility of non-discriminatory taxation with base-widening, emphasis on direct taxation, and close legal loopholes to ‘whiten’ money.On tax administration, we need to need to insulate FBR from political system, institute organizational development program, professionalize tax cadre, strengthen human resource, follow international standards on IT platform, need composite risk-based tax audit, and need to change incentive. Finally, on tax culture, we need to ascertain moral authority of political system which will establish trust in Tax Administration.

Dr. AtherMaqsood, Professor and Head of Department of Economics and School of Social Sciences NUST, Islamabad spoke on Tax Policy Challenges in Pakistan. He said that the ‘Independent Economists’ – do not trust the GOP position on the economy. It will be eighth consecutive year since 2007-08 that the revenue target will be missed by the government. One of the critical reasons is that the FBR has reversed the reform process. Today the tax policy is ad-hoc and growth retarding. Highlighting the specific challenges he said that the overall tax base is too narrow. About 75% of entire collection comes from 15 commodities sectors.Without POL taxes the FBR tax collection reduces to 70% of its current level.Nearly 85% of FBR collection is regressive in nature.Most of the taxes are being collected through withholding agents.Corporate compliance is low at 45%.A substantial proportion (above 50%) of corporate return filers declare either NIL income or the show business losses; and those who declared income, nearly one quarter of them declare income that is marginally higher than the exemption threshold. A large number don’t file returns. Had there been proper monitoring and enforcement, the compliance level would not have declined.  The process of tariff reduction and rationalization has been compromised. There is no link between the latest Trade Strategy document and the Tariff Design as the relevant organizations are working in silos.Regulatory duty and additional taxation on so-called luxury items has become the order of the day.GST continues to be levied in the Excise Tax mode. Very little progress has been made to convert it into VAT mode.

Dr. Ather said that the way forward is to prepare a long-term tax policy strategy in consultation with important stakeholders excluding the tax accountants to avoid clash of interests. Taxation system should be part of the Economic system and not alien to it. A comprehensive Macroeconomic Framework is required as part of the MTBF document and taxes should be collected according to the economic strength.Difficult decisions are needed to tax the hard areas.Difficult decisions are also needed to convert FBR into an efficient organization. Redundant and inefficient workforce (deadwood) has to be separated.

The Chairperson of the session, Mr. Qaiser Ahmad Shaikh, Chairman, National Assembly Standing Committee on Finance, Revenue, Economic Affairs, Statistics and Privatization thanked the speakers and participants and said that the current government has achieved many successes, brought improvement in macroeconomic indicators and it will take important measures in the next budget for economic development in the country.

 

Concluding Remarks of the Seminar

In the end, Dr. Talat Anwar, Advisor, Centre for Policy Studies, CIIT summarized the long day discussions and gave concluding remarks. He thanked the chief guest, Mr. HaroonAkhtar Khan,Special Advisor to Prime Minister on Revenue for his participation and underlining the relevant challenges which have been affecting the economy adversely. No doubt that the Zarb-e-Azb operation led to revival of some economic indicators. The forthcoming Budget 2016-17 needs to be pro-poor and pro-growth. The root of all our economic problems is the low tax-to-GDP ratio and Mr. HaroonAkhtar has shown his full commitment to improve it. If we focus to increase tax-to-GDP ratio to a respectable levelin the forthcoming budget we would not need to borrow from IMF as low tax-to-GDP ratio leads to high fiscal and current account deficits and results in undertaking loans from the IMF.

Dr. Anwar said that views on the manipulation of data on the economy and strong contests on the government's claim of improving various economic indicators are important since accuracy of data plays a key role in bringing the confidence of the investors. The manipulation of data by changing the definition of revenue, expenditure, and the fiscal deficit may mislead the planners to borrow heavily and results in high debt accumulation and financial crisis in future.

On China-Pakistan Economic Corridor (CPEC), all panelists raised very important issues and candidly expressed their views. No doubt that CPEC is a winning paradigm and will lead Pakistan as a prominent country in the world. I agree with Dr. Khalid Riaz that unless Pakistan integrates into the Chinese supply chain, the regional integration will not take place and the country will not fully benefit from CPEC. Senator Syed ShibliFaraz, Member Parliamentary Committee concerns over ignoring the CPEC Western route are important since it has serious implications for underdevelopment, backwardness and sense of deprivation. These are the main causes of extremism and militancy in smaller provinces like KP and Baluchistan. The differences on CPEC route should be addressed by taking on board all the political parties as well as the provincial authorities.

In poverty and social sector session, it is shown as to why an unbiased poverty measurement is essential to monitor impact of government policies on poverty.The new official poverty line ignores the consumption patterns of the poorest 10% households and poverty decline is not consistent with rising malnutrition and declining economic growth that need to be addressed by the government and the World Bank while devising policies and programs in the country. We need to correct our priorities from the expensive projects and focus in the forthcoming budget on the development of those sectors that benefit the poor and the low income groups.It has beenemphasized on developing social sector projects which are important for more jobs creation in particular for women for poverty reduction and equal development.

An important session was on energy.The recommendations by a senior official from the Planning Commission for integration of the sector by a unified ministry of energy, and a unified regulator needs to be considered seriously along with other proposals.

The simulation results of LUMS study that shows that if the effective corporate tax rates had been 30% over the 2005-2014 period, FDI inflows to Pakistan would have been much higher and the forgone FDI Inflows would be $7.6 billion.Thus, government should consider revising tax rates downwards to 25%.

Pakistan’s tax crisis has been highlighted. No doubt that outcomes in education and health sectors are dismal as they have never been the priority of successive governments in past.  Tax system is highly inequitable as Agriculture sector that contributes to 21% to GDP collects only 1% taxes. The recommended strategic interventions are important for building moral authority of political system to tax citizens, and promote tax culture.

It has been emphasized that the tax policy is ad hoc, growth retarding, and two third of entire collection comes from 15 commodities sectors. It is a serious concern that Pakistan still collects 85% of taxes through indirect taxes which are regressive in nature and impact of these taxes falls disproportionately on the poor and the low income households.  The government should prepare a long-term tax policy strategy along with comprehensive Macroeconomic Framework before the announcement of budget.

Finally, Dr. Talat Anwar concluded that the seminar has provided an opportunity to academia, professionals, and civil society to give their recommendations for improving the current state of economy and priorities for the forthcoming budget.  The CPS is going to prepare a report on the proceedings of the seminar that it aims to send to the concerned authorities for consideration before the announcement of Federal Budget, 2016-17.  Dr. Anwar expressed his gratitude to all speakers, panelists,chairpersons and participants including students and faculty for attending this long day seminar and declared the seminar closed. In the end, Ambassador FauziaNasreen, Head, Centre for Policy Studies, CIIT gave the vote of thanks to the participants.


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Media Coverage Links
  • Salaried persons could now come under the tax hammer (Urdu News Daily Jang)
  • Salaried persons could now come under the tax hammer (The Expres Tribune)
  • Zarb-e-Azb helped revive economy: Haroon (AAj TV)
  • Zarb-e-Azb helped revive economy: Haroon (Business Recorder)
  • Pre Budget Seminar
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