January 13, 2003	Monday	Ziqa'ad 9, 1423

High financial cost matched by equally high utility tariff plus the crippling 15 to 20 per cent sales tax on business have brought Pakistan’s industry under severe strain.

Smart and enterprising businessmen—and they are many in Karachi, Lahore, Faisalabad, Gujranwala, Sialkot, Gujrat and in many areas of NWFP—prefer to stay out of documentation, steal electricity, evade taxes but share the refund booty of bogus rebate claims with their business partners in the documented sector.

“This is the short story of under-reporting of large scale manufacturing (LSM) in Pakistan” a senior official who monitors a big segment of manufacturing sector remarked when asked how he would explain the State Bank of Pakistan’s observation in its recent report that LSM growth at 2.2 per cent is “puzzling and inconsistent” with the behaviour of other aligned indicators.

The State Bank of Pakistan has reported with “strong reservations” the 2.2 per cent growth rate of large scale manufacturing (LSM) sector during the first quarter of the current fiscal year in its recently released report. It finds LSM growth “puzzling and inconsistent” with the behaviour of other aligned indicators such as corporate earning growth, manufactured exports, domestic sales tax collection and imports of machinery and raw materials.

“Thus, it is probable that the LSM growth depicted by the official statistics understates the true improvement,” the SBP report observed.

Particularly surprising for the authors of the SBP report is the stated performance of textiles in terms of 3.2 per cent growth in production during July-September 2002 period when export of textile products went up by over 16 per cent.

“As much as 80 per cent of Pakistan’ s cloth weaving is in informal sector” the official said that all these loom operators thrive on electricity pilferage and tax evasion.

“There are about 10,000 looms in the organised weaving mills sector of which about 4,500 are said to be in production. There are about 17,500 shuttleless weaving units of which 16,500 are said to be in working conditions” the officials said.

Compare this with largely undocumented power loom sector with more than 225,000 looms. Of these 190,000 looms are said to be working.

A rough estimate shows that organised mills sector manufacture 575 million square meters of cloth. As against this, the unorganised and non documented sector weaves 4,300 million square meters a year. More than 600 units in the undocumented sector do finishing and dyeing as against 106 units in the organised mills sector. As much as 4,600 million square meters of cloth is finished and dyed in undocumented sector.

There are about 400 cottage level units of terry towels equipped with more than 7,600 looms. Their total production is estimated at around 55 million kilograms. Then there are about 4,500 to 5,000 garment units operating in urban and rural areas producing anywhere upto 5.50 million small and big pieces.

The operators of these cottage level units showed their strength when sales tax act was promulgated in 1990 and one government after the other made futile attempts to bring them in tax net. Virtually after every budget announcement in June these operators observed strikes and effectively pressurised the government of the day to reconcile with fixed sales tax concept.

A tax survey carried out by the military government in the year 2,000 was resisted with street power and had to be abandoned half way. Now that the government had no option but to expand the sales tax net under IMF and World Bank pressure, the businessmen have found new ways of book keeping and account maintenance to successfully circumvent it.

This new science of book keeping and accounting is being practised with religious zeal in the informal sector. It helps the small businessmen to evade taxes, get electricity, gas and water supply at no cost or at much lower price than what it should have actually cost. It also provides a framework of relationship with business firms that are in the documented area. This relationship is based on mutual benefit obtained from rebate claims. The spinners represent the documented sector and are the supplier of yarn to these small units. How these transactions are manipulated and who gets how much is something one can learn only by getting personally involved in such a business.

Shaukat Aziz, Prime Minister’s Advisor on Finance disclosed revenue collection figures of more than Rs 200 billion during last six months (July to December 2002) at a meeting of Karachi Chamber of Commerce and Industry. He claimed that an impressive increase in sales tax and import duty reflects revival of economic activities in the country.

But the State Bank’ s quarterly report has reported that services sector has become the single largest source of sales tax in first quarter which obviously would have been maintained in the second quarter also. Also gross collections of sales tax from utilities also increased. All this increase collection has come from the hostage consumers of the KESC and Wapda who pay their bills regularly and compensate for more than 35 per cent line losses.

Electricity pilferage, tax evasion and reliance on local saving committees for financing enable the informal sector textile units to offer bed linen at as low price as 4.50 dollars a kilogram. In the year 2001 about 34 per cent Pakistan’s exports to European Union under quota was shipped at below 4.50 dollar per kilogram price. The average national price was 5.30 dollars a kilogram.

The EU took note of this low price and bad quality of products as early as March 2002. Committees were formed to regulate lowest export price and set a quality standard. None worked and finally in November 2002 the EU decided to initiate anti-dumping measures against Pakistan. This decision was conveyed on December 18, a day before the Christmas holidays. And at present the entire export trade is threatened.

Vegetable ghee industry is also gasping for breath under the burden of 15 per cent GST on supply of cooking oil and 20 per cent non-refundable sales tax on final product. The production of gas has come down by over 10 per cent and informal and undocumented sector is gradually taking over market share.

Reports emerging from Islamabad suggest that the Jamali government is having a close look at the implication of taxation and utility tariffs on industry. Multinational corporations were asked to give their working on comparative production cost of various items being produced in their factories in Pakistan and in other countries.

A federal secretary speaking from Islamabad by telephone confided that high utility cost coupled with equally high financial cost plus the exorbitant rate of sales tax are found to be villain factors in growth of industry. Of course outdated technology, small scale production, bad management are also the factors that are affecting industry but utility tariff, high financial cost and crippling sales tax remain the top villain.