The current business environment is marked by improved corporate profits and savings, much higher rates of industrial capacity utilization and rising capital spending on strengthening of existing businesses. It is the natural process of industrial consolidation on the verge of expansion.

The upsurge in demand for fiscal stimulus, supported by economic muscle acquired by industry on 15 per cent growth in output, may turn out to be a harbinger of a new high tide of investment.

With business confidence renewed, the time has come to embark on an investment-led industrial growth supported by selected dozes of fiscal stimulus and a resource distribution policy that makes domestic market prosperous. These are the first requirement of a sustained economic growth over the long-term. The taxation policy needs to be adjusted accordingly.

As industrial development is dependent on agriculture for its raw materials and markets, the future of industrialzation is deeply linked to the modernization of farms. It is the real economy that needs to be focused in the next budget.

So far, the taxation regime has been revenue-oriented to achieve fiscal stability. With improved tax culture, a high economic growth has begun to yield more revenues. For this trend to continue, the tax policy should now be investment-oriented.

A strong commitment to an investment-led economic growth, job creation and diversified industrial base is required to step up governmental and private capital spending.

Finance Minister Shaukat Aziz says that the budget 2004-05 will provide "relief" that is expected to be spelt in his budget speech scheduled for June 5. Business has high hopes that the sales tax rate may be reduced from 15 per cent to 12.5 per cent.

Any cut in indirect taxes would reduce prices. It would also help contain rising inflation which the finance minister thinks is the great challenge facing the policy makers.

High sales tax rates is a major issue for the potential investors seeking even playing field so that manufacturing costs can be brought down and exports can be made more competitive under a liberalized import regime under WTO from January 1, 2005. In neighbouring countries giving a tough competition to Pakistani exports, the sales tax rates are much lower.

In fact, there are high multiple GST rates: 15 per cent,18 per cent, 20 per cent and 23 per cent. All trade bodies want GST rate to be uniform and to be cut to 10 per cent over a period of two years.

Under the guide-lines for tax and tariff rationalization prepared by the Central Board of Revenue, the Board of Investment and the Expert Advisory Cell of the ministry of industries, a uniform GST rate of 15 per cent has been proposed for the first phase followed by a cut of one per cent a year to reach the target of 10 per cent. It would be submitted to the consideration of the cabinet.

Manufacturing has remained neglected but for the cash flows after 9/11 that has pushed domestic demand helped by increased export earnings and consumer financing. For the past two decades or more, the share of manufacturing has remained stuck at 18-19 per cent of GDP against 26 per cent for Indonesia, 28 per cent for Malaysia and 32 per cent for Korea.

The contribution of agriculture to GDP has dropped to 23.4 per cent though 44 of the work force is engaged in agriculture. More than two-third people live in villages.

Investor concerns revolve around 3-4 major taxation-related issues in the real economy. Apart from sales tax, there is a universal demand from industrialists and farmers that import of plant, machinery and equipments, not produced locally, should be allowed duty free.

Duties on industrial raw materials and spare parts should be zero-rated or drastically reduced. The duties on import of plants and machinery ranges from 25 per cent to 5 per cent with rare exceptions like zero rate for oil exploration. The same rates apply to spare parts.

Under examination of the CBR is a proposal to reduce duty on imports of machinery. The official guideline has however included abolition of withholding tax on machinery. The government is also committed to the IMF for gradual withdrawal of withholding tax.

For a selected number of industries, reduction of duties to 0.5 per cent have been proposed under the official guidelines. These included petroleum, food processing, mining and construction sectors, pharmaceutical and textiles. It has also been proposed to abolish excise duty on five items.

Though investments have gone into strengthening of existing business, there is enough room to encourage industrial consolidation through mergers of profitable manufacturing units with sick units that are capable of rehabilitation.

For this to happen, the losses of the one may be allowed to be set against the profits of the other in case of merger. The financial institutions are eligible for such tax incentives which could facilitate industrial production on economies of scale and bring under-utilized industrial capacity into early production.

Every budget brings scores of tariff anomalies. Customs duty on finished products is often lower than on industrial raw materials. Officials are committed to doing away with fiscal anomalies but the problem persists.

This is a chronic problem that needs to be attended to seriously and effectively. The SITE Association of Industry wants minimum protection of 10 per cent in customs duty between imported finished products and imported intermediary for local manufacturing of similar products.

Much time has been spent on financial sector reforms to encourage industrial borrowers to access capital market rather than banks for raising funds either through equity or corporate bonds.

Yet, the difference in corporate tax rates on private and listed companies is being eliminated. With low rates of interest and the hassle of running a listed company, private firms need to be encouraged by tax incentives to float their shares in the stock exchanges for public subscription.

This will provide access to share ownership for small investors as being done through IPOs by state-owned units. To broaden the base of industrial ownership, it has been proposed that personal income-tax should be rationalized to allow savings for investment in shares.

For this to happen, relief in investment in shares be allowed as straight deduction in income-tax. Meanwhile, the IT exemption limit may reportedly be increased from Rs80,000 to Rs100,000 against industry's demand of Rs1,20,000.

The governor of State Bank, Dr Ishrat Husain, says that the higher economic growth is itself not sufficient to reduce poverty but it also requires equitable distribution of resources to achieve the desired results. It means providing access of all kind of assets to a much wider group of people.

Finally, taxation must made be equitable and fair for all classes of peoples, says SITE Association and adding that "The worst aspect of our tax system is its inequality."

The tax culture needs to be encouraged through equity. The tax rates should not be fixed arbitrarily. The tax regime should have social acceptability to improve the tax culture. Self-assessment scheme and voluntary compliance is a major move in that direction.

Farmers appear to be defaulters in paying of income tax. The government, the IMF and other international lenders are silent about it. Agriculture contributes nearly a quarter of the GDP but the farmers pay income tax of less than Rs2 billion. Trade, industry and salaried classes pay Rs125 billion when the contribution of manufacturing is a mere 18 per cent of the GDP, says a trade body.