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Post-budget business sentiments

June 12, 2017

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Early last week, the Pakistan Stock Exchange took out an advertisement in the country’s leading newspapers, contending that the proposed federal budget for 2017/2018 was ‘negative for investment’.

Among other things, it stated the exchange was ‘extremely surprised with the budget proposals’ and underlined that the securities industry cannot develop under such a tax regime.

Around the same time, the Overseas Investors Chamber of Commerce and Industry (OICCI), which represents large foreign firms operating in Pakistan, wrote a letter to Finance Minister, Ishaq Dar, to express its member companies’ resentment against the tax measures on existing taxpayers instead of bringing untaxed and under-taxed segments of the economy into the net.

The chamber said some of the tax measures will negatively impact efforts to build trust for existing foreign investors and attract new non-CPEC FDI.

Angered by the ‘lack of focus on revival of the export sector’, the All Pakistan Textile Mills Association (Aptma) and several other textile associations were mulling the possible reaction of the government and the subsequent consequences of taking out a series of ads illustrating the fragility of economic recovery under Mr Dar in the last four years.

While one ad depicts the ship of the country’s economy seesawing in the middle of a sea storm, another shows the minister cutting one of the most important branches of the economy — exports.

Indeed, the tax proposals contained in the last revenue-driven budget of the Nawaz Sharif government have peeved the business class.

Majority of the tax proposals, businessmen argue, run counter to (economic) policy predictability, consistency and transparency — crucial for making investment decisions.

The major proposed taxation measures that have upset the country’s corporate sector include extension of one-off super tax for the third year and increase in minimum turnover tax by a quarter to 1.25pc, regardless whether a firm is making a profit or a loss.

Other major proposed changes in the tax regime include abolition of tax credit.

Businessmen insist that these measures will work against capital formation (required for growth and investment), discourage documentation of the economy, and lead to multiple taxation on the same income.

Other tax proposals considered ‘harmful’ for the stock market include enhancement of capital gains tax to 15pc-20pc for filers and non-filers, increase in tax rate on dividends from 12.5pc to 15pc and imposition of 10pc tax on profits of companies that do not distribute 40pc of their after-tax profit as dividend.

The market expected removal of 10pc tax on bonus shares but the government did not oblige.

“If approved, the suggested tax measures will suppress firms’’ profitability and hamper capital formation necessary for making new investment,” contended a multinational company’s chief financial officer (CFO) on condition of anonymity.

“The increased tax rates on the documented segments of the economy clearly demonstrate the failure of the government to broaden the tax net.

“Instead of taxing the undocumented sectors operating from the shadows, the government has once again resorted to squeezing the existing taxpayers regardless of whether a business is making profit or losing money.”

The continuation of super tax implemented on large companies for one year in 2015/2016 and the increased rate of minimum tax will, in effect, raise the effective tax burden on high turnover and low margin firms beyond 30pc, offsetting the impact of 1pc decrease in corporate tax proposed in the budget, the CFO said.

The budget though, has proposed continuing the cash subsidy and other incentives, like subsidised credit for machinery imports and so on, for the five major manufactured export industries.

This is especially for textiles, announced in the Rs180bn Prime Minister’s Package for Exports during the next fiscal year; exporters remain unimpressed.

“The minister has allocated just Rs4bn in the budget for implementation of the package next year! That shows their seriousness in addressing falling exports,” said PRGMEA chairman Ijaz Khokhar.

The government has so far disbursed just Rs1bn among exporters under the package, since January, when the incentives were announced.

Exporters are also furious because budget measures proposed for the next year will further squeeze their liquidity.

“The government has imposed a further 2pc tax on local sales to unregistered buyers. Why is the industry being punished for the government’s failure to net the unregistered?

Abdul Basit, president of the Lahore Chamber of Commerce and Industry, said we were expecting the budget to declare the food sector zero-rated to push its exports,” he said.

According to him, Pakistan could easily become a major player in the $300bn global halal meat market, provided the government curb cheap processed meat imports under FTAs and remove the high duty of 65pc on import of spices for cooked poultry meat.

“The government has reduced duty on machinery imports for new poultry projects. But what’s in there for the existing players?” he asked.

Published in Dawn, The Business and Finance Weekly, June 12th, 2017