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Tax breaks to cut cost of doing business

June 03, 2012

THE Large-scale tax breaks proposed in the federal budget for the next fiscal year must reduce the surging cost of doing business.

However, the new incentives are not enough to boost investment in the manufacturing sector and spur economic growth. Energy crunch and cost of borrowing still remain major impediments to growth.

“Energy crunch is the fundamental issue hampering expansion of industrial capacity and growth. Unless power and gas supply gaps are bridged permanently, growth will remain subdued,” warns prominent business leader Gohar Ejaz, who believes that the government should have taken measures to pull interest rates down to seven per cent for encouraging investment.

He, however, is appreciative of the government’s decision to impose gas development surcharge on industry and CNG sector. “This is the first such policy intervention and the only innovative move in the budget meant to discourage unproductive use of depleting fuel in 10 years. The amount of Rs104bn generated from this new levy will be spent on construction of energy infrastructure for removing energy supply gaps,” he says.

The tax changes include halving turnover tax to 0.5 per cent, reducing income tax rates and slabs to five from existing 17, allowing five-year tax credit to the industry on its imports for BMR (balancing, modernisation and renovation), cutting federal excise duty on different sectors, rationalising general sales tax rate at 16 per cent and phasing out presumptive tax regime.

Customs tariffs have also been decreased. The changes are meant to woo fresh investment to push slowing growth recorded at 3.7 per cent for the current financial year, though up by 1.3 per cent from last year’s 2.4 per cent. Next year’s growth target has been set at 4.3 per cent.

“We need a policy that is growth-oriented if we want to create jobs and cut poverty,” Gohar argues. “It will not be possible without ending energy shortages,” he insists. According to him, power shortages in the country are nothing more than a governance and management problem.

“This problem can be solved in a jiffy. You just have either to raise the tariff to bridge the differential between the generation cost and consumer price. If you cannot do so because of one reason or the other, then you should fully provide for energy subsidies in the budget for timely payments to power producers to facilitate optimal utilisation of installed generation capacity,” he contends.

“Unless the government chooses either of the two options, it will continue to bleed without generating enough electricity for industry, homes and shops at the cost of growth,” he says.

The government has put aside Rs136bn for power subsidies in the next budget, an amount that Gohar considers not sufficient to ensure full generation capacity utilisation.

“The meagre budgetary allocation for power subsidies will not serve the purpose and the problem of circular debt would keep on haunting industrial growth. The average annual differential between the generation cost and consumer price of electricity is estimated to be Rs400bn. This year the government paid Rs250bn, which was not enough for full utilisation of the installed generation capacity and resulted in closure of 40 per cent industrial capacity. The subsidy amount budgeted for the next fiscal means we shall be facing longer power cuts,” the former chairman of the All Pakistan Textile Mills Association warns.

Lahore Chamber of Commerce and Industry president Irfan Qaiser Sheikh agreed with Gohar. “The government deserves our appreciation for allowing reducing and rationalising taxes to cut our cost of doing business and allocating Rs10bn for the Export Development Fund. But the business community is disappointed to see that no announcement on new dams and power generation has been made. Nor has the government given a plan to restructure the loss-making state-owned enterprises and broaden the tax net,” he says. “These are not good signs for the economy and growth going forward. Economic growth will not pick up as long as the issues of energy and fiscal deficits are addressed on war footing.”

Many consider the tax breaks announced in the budget 2012/13 as populist measures taken in view of the new election next year. “This is for the first time that such large-scale changes have been made in the tax regime in one go. But these measures will not push investment or growth due to energy crunch and surging inflation,” argues Sayem Ali, country economist at Standard Chartered Bank, who considers macroeconomic targets for the next year as unrealistic.

He believes that financing its budget deficit will remain a serious issue for the government, especially in view of new tax cuts, putting pressure on the rupee that has already touched its historic low in the recent days.

“No doubt the measures proposed by the finance minister will help to reduce the cost of doing business. But I don’t think these can push growth significantly or help tame inflation at 9.5 per cent, cut interest rates and narrow fiscal gap. These will only add to its financial woes,” he contends.