Proposed St Rage Gy for Economic Growth

Proposed Strategy for

Economic and

Industrial Growth

of PakistanA brief Assessment of current major issues facing the

national economy and the industrial sector; and their

possible short and long term solutions

– Also includes ‘Taxation Proposals’ for Federal Budget 2013-14

submitted to FBR by ICMA Pakistan in May 2013IC

MA

Pakis

tan

© ALL RIGHTS RESERVED

No part of this publication covered by the Copyright may be reproduced, stored in a

retrieval system or transmitted in any form or by any means – electronic, mechanical,

photocopying, recording or otherwise – without prior written permission of the Research

& Publications Department, ICMA Pakistan, Karachi.

© Institute of Cost and Management

Accountants of Pakistan, 2013

Published by:Institute of Cost and Management Accountants of Pakistan

E-mail: [email protected]

Website: http://www.icmap.com.pk

Fax: +92-21-99243342

Published in 2013

Disclaimer

This document has been developed to serve as a comprehensive reference guide to the

prospective investors/ entrepreneurs, in general, and the Government of Pakistan, in

particular. It is neither intended to be exhaustive nor does it purport to be a legal

document. In case of any variance between what has been stated and that contained in

the relevant act, rules, regulations, policy statements etc, the latter shall prevail. While

utmost care has been taken in the preparation of this publication, it should not be relied

upon as a substitute for legal advice.

Brief Contents

Foreword .......................................................................................................................9

Preface .....................................................................................................................10

Key Recommendations ...................................................................................................13

Chapter 1: Proposed Strategies for Economic Growth ...............................................23

Chapter 2: Assessment of major Economic Issues.......................................................35

Chapter 3: Assessment of major issues of Industry,

Services and Financial Sectors ...................................................................61

Chapter 4: Assessment of Taxation Policies ..............................................................87

Annxure: ICMA Pakistan’s Suggestions for 10-Point Agenda of ..............................108

New Government of Pakistan Muslim League (PML)

Submitted in May, 2013

| 3

Proposed Strategy for Economic and Industrial Growth of Pakistan

Contents

Foreword .........................................................................................................................9

Preface ......................................................................................................................10

Key Recommendations .....................................................................................................13

Chapter 1: Proposed Strategies for Economic Growth

Strategy 1: Generating Economic Growth through

Accelerating Industrialization process.................................................................23

� An ‘Integrated Industrial Policy’ should be announced and implemented ...........24

� Government and Private Sector should engage inmutually supportive relationship ...........................................................................24

� An Export- led Industrial Development strategy should be adopted ....................25

� Capital goods industry should be the core of Industrial policy .............................26

� Services Sector should be given priority in Industrialization .................................26

Strategy 2: Creating Employment Opportunities through

Encouraging SME Development ...........................................................................27

� Pakistan should learn lessons from SMEs-Driven Success Stories ........................27

� Government should extend support to boost SMEs capabilities ..........................28

� Special Priority be given to SME Development ......................................................29

� Incentives for Increasing Employment through SMEs ...........................................29

� A comprehensive SME Policy should be developed ..............................................29

Strategy 3: Stimulating Foreign and local Investment through

Promoting Savings and Capital Formation ........................................................30

� Reasons for low investment rate in Pakistan .........................................................30

� Lucrative tax Incentives should be provided to lure investments ........................30

� Special Status and Incentives for mega investment projects ................................31

� Investment Projects on Public-Private Partnership Initiatives be encouraged .....31

� Mutual and Pension Funds Industry be strengthened to mobilizefunds for investment ............................................................................................32

� Corporate Debt Market should be expanded to channelizefunds to private sector .........................................................................................32

� All Money Whitening Schemes be abolished to divert moneyinto investment schemes ......................................................................................32

� Tax Exemption Limit on National Savings Certificates should beenhanced to attract savings ..................................................................................33

� Policy Reforms in Public Sector should be undertaken toaccelerate investment ...........................................................................................33

Chapter 2: Assessment of major Economic Issues� Severe Energy crisis ...............................................................................................35

� Alarming Security Situation ...................................................................................37

� Depleting Foreign Reserves....................................................................................39

� Declining Investments ............................................................................................41

� Spiraling Inflation ..................................................................................................43

� Growing Fiscal Budget Deficit.................................................................................45

� Expanding Foreign Debts........................................................................................48

4 |


� Unbridled Tax Evasion ............................................................................................50

� Rising Un-employment...........................................................................................52

� Loss-making Public sector Enterprises ..................................................................54

� Rampant Corruption ..............................................................................................56

� Growing Informal Economy....................................................................................58

Chapter 3: Assessment of major issues of Industry, Servicesand Financial Sector

Industry / Manufacturing Sector ..........................................................................61

� Textiles Industry .....................................................................................................61

� Cement Industry.....................................................................................................63

� Sugar Industry ........................................................................................................64

� Automobile Industry ..............................................................................................66

� Leather Industry .....................................................................................................67

� Pharmaceutical Industry ........................................................................................68

� Fertilizer Industry ...................................................................................................70

� Edible Oil Industry ..................................................................................................71

� Oil and Gas Industry ...............................................................................................73

Services Sector .........................................................................................................75

� Information Technology Sector .............................................................................75

� Telecommunication Sector ....................................................................................77

� Housing and Construction Sector...........................................................................79

� Transport and Communication Sector ..................................................................81

Financial Sector ........................................................................................................83

� Banking Industry.....................................................................................................83

� Insurance Industry ................................................................................................85

Chapter 4: Assessment of Taxation Policies

Note: ICMA Pakistan had submitted these taxation proposals, prepared by its Research

Department, to the Member Legal/ Tax Policy FBR vide letter dated 16th

May 2013 to

consider for inclusion in the Federal Budget 2013-2014. It is now published with this

Booklet as a record and reference of our members)

Income Tax

1. Tax on Companies ..............................................................................................87

1.1. Reduction in Corporate Tax Rate ...........................................................87

1.2. Tax Rebate for Listed Companies ..........................................................87

1.3. Levy and collection of Workers Welfare Fund (WWF) ...........................87

2. Tax on Dividends (Section 5) ..............................................................................88

2.1 Imposition of Tax based on period of holding Shares.................................88

3. Deductions not Allowed (Section 21) .................................................................88

3.1. Enhancement in Threshold of payment through Cash ............................88

4. Contribution to an Approved Pension Fund (Section 63) ..................................88

4.1. Enhancement in amount of Annual Contribution made by Employer ....88


Contents | 5

5. Tax Credit for Enlistment (Section 65C) .............................................................88

5.1. Increase in Tax Credit Rate for Enlistment ...............................................88

6. Minimum Tax on Turnover (Section 113)

6.1. Reduction in Minimum Tax rate to 0.2% on Total Turnover

of Taxpayer...............................................................................................89

6.2. Exemption of Refineries and OMCs from Turnover Tax ..........................89

7. Advance Tax paid by Taxpayers (Section 147) ...................................................89

7.1. Reversal of Advance Tax Payment Dates to 15th

of next month

of each quarter .........................................................................................89

8. Withholding Tax on Imports (Section 148) ........................................................90

8.1. Re-instatement of Final Discharge of Liability on Imported Edible Oil ....90

9. Tax on Salaried Individuals (Section 149)...........................................................90

9.1. Rectification of anomalies in Tax Slabs for Salaried Persons ...................90

9.2. Tax Credit for Salaried Persons ..............................................................90

9.3. Extension in Date of Filing Tax Returns .................................................91

9.4. Extension in Date of Filing Annual Statements under

Section 149 and 165 .............................................................................91

9.5. Allowing Credit to Salaried Person under Section 62 and 63 ..................91

9.6. Adjustment of Refund to Salaried Person ...............................................91

10. Withholding Tax on Payment for Goods, Services & Contracts (Section 153) ..91

10.1. Adjustment of tax collected against final tax liability ..............................91

11. Withholding Tax on Payment to Traders and Distributors (Section 153A) .......92

11.1. Withdrawal of Withholding Tax Collection under Section 153A .............92

12. Withholding Tax on Petroleum Products (Section 156A) ..................................92

12.1. Sale of Petroleum Products by OMCs to Petrol Pumps in AJK ................92

12.2. Interpretation of Discount allowed to customers ...................................92

13. Withholding Tax Exemption (Section 159).........................................................93

13.1. Doing Away with Requirement of Withholding Tax

Exemption Certificates .............................................................................93

14. Payment of Tax Collected or Deducted (Section 160) ......................................93

14.1. Extension in period for deposit of tax collection amount

by Withholding Agents ............................................................................93

15. Statements (Section 165)...................................................................................93

15.1. Filing of Monthly Statements of Withholding of Tax ...............................93

16. Refunds (Section 170) ........................................................................................94

16.1. Reducing period allowed to Commissioner

from 60 days to 15 days for Refund ........................................................94

17. Notice to obtain Information or Evidence (Section 176) ...................................94

17.1. Notices be issued after verification of Data available at PRAL ................94

18. Offences and Penalties (Section 182) .................................................................94

18.1. Insertion of new provision of penalty on offences by Tax Officers ..........94

19. Appointment of Income Tax Authorities (Section 205) ....................................95

19.1. Disclosure of Imposition of Withholding tax on Sale of Air Tickets..........95

20. Cash Withdrawal from a Bank (Section 231A) ...................................................95

20.1. No advance tax deduction from cash withdrawal by NTN holder ...........95


6 | Contents

21. Advance Tax on Brokerage and Commission (Section 233)...............................95

21.1. Disclosure of Imposition of Withholding tax on Sale of Air Tickets..........95

21.2. Tax Credit for Withholding Agents on Performing State Duty ................95

22. Telephone Users (Section 236) ...........................................................................96

22.1. Imposition of tax on Mobile Connection .................................................96

23. Second Schedule – Part II ................................................................................96

23.1. Withdrawal of Tax Reduction on Import of Gold,

Silver and Mobile Sets .............................................................................96

23.2. Tax Incentive for handicapped Tax payer ................................................96

24. Sixth Schedule – Part 1 ......................................................................................96

24.1. Enhancement in amount of Annual Contribution made by Employer .....96

Sales Tax

1. Definitions (Section 2) ........................................................................................97

1.1 Enhancing the exemption limit for Cottage Industry ................................97

2. Change in the Rate of Tax (Section 5).................................................................97

2.1 Reduction in Sales Tax Rate .....................................................................97

3. Determination of Tax Liability (Section 7)..........................................................97

3.1 Allowing Input within one year from Invoice Date

for Refineries and OMCs ..........................................................................97

4. Adjustable Input Tax (Section 8B) ......................................................................98

4.1 Allowing 100% Input Tax Adjustment ......................................................98

5. Debit and Credit Note (Section 9).......................................................................98

5.1 Relaxation or Extension in Time Restriction

for issuing Debit/Credit Notes..................................................................98

6. Refund of Input Tax (Section 10) – Including e-refund claims...........................98

6.1 Integration of STARR System with FBR e-Portal

for speedy Sales Tax Refunds ..................................................................98

6.2 Streamlining of Flawed Automated STARR System of

Sales Tax Refund Claims ..........................................................................98

6.3 Allowing Listed Companies to avail PRAL system of

claiming Refunds ......................................................................................99

6.4 Allowing Offsetting Income Tax Liabilities / Refunds

against Sales Tax ......................................................................................99

6.5 Allowing Option of Duplicate Invoice in Sales Tax Act .............................99

7. Assessment of Tax (Section 11) ..........................................................................99

7.1 Rectification of mistake in Assessment Orders ........................................99

8. Sales Tax Exemption (Section 13) .....................................................................100

8.1 Exemption to OMCs from Payment of Sales Tax

on import of POL products ....................................................................100

8.2 Exemption of the Vegetable Ghee/Cooking Oil from Sales Tax ............100

9. Sales Tax Return (Section 26) ...........................................................................100

9.1 Declaration of Exports in Sales Tax Return.............................................100

9.2 Amendments in Sales Tax Return format through E-Portal ...................100

9.3 Allowing Manual Feeding of Computerized

Payment Receipts (CPR) for E&Ps...........................................................101


Contents | 7

10. Power to Call for Information (Section 38A)....................................................101

10.1 Withdrawal of discretionary powers of Commissioner

for seeking information .........................................................................101

11. Refund to be Claimed within One Year (Section 66) .......................................101

11. 1 Extension in period of claiming Input Tax.................................................101

12. Delayed Refund (Section 67) ............................................................................101

12.1 Allowing ST Department to release amount at time of refund claim ....101

13. Certain Transactions not admissible (Section 73)............................................102

13.1 Extension in limit of payment ..............................................................102

14. New Areas for Generating Tax Revenue ..........................................................102

14.1 Tax on revenues of Ship breakers .......................................................102

Customs Duty1. Duty and Tax Remission for Export (DTRE) – [Chapter XII (7)

– Custom Rules 2001 ........................................................................................103

1.1 Simplification of DTRE Approval Process ............................................103

1.2 Provision of DTRE Facility to SME Garment Sector ...............................103

1.3 Doing away with Requirement of Bank Guarantee/

Bond for DTRE Approval ........................................................................103

1.4 Extension in DTRE utilization Period to two years .................................104

1.5 Application of DTRE Scheme for Vegetable Ghee/

Cooking Oil Exporter .............................................................................104

2. General Power to Exempt from Custom Duties

[Section 19 – Customs Act 1969] ......................................................................104

2.1 Duty Exemption on Import of Palm Stearin ...........................................104

3. Reduction in Custom Duty ................................................................................104

3.1 Reduction in Custom Duty on Imported edible oil .................................104

3.2 Reduction in Custom Duty on Imported Tinplate ..................................105

4. Warehousing Period [Rule 350, Chapter XV – Customs Rules 2001] ..............105

4.1 Enhancement in Warehousing Period for Ghee and Oil ........................105

Federal Excise1. Levy, Collection and Payment of Duty – [Section 3] ........................................106

1.1 Basis of Charging and Recovery of Federal Excise Duty ........................106

1.2 FED on Franchise Services (Tariff Heading 9812.9410) .........................106

1.3 Rate of provincial sales tax on Franchise Services..................................106

2. Deposit, pending appeal, of duty demanded or penalty levied [Section 37] .106

2.1 Refund of FED on Export for Tax Payers ................................................106

3. Refund of Duty – [Section 44]...........................................................................107

3.1 Refund of FED on Export for Tax Payers ................................................107

Annxure: ICMA Pakistan’s Suggestions for 10-Point Agenda of

New Government of Pakistan Muslim League (PML)

Submitted in May, 2013 ...................................................................................108


8 | Contents

Foreword

The industrial growth and economic prosperity of any country are intertwined with its

political stability and persuasion of prudent economic policies by the government. Today,

Pakistan is confronted with enormous economic challenges, marked by sluggish economic

growth, energy crisis, security concerns, rising public debts and external liabilities,

widening fiscal deficits, soaring inflation and unemployment and so on.

Now that a new government of Muslim League, spearheaded by the experienced Mian

Muhammad Nawaz Sharif sahib, has taken over the reins of this country, it is anticipated

that these economic challenges will be dealt with seriously and prudently. The nation

expects that the new government would pursue and implement an effective ‘economic

revival plan’ to make our economy move forward with appropriate strategies towards the

path of rapid and sustained economic growth. Keeping in view of the magnitude and

intensity of economy-related problems, this seems to be formidable task, however, the

concern and avidness shown by the Prime Minister signifies his strong resolve and

commitment to steer the country out of the economic crisis.

The two most important and crucial challenges facing our economy at present are the

‘acute energy crisis’ and ‘deteriorating security situation’. These two challenges need

immediate attention of the new government as without improving them, it would not be

possible to achieve industrial productivity and attract investments, both local and

international. The power and gas shortages have crippled our industries and are having a

negative effect on the national economy and GDP growth rates, besides leading to

massive unemployment. After tackling these two challenges, the other priority areas to be

focused on by the government are to root out the menace of corruption, especially in the

government machinery and public offices.

From the perspective of the common people, it is imperative that the government should

put in place an effective national price-control mechanism to control and check sustained

inflationary pressures and undue profitability in the market by determining the actual cost

of every product sold and discouraging hoarding. The ICMA Pakistan would be pleased to

extend its professional services in cost determination and audit.

In the end, I would like to express my deepest appreciation to Mr. Shahzad Ahmed Awan,

Chairman and members of the ICMA Pakistan’s Research and Publications Committee for

publishing this useful booklet titled “Proposed Strategy for Economic and Industrial

Growth of Pakistan”. I also acknowledge the hard work put in by the Research &

Publications Department in developing this comprehensive booklet. I hope that the

relevant government organizations would give due considerations to these

recommendations.

Zia ul Mustafa, FCMAPresident and Chief Executive


| 9

Preface

It gives me immense pleasure to launch this brief, yet comprehensive, booklet titled

“Proposed Strategy for Economic and Industrial Growth of Pakistan” developed by the

Research and Publications Directorate of ICMA Pakistan. The recommendations cover the

economic, industrial and taxation policies and intended to provide a useful reference to

the policy makers and trade and industry in assessing the current economic scenario.

The booklet has been classified into four Chapters.

Chapter 1 is the most important part of this booklet in which the Research Department of

ICMA Pakistan has proposed a three-pronged strategy for achieving sustained economic

growth. These strategies are as under:

Strategy 1: Generating Economic Growth through accelerating

Industrialization process

It is proposed that the government should immediately announce an ‘Integrated

Industrial Policy’ and set up a Permanent Task Force to implement the strategies to

speed up industrialization in the country. The government and private sector should

engage in mutually supportive relationship so as to work collectively for

industrialization – leading to rapid economic growth. The capital goods industry and

the services sector should be given priority in proposed policy. Further, an export- led

Industrial development strategy should be adopted.

Strategy 2: Creating Employment Opportunities through encouraging

SME Development

It is suggested that Pakistan should learn lessons from SMEs-Driven Success Stories of

Japan, Taiwan, China and Singapore. Further, the government should extend support

to boost SMEs capabilities and give special priority to SME development. Moreover,

government should introduce measures to encourage SMEs to recruit new employees

to resolve unemployment issue. A comprehensive SME Policy should be developed

and implemented.

Strategy 3: Stimulating Investment through promoting Savings and

Capital Formation

It is proposed that the government should provide maximum tax and other incentives

to promote domestic investment and attract foreign investors to Pakistan, especially

in mega projects. Further, investment projects on Public-Private Partnership

Initiatives should be encouraged. Further, the mutual fund and pension funds

industry be strengthened to mobilize funds for investment, and the corporate debt

market be expanded to channelize funds to private sector. It is recommended that all

money whitening schemes be abolished to divert money into investment schemes and

policy reforms be undertaken in public sector to accelerate investment.


10 |

Chapter 2 provides an assessment of the current major issues facing the national economy

which includes (1) severe energy crisis, (2) alarming Security situation, (3) depleting

foreign reserves, (4) declining investments, (5) spiraling inflation, (6) growing fiscal Budget

Deficit, (7) expanding foreign debts, (8) unbridled tax evasion, (9) rising unemployment,

(10) loss-making Public sector Enterprises (PSEs), (11) rampant corruption, and (12)

growing informal economy. The impact of each economic issue has been analyzed, in

addition to proposing some short and long-terms solutions for consideration by the

government to tackle these economic issues.

Chapter 3 provides detailed assessments of the important manufacturing industries as

well as services and financial sectors. The manufacturing industry includes (1) Textiles, (2)

Cement, (3) Sugar, (4) Automobile, (5) Leather, (6) Pharmaceuticals, (7) Fertilizer, (8)

Edible Oil, and (9) Oil and Gas. The Services sector covers (10) Information Technology,

(11) Telecommunication, (12) Housing & Construction, (13) Transport & Communication.

Banking and Insurance industries have been analyzed in the Financial Sector.

Chapter 4 comprises the taxations proposals for Federal Budget 2013-14, developed by

the Research Department of ICMA Pakistan and already forwarded to the Federal Board of

Revenue (FBR), Government of Pakistan. The tax proposals cover Income Tax, Sales Tax,

Federal Excise and Customs Duty. Special efforts have been made by the Research

Department to mention the specific ‘Section’ and ‘Clause’ of the relevant Ordinance, Act

and Rules.

This is for the first time that the Institute has ventured to provide its professional input on

macro-economic issues and it is hoped that the government and the private sector would

appreciate this role of ICMA Pakistan and provide us with their valuable views and

suggestions. We intend to continue our advisory role to the government and private

sector on matters of economic importance and for developing economic policy

framework.

In the end, I must acknowledge the members of Research & Publications Committee for

their value cooperation and support. It would be unwise if I do not mention the intellectual

input and untiring efforts of the Research and Publications Department, comprising Ms.

Ghazala Yunus, Director, and Mr. Shahid Anwar, Deputy Director in conceiving the idea of

this book and collecting, analyzing and writing this splendid reference document.

Shahzad Ahmed Awan, FCMAChairman

Research & Publications Committee


Preface | 11

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12 |

Key Recommendations

Economic Growth Strategy Proposed by ICMA Pakistan

Strategy 1: Generating Economic Growth through Accelerating Industrialization process

� An ‘Integrated Industrial Policy’ should be announced and implemented

� Government and Private Sector should engage in mutually supportive relationship

� An Export- led Industrial Development strategy should be adopted

� Capital goods industry should be the core of Industrial policy

� Services Sector should be given priority in Industrialization

Strategy 2: Creating Employment Opportunities through Encouraging SME Development

� Pakistan should learn lessons from SMEs-Driven Success Stories

� Government should extend support to boost SMEs capabilities

� Special Priority be given to SME Development

� Incentives for Increasing Employment through SMEs

� A comprehensive SME Policy should be developed

Strategy 3: Stimulating Investment through Promoting Savings and Capital Formation

� Lucrative tax Incentives should be provided to lure investments

� Special Status and Incentives for mega investment projects

� Investment Projects on Public-Private Partnership Initiatives be encouraged

� Mutual and Pension Funds Industry be strengthened to mobilize funds for

investment

� Corporate Debt Market should be expanded to channelize funds to private sector

� All Money Whitening Schemes be abolished to divert money into investment

schemes

� Tax Exemption Limit on National Savings Certificates should be enhanced to attract

savings

� Policy Reforms in Public Sector should be undertaken to accelerate investment


Key Recommentations | 13

Tackling the Major Economic Issues

Severe Energy Crisis

� Forming a special Task Force to take immediate crack down on ‘electricity thefts' and

recover dues.

� Importing cheaper clean coal, instead of expensive oil and gas, for use as fuel in

power generation.

� Allowing business community to set up own solar, wind power projects without

NEPRA permission.

� Generating electricity from waste materials of crops e.g. sugarcane bagasse, cotton

waste, rice husk etc

� Curtailing reliance on rental power projects and apportioning funds in budget for

hydel power projects.

� Building small dams on Public-Private Partnership (PPP) basis to generate hydel

power.

� Exploring alternate energy resources (solar, wind, tidal, bio-mass, biodiesel and

waste energy).

� Providing loans to public for installing small solar panels in their homes to generate

energy.

� Providing electricity at cheaper rates to efficient industries to improve performance

and cost efficiency.

� Merging Petroleum and Power Ministries into an Integrated Energy Board.

� Energy conservation initiatives by Government – leading by example.

Alarming Security Situation

� Taking drastic action against crimes and starting de-weaponisation campaign on war-

footing basis.

� Revamping law enforcement machinery to deal effectively with the terrorist and

criminal elements.

� Giving more powers to CPLC to take actions against ‘money extortions’ from business

areas.

� Banning Strike calls given by political and religious parties that leads to billions of

Rupees loss to economy.

� Establishing an Independent Police Complaints Commission to investigate

complaints against police.

� Developing national consensus on measures to be taken to tackle violence, crime,

arms and mafias.


14 | Key Recommentations

Depleting Foreign Reserves

� Undertaking structural reforms to build stable foreign exchange reserves.

� Restricting government borrowing from the State Bank of Pakistan to stabilize forex

reserves.

� Seeking funding from friendly countries, like China and Saudi Arabia, instead of IMF

and World Bank.

� Engaging economic experts to develop a comprehensive foreign exchange savings

policy.

� Controlling oil consumption in the country to save foreign exchange spent on

importing oil.

� Restricting imports of luxury items to stabilize forex reserves.

� Offering lucrative incentives to exporters to enhance exports that would bring more

foreign exchange.

Declining Investments

� Removing major hurdles to FDI inflows such as energy crisis and unstable security

situation.

� Adopting long-term consistent economic policies to woo foreign investors

� Improving economic governance and coordination in policies of different

government agencies

� Taking existing investors in Pakistan into confidence to overcome their business

bottlenecks

� Providing tax and other incentives to domestic investors to expand their business.

� Assessing and removing regulatory impediments that are depriving foreign investors

to come to Pakistan.

Spiraling Inflation

� Waiving all taxes and levies on essential commodities (flour, sugar, rice, ghee, oil,

vegetables and dairy).

� Cracking down on hoarders of food items that lead to artificial inflation.

� Forming nation-wide network of ‘Consumer Societies’ to assert pressure on the

Retailers Associations.

� Encouraging domestic production instead of relying on imports.

� Giving a role to Cost Accountants to carry out ‘cost-profit analyses’ of goods to

discourage profiteering.

� Seeking services of Cost Accountants to evaluate production processes and effective

monitoring.



� Improving supply chain of high value crops to control prices of essential commodities

in the market.

� Restricting government borrowing to curtail excessive monetary growth – leading to

inflationary pressure.

� Developing a prudent monetary policy to ease government’s funding requirement

and control inflation.

� Strictly controlling money supply to bring down inflation. SBP may keep inflation

close to 5 percent.

Growing Fiscal Deficit

� Promoting economic growth to get more tax revenues, without raising taxes.

� Expanding tax net and taking strict action against tax evaders.

� Reducing subsidies given to power sector and other Public Sector Enterprises (PSEs).

� Doing away with all tax exemptions, especially to agriculture and services sector.

� Curtailing public spending as well as domestic borrowing to reduce budget deficit.

� Maintaining fiscal discipline and bringing consistency in monetary and fiscal policies.

� Minimizing financial and fiscal constraints through reforms for generating more

revenue.

� Keeping equilibrium in exports and imports to overcome fiscal deficit.

Expanding Foreign Debts

� Using ‘threat of default’ to persuade IMF, World Bank and other international donors

to write off debt and re-negotiate terms of remaining debt on a lower interest rate

and for a longer duration.

� Constituting an independent ‘Debt Audit Commission’ to undertake a comprehensive

debt audit.

� Formulating a national strategy to increase industrial productivity and self-reliance

scheme.

� Introducing progressive taxes on income and wealth to make rich class pay fair share

of their taxes.

� Making strong fiscal adjustments, instead of further borrowing from foreign lenders.

� Taking measures to stabilize macro-imbalances and mobile domestic resources.

� Keeping equilibrium in exports and imports to minimize the need for external

borrowing.

� Ensuring proper monitoring and utilization of external borrowings for development

projects.



Unbridles Tax Evasion

� Eliminating unholy alliance between tax evaders and corrupt tax collectors.

� Introducing “Tax Payer Cards’ to discourage tax evasion and bring more people into

the tax net.

� Doing away with all amnesty schemes.

� Expanding tax network to agriculture, textile, real Estate, retail and service sectors.

� Simplifying taxation laws and re-orienting tax machinery to develop capability,

capacity and credibility.

� Strengthening vigilance to identify businesses units running in losses but their

owners living comfortably.

� Providing honest tax payers with level playing field.

� Launching a national movement by FBR with the slogan “Let us all pay income tax”.

� Detecting companies registered with SECP but not registered with FBR to bring them

into tax net.

� Signing deal with Swiss government to recover lost revenue and stolen funds - badly

needed at home.

Rising Unemployment

� Imposing limit on maximum number of per capita working hours to force industries

to hire more workers.

� Introducing self-employment schemes in rural areas to discourage influx of rural

people to urban cities.

� Setting up more technical and vocational training institute to enhance skills of

unemployed youth.

� Establishing ‘employment offices’ to provide information to jobless youth on

available opportunities.

� Setting up of small industries in rural areas with subsidies and credit facilitates to

reduce un-employment.

Loss Making PSEs

� Inducting independent ‘board of directors’ in PSEs to transform them into profitable

units. Private sector should be given major representation on the board of these

PSEs.

� Appointing private sector and professionals as heads of PSEs, especially in PIA, PSM,

PR, TCP, PEPC etc.



� Non-interference by government in PSEs affairs in shape of political appointments.

� Identifying PSEs for privatization in shortest time frame. Other PSEs be restructured.

� Forming independent ‘holding company’ to replace different administrative

ministries in controlling SOEs.

� Appointing Auditor General of Pakistan as ‘auditor’ for all the PSEs.

Rampant Corruption

� Undertaking a nation-wide anti-corruption reform in public and civil services.

� Giving NAB more powers and independency to check and take action against

corruption cases.

� Associating business community and civil society in all anti-corruption reforms and

initiatives.

� Passing a ‘code of conduct’ Act for public servants and parliamentarians.

� Conducting regular audit of personal bank accounts of politicians and bureaucrats.

� Setting up independent ‘Anti-Corruption Ombudsmen’ to deal with public

complaints against government.

� Ensuring merit and professional standards in recruitment process of law

enforcement agencies.

Growing Informal Economy

� Providing adequate financial services to SMEs to encourage them to register as

corporate entities.

� Simplifying regulatory framework and registration process to attract informal and

unlisted businesses.

� Rationalizing taxation structure to speed up corporatization.

� Reducing gradually concept of presumptive taxation and taxing only real income.

� Withdrawing generous unjustified tax exemptions given to privileged and protected

segments of society.

� Reducing corporate tax to 25% or else introducing uniform tax rate of 30% for all

businesses.

� Making it mandatory for profit-making listed companies to pay dividends to their

shareholders.

� Launching “Pay your Taxes” campaign by local Chambers of Commerce to promote

corporate sector.



Resolving Problems faced by Industry, Services and Financial Sectors

Textile Industry

� The government should take serious measures for the survival of and investments in

the textile industry.

� The textile industry may be given preferential treatment by providing un-interrupted

electricity and gas supply.

� The SME textile industry be allowed to avail the DTRE facility

Cement Industry

� Zero-rated custom duty on import of petroleum coke for use as coal substitute which

will reduce input cost.

� The government must seek trade concessions for cement industry from Gulf and

Middle Eastern countries.

� Trade Development Authority of Pakistan may be advised to include cement in their

exhibitors’ profile.

Sugar Industry

� Indian government should be asked to facilitate sugar exports from Pakistan on

bilateral basis.

� Special incentives should be provided to those sugar mills which co-generate energy

from Bagasse during off-season. This would create additional revenue for sugar mills

and help us in meeting electricity shortfall.

� The role of middlemen should be eliminated or reduced to control sugar hoarding

and artificial price hike.

Automobile Industry

� A policy be developed for auto dealership/supply chain structure as they have no

significant role in industry.

� Foreign auto-assemblers should be encouraged to transfer technology in a given time

frame for localization.

� Auto assembles be made bound to offer safety measures to ensure standard safety

and quality standards.



Leather Industry

� A complete ban should be imposed on export of wet blue leather to avoid its shortage

for local industry.

� Duty free import of essential accessories may be allowed for value addition in leather

product.

� A ‘Leather Development Plan’ may be developed, as being done in India.

Pharmaceutical Industry

� Pharma companies should produce atleast one essential raw material to reduce its

import dependence.

� Pharma companies may be allowed price adjustments, subject to mandatory cost

audit of each product.

� Drug Regulatory Authority (DRA) should be revamped to transform it into a dynamic

and professional body.

Fertilizer industry

� ICMA Pakistan be included on Committee formed by ECC to develop modalities for

gas supply to fertilizer sector.

� SNGPL be directed to resume full and immediate gas to deprived SNGPL based

fertilizer plants.

� Gas supply should be resumed to all plants on permanent basis so that they remain

viable for longer run.

� Strict quality control and monitoring be made to prevent import of sub-standard

fertilizer products.

Edible oil Industry

� Olive oil cultivation should be undertaken in Potohar region and Balochistan jointly

with private sector.

� Import duty on crude palm oil be abolished as done by India and Bangladesh to

promote local refining industry.

� Incentives should be given for proper farming, production, processing and marketing

of oil seeds.



Oil and Gas Industry

� Incentives should be given to petroleum companies to explore, develop and exploit

petroleum resources.

� Abundant untapped reserves of oil and gas available in Sindh, Balochistan and other

parts should be explored.

� Training should be imparted to geo-scientists and engineers in latest exploration and

production skills.

� The government should take urgent measures to narrow down increasing gap

between supply and demand.

Information Technology Sector

� IT businesses should be exempted from corporate income tax till 2020.

� Tax relief be granted to business units on amounts spent on software applications

and related equipments.

� Threshold level for floating IT companies on stock market should be lowered to

encourage listings.

� All government departments should be directed to procure software only through

local IT companies.

Telecommunication Sector

� A 10-years Integrated and focused ICT policy be announced, rather than segmented

policy frameworks.

� No more licenses be granted/ allowed until maturity of present telecom sector.

� Special subsidy/incentives may be given to telecom sector for providing services in

high–loss war zone.

� All regulatory bodies looking after telecom sector should be converged for one-

window facility.

Housing and Construction Sector

� Banks and DFIs should extend credit for BMR of machinery used in housing and

construction industry.

� State Bank should direct banks to allocate a certain percentage of the credit to

housing sector.

� Zero-rated duty be allowed on import of tower cranes, batching plants, elevators,

solar panels etc

� Annual HBFCL loans disbursement should be enhanced to Rs. 20 Billion to overcome

housing shortage.



Transport and Communication Sector

� Private sector should be involved to improve air, sea, rail and road logistics and

supply chain system.

� Indus River System should be developed as a way for transporting goods from Karachi

to rest of country

� Restriction imposed by SSGC to construct high rise buildings should be removed

immediately.

� HBFC should invest Rs. 10 billion annually in apartments below 1500 sq. ft. and 120

sq. yards bungalows.

Banking Industry

� SBP should advise banks to introduce fee-based products and tap SMEs and

undocumented economy.

� Banks should provide soft-term loans to SMEs to encourage expansion of small

business sector.

� Banks should play role for economic growth and not as a source of financing

government activities.

� A higher tax levy should be imposed on income derived by banks from investment in

T-bills.

Insurance Industry

� More licenses be issued to new non-life insurance firms to expand health and general

insurance business.

� Insurance Institute and government should work jointly to improve insurance

penetration and density.

� Conventional insurance companies should not be granted permission to operate

Takaful Operations.



Generate Economic

Growth

Stimulate Foreign and

Domestic Investments

Create Employment

Opportunities

Accelerate

Industrialization Process

Encourage SME

Development

Promote Savings and

Capital formation

Proposed StrategiesPriority Objectives

Chapter1 Proposed Strategies for Economic Growth

ICMA Pakistan feels that the government should focus on ‘sustained’, ‘high’, ‘equitable’

and ‘inclusive’ economic growth model so that its benefits are reaped by the poor and less

privileged segments of society and they feel a sense of participation in the accruing

economic benefits. To this effect, ICMA Pakistan proposes that the government should

develop its economic growth strategy based on following ‘priority objectives’ and

‘proposed strategies’:

Strategy 1:

Generating Economic Growth through accelerating Industrialization Process

Professor Dani Rodrik, PhD, a world renowned economist, who is considered an expert ininternational economics, economic development and political economy, maintains that:

“All of the successful economies of the last six decades owe their growth to rapid

industrialization’

The above observation by Professor Dani Rodrik is quite correct as during the period 1880sto 1970s, Japan achieved sustained per capita growth through industrialization. Similarly,almost all the Far Eastern countries like China, Malaysia, Singapore, Vietnam, Thailand,Mauritius and the Philippines achieved export-oriented industrial development byencouraging Foreign Direct Investment (FDI) into their economies during the period 1970sto 1990s. Moreover, USA, Canada, Australia and the western European countriessucceeded in attaining high levels of per capita income by shifting from agrarian-basedproduction to manufacturing and services sectors activities.

Pakistan should learn from the experience of the above countries and follow economicstrategy of investment-led industrial growth. This should be achieved by creatingconducive environment to attract domestic and foreign private investments; diversifyingexport base, and using natural resources to drive industrialization.


| 23

ICMA Pakistan presents following proposals to speed up industrialization process in the

country.

An ‘Integrated Industrial Policy’ should be announced and implementedin true spirit

� The foremost priority of government should be to formulate and implement an

‘Integrated Industrial Policy” to speed up industrialization in Pakistan. This is sine qua

non for us, if we need to overcome our problems associated with lack of

industrialization such as unemployment, poverty, low per capita income etc

� ICMA Pakistan’s research reveals that a policy draft of an ‘integrated industrial

policy’ was formulated and finalized way back in 1990s, but it remained in cold

storage. Instead of an integrated policy, the successive government followed the

practice of announcing sector-specific policies such as Textile Vision, Chemical Vision,

Sugar policy, Fertilizer policy etc. which proved not so successful.

� In 2010, a national industrial policy was developed after consultations with all

stakeholders in government and private sector, which aimed at strengthening and

expanding the manufacturing base to achieve sustained economic growth. However,

this industrial policy is also yet to be finalized and implemented.

� ICMA Pakistan strongly recommends that the government should immediately

announce an ‘Integrated Industrial Policy’ and set up a Permanent Task Force to

implement the policies and strategies of the integrated policy to speed up

industrialization in the country.

Government and Private Sector should engage in mutually supportiverelationship

� The role of government has always been quite significant and central to the

industrialization process in any country. ICMA Pakistan thinks that government and

private sector should engage into a mutually supportive relationship so as to work

collectively for industrialization – leading to rapid economic growth.

� The private sector should play a leading role in all economic activities whereas the

government’s primary role should be to provide a regulatory and supportive role to

facilitate business and industry, and remove impediments to industrialization. Some

of the roles that the government could play in this regard are:

1. Providing physical and social infrastructure (transport, communication,

power and energy)

2. Establishing vocational training centers to impart modern labour skills

3. Advancing technology and industry- research

4. Intervening through regulations and fiscal incentives to guide

private investment in industry

5. Providing affordable social protection and safety net to the poor


24 | Chapter 1: Proposed Strategies for Economic Growth

� The government should form a Joint Government- Business Forum (JGBF),

comprising Ministers of Finance, Commerce, Industry, and Investment (from

Government side) and Presidents/ Chairmen of Chambers of Commerce and industry

Associations (from private sector) that meet regularly on quarterly basis to resolve

problems faced by trade and industry as well as to seek their proposals in framing

economic policies. A permanent secretariat of this forum may also be set up.

� A renowned business personality of each province may be nominated as ‘Special

Advisor’ to the Chief Minister for advising him about the business concerns and to

identify areas for future business growth.

An Export- led Industrial Development strategy should be adopted

� ICMA Pakistan is of the view that an export-led industrial development would give

impetus to the economic growth of the country. The proposed export strategy of

government should be to enhance Pakistan’s share in the global imports; expand the

export product-mix and diversify exports to new untapped markets.

� Pakistan should take advantage of regional trade opportunities, including trade with

India. However, this should not be at the cost of the national integrity and interests of

the domestic industry. At the same time, the government should improve the quality

of Pakistan’s human resource to achieve competitiveness.

� Pakistan should focus on UAE, China, Afghanistan, India, and Iran for trade. The

recent trading pattern shows that Pakistan trade (exports and imports) with this

group of five countries have enhanced gradually.

� The Central Asian Republics, including Kazakhstan, Kyrgyzstan, Tajikistan,

Turkmenistan, and Uzbekistan, with a combined population of 61 million, also offer a

wide market for Pakistan’s exports.

� The government should give priority focus on promoting exports of SME sector

whose share in Pakistan’s exports has increased steadily in recent years. The SME

units are operating in industrial clusters around Karachi, Lahore,

Sialkot–Gujarat–Gujranwala triangle in central Punjab. The government should

provide special incentives to those SMEs which are already exporting and have

potential for exports such as sports goods, surgical instruments, electric fans,

automobile parts, garments, etc.

� The government should also encourage exports of high-value nontraditional

agricultural exports such as fruits and vegetables, halal meat and meat preparations,

which have much potential for growth.

� There exist large potential for expanding knowledge-based exports from Pakistan,

including information and communication technology, as well as entertainment and

health services. Pakistan has a better edge over India in some IT areas, such as

‘product development’.


Chapter 1: Proposed Strategies for Economic Growth | 25

Capital goods industry should be the core of Industrial policy

� Capital goods industry is a strategically important industry and a pre-requisite for

industrial advancement. Almost all the developed and industrialized countries have

given priority to the capital goods industry.

� ICMA Pakistan is of the view that the heavy engineering and capital goods industry,

which offers immense growth potential, should be the central focus of the Integrated

Industrial policy that is to be announced by the government. This is also important as

in current global scenario of rising cost of doing business; almost all developed

economies are relocating their units and technologies to low cost countries.

� The development and expansion of capital goods industry would help the country in

creating employment, especially for educated professionals; promoting

establishment of ancillary industries; enhancing exports and in making higher value

addition in manufacturing sector.

� Pakistan has to spend huge foreign exchange for importing plants, machinery,

components and spares. The development of capital goods industry will help the

country to save this valuable foreign exchange.

� The capital goods industry can also play a catalytic role in achieving import

substitution in many areas. For this purpose, the government should facilitate in

providing the requisite cutting-edge technology through technical collaboration and

foreign technology transfer agreements.

� The capital goods industry in which the government should encourage investments is

machine tools, boilers, bulldozers, foundries, etc.

Services Sector should be given priority in Industrialization

� The services sector has shown a satisfactory growth over the last several years and

this sector offers a much potential sector that could help the country in achieving

rapid economic growth.

� ICMA Pakistan suggests that the government should remove impediments to the

growth of this sector and provide a special package of incentives for policy reform in

this sector, which can prove to be a key sector for growth, employment and poverty

alleviation.

� The government support to services sector would open up new employment

opportunities, especially for our youth – leading to poverty alleviation. An analysis

indicates that services sector has created more employment opportunities, as

compared to the commodity-producing sector, during the recent past.

� Information technology is one of the key drivers in the services sector. The

government should consider extending support to IT sector in providing and

improving advance technical skills to workers to cope up with global requirements.

Similarly, government support is required to improve infrastructure, HR

development and technology upgradation in financial, trade, transport and

communication services.



Strategy 2:

Creating Employment Opportunities through encouraging SME Development

Mr. Jean-Philippe Courtois, President of Microsoft International, in one of the

conferences held in Europe said:

“About 85 per cent of net new jobs in the EU between 2002 and 2010 were created by

SMEs”.

The above statement is an ample proof of utmost significance of SME development for the

economic growth and prosperity of any nation, especially for a developing country like

Pakistan. Our policies should, therefore, focus on the development and expansion of small

and medium business (SMEs) so as to create more and more opportunities for new

employment that could eventually lead to poverty reduction and sustainable economic

growth.

ICMA Pakistan feels that SMEs can be instrumental in poverty reduction and job creation

as they make a significant contribution to the Pakistani economy in terms of 30% value-

addition and 80% employment in the industrial sector. The SMEs in Pakistan, however,

experience financial and other constraints which need to be removed. The government

should play a proactive role in providing an enabling environment for SME growth.

ICMA Pakistan presents following proposals to create employment opportunities in the

country.

Pakistan should learn lessons from SMEs-Driven Success Stories ofJapan, Taiwan and China

Pakistan can learn lessons from experiences of SMEs-driven success stories of Japan,

Taiwan, China and Singapore.

� In Japan, over 99% of all business is SMEs, employing huge local work force and

accounting for major proportion of economic output. Though most of these SMEs are

not giants, but they form the backbone of manufacturing, services and export supply

chain industry of Japan.

� Taiwan is a small island but have around 98% SMEs, contributing 85% to the Taiwan’s

GDP and engaging over 80% of non-agricultural work force. Today, Taiwan is the 6th

largest per capita earner in Asia and has 5th

largest foreign exchange reserves of the

world. The Taiwanese government had a continued support to SMEs.

� In China there is around 25 million registered small businesses, according to China’s

own estimates for 2012, which contribute 75% share in GDP and engaging 85% non-

agricultural labour force. The Chinese government promoted research and

innovation in the SME sector.

� In Singapore, SMEs constitutes an important pillar of national economy, contributing

over 50% of the economic output and around 70% of employment.



Pakistan’s SME Sector

During the period 1950s to 1980’s, the Pakistan's economic policy remained focused on

large enterprise. Since late 1990s, the economic policy focuses on promotion of SMEs. A

Small and Medium Enterprises Development Authority (SMEDA) was established in 1998

and SME Banks were set up in 2002.

Today, Pakistan's SME sector constitutes 90% of total enterprises, contributing 38% to

GDP, 25% to exports and engaging 80% non-agricultural labour force. There are 3.9 Million

SMEs in Pakistan, majority of which are based in Punjab and Sindh. In Karachi alone over

16,000 industrial units are operating out of which majority are SMEs. Karachi’s industries

are providing employment to 1.5 million labour force.

Government should extend support to boost SMEs capabilities

� Government through SMEDA should review the development strategies for SMEs to

help them strengthen their business competitiveness by upgrading skills and

adopting new technologies and innovative processes.

� SMEDA should enhance support for SMEs in the areas of productivity, innovation and

capability upgrading. This would help SMEs to boost their capabilities, restructure

their business and remain competitive.

� Like Singapore, SMEDA may consider introducing a Productivity and Innovation

Credit (PIC) cash bonus for companies that invest some amount in productivity and

innovation activities in a year. This will help SMEs defray the cost of implementing

their productivity improvements.

� SMEDA may consider incentive to those SMEs which leads in innovations and new

product development.

� The government can help the SME sector in nurturing talent by initiating a ‘Talent-

hunt’ program that targets polytechnic students. The selected youth may be

sponsored a study award, followed by a job opportunity upon graduation or

completion of the vocational training. This would help the SME build a strong pool of

local talents for sustainable business growth.

� SMEDA may consider extending consultancy services for the SMEs in areas of export

market assessment, market entry and business restructuring through

internationalization. For this purpose, SMEDA may also offer facilities and financial

support to SMES under patronage of Trade Development Authority of Pakistan

(TDAP).

� The government should play a catalytic role in establishing collaborations of SMEs

with large enterprises in areas of product development, technology sharing and

transfer and sharing of best operational practices.



Special Priority be given to SME Development

� The government should give special priority to the SMEs sector in its economic

growth strategy, with a view to enhance industrial productivity and create

employment opportunities.

� SMEs should be provided special incentives and tax concessions to set up industries

in the Special Economic Zones (SEZ) and other industrial estates of the country. One

window facility for SMEs should be provided.

� The government should provide soft loans to SMEs through banks on preferential

basis with minimum conditions. SMEs should also be provided easy access to export

finance on easy and softer terms.

� SMEs may be allowed duty free import of machinery, plant and equipment with BMR

facility.

� Small industrial parks for SMEs should be developed in major cities with basic

infrastructure facilities.

� SMEs may be exempted from lengthy audit procedures of different government

departments.

� The regulatory procedures for registration of SMEs in formal sector should be

simplified. All major bottlenecks in way of SME growth should be done away with.

� SMEs should be relieved from tax burden by providing as many exemptions as

possible. This would encourage more SMEs to get registered and play their role in

economic development of the country.

Incentives for Increasing Employment through SMEs

� The government should introduce measures to encourage SMEs to recruit new

employees. This initiative will provide employment opportunities to those people

who are unemployment.

� In USA, the HIRE Act provides financial incentive for small businesses to employ

previously unemployed workers. In UK, a Youth Contract Scheme has been launched

in 2012, which provides wage subsidies for SMEs which offers work placements to

unemployed in ages between 16 to 24 years.

A comprehensive SME Policy should be developed

� The government should develop a comprehensive SME Policy that defines the role of

concerned public sector institutions. Such a Policy framework will provide the

required direction and focus for achieving SME led economic growth resulting in job

creation and reduction in poverty.

� The proposed SME Policy should provide short term, medium-term and long-term

policy framework with an implementation mechanism to achieve economic growth,

based on SME-led private sector development.

� The government may consider a proposal for setting-up an ‘SME Exchange’. In India,

such a proposal is under active consideration for which necessary changes and

amendments are being made in the rules and regulations of cash market for making a

provision for SME Platform.



Strategy 3:

Stimulating Investment through promoting savings and capital formation

John F. Kennedy, the 35th

President of USA, while giving a message on economic recovery

in February 1961 stated:

“Expansion and modernization of the nation’s productive plant is essential to

accelerate economic growth and to improve the international competitive

position of American industry … An early stimulus to business investment will

promote recovery and increase employment.”

The above message indicates that for achieving economic growth and recovery, it is

essential that a country should stimulate business investment. However, to accomplish

this task, there is a pre-requisite of promoting capital formation and long term savings in

the country. In the words of Rajen Devadason, a world renowned Certified Financial

Planner (CFP) and publisher of GET BETTER, “The reason saving comes before investing is

that you need to have ‘seed’ before you can ‘sow’ it in anticipation of a ‘harvest’."

Reasons for low investment rate in Pakistan

ICMA Pakistan research reveals that the main reason for low investment rate in Pakistan is

due to low rate of savings and capital formation. The growth in private corporate

investment in Pakistan has slowed down considerably during the last couple of years,

because of un-conducive business environment, resulting from security concerns; as well

as due to domestic inflationary pressures and uncertainties flowing out of the global crisis.

The low per capita income and unequal distribution of wealth have added to this situation.

Though the government has introduced many saving schemes to increase savings rate

(e.g. Defence Savings Certificates, National Deposits Certificate, Khas Deposit Certificates,

Special Savings Accounts, Mahana Amdan Accounts, Prize Bonds, NIT Units etc), there

seems to be no significant improvement. Recently, the SECP has introduced the Draft

Bond Pricing Agency Regulations, 2013 for establishing a bond pricing agency to stimulate

activity in the primary and secondary markets and to induce foreign investment. ICMA

Pakistan feels that this is a very encouraging initiative by SECP that would help raise

savings and investments levels in the country.

To increase the level of savings and capital formation, it is important that the governmentshould develop and implement such polices that could help facilitate in liberalizingfinancial markets, ensuring greater financial intermediation, controlling inflation,channelizing resources from informal or unorganized sector and expanding bonds andshort term commercial papers for subscription in capital market.

ICMA Pakistan presents following proposals to promote savings and investments in the

country:

Lucrative tax Incentives should be provided to lure investments

� Pakistan has of late witnessed capital flight, industry closures and recession in trade

market due to deteriorating law and order situation. The security concerns, coupled

with inconsistency in tax policies, have forced the businesses to move towards safer

havens, like Bangladesh, Sri Lanka, Dubai, Malaysia, depriving the country of

invaluable capital. The foreign investors are also reluctant to invest in Pakistan in this

situation.



� The government should consider providing ‘lucrative incentives and benefits’ to the

international investors to bring their capital into Pakistan for better returns. At the

same time, the domestic investors may also be given a package of tax benefits and

concessions to encourage them to continue their businesses in Pakistan.

� The government should provide tax incentives to those investment units which bring

huge capital investment; are energy efficient; environment-friendly; involved in CSR

activities and operate at maximum capacity.

� The government, with the help of experts, should make Industry Specific Standards

(ISS) for cost of goods manufactured and sold. Tolerance limits for acceptable

variance, if any, be made from the ISS. Any breach of ISS after the tolerance limit

should attract Audit, Cost Audit and detailed scrutiny.

� The government should also discourage and penalize speculative investments in real

estate and stock markets, so as to improve the efficiency of financial sector to lower

intermediation costs and provide long term financing options through an efficiently

managed stocks and bonds markets.

Special Status and Incentives for mega investment projects

� Any project which has potential for developing ancillary industries, based on their

products, and providing employment opportunities to large number of local skilled

and unskilled population; should be granted the status of ‘mega project’ and they

should be given special incentives, including tax concessions and infrastructural

facilities. A minimum capital investment ceiling may be fixed by the government in

this regard.

� Government may announce a special package of incentives for the overseas

Pakistanis who wish to invest in Pakistan in feasible projects. They may also be

allowed incentives for setting up mega projects or SMEs in the Special Economic

Zones in Pakistan. The increased flow of remittances will not only improve balance of

payment position, but also give impetus to industrial and economic growth.

Investment Projects on Public-Private Partnership Initiatives beencouraged

� The government should associate the private sector in Public Private Partnership

(PPP) infrastructure and other development projects by developing a transparent,

hassle-free investment and approval criteria and procedures to attract the private

sector capital.

� The Public-Private Projects would play a catalytic role in raising total investment rate

to required levels and restoring investors’ confidence (both local and foreign). Some

key areas where such joint projects could be undertaken are energy,

telecommunication, transportation, construction of road, highways, etc

� There is good prospect for promoting foreign investment through joint public and

private sector initiatives in textiles, clothing, and other promising export sectors from

China, Korea, Malaysia, and Taiwan.



Mutual Funds and Pension Funds Industry be strengthened to mobilizefunds for investment

� The government should facilitate the mutual and pension funds industry to play a

catalytic role in mobilizing funds from private sector for productive investments.

� Around two-thirds of investment in the country is in hand of the private sector, which

includes households and corporate sectors. The existing savings instruments, such as

bank deposits, mutual funds, pension funds and insurance, are still not capable of

generating sufficient resources to meet domestic investment needs.

� There is need to strengthen and improve the efficiency of banks, NBFIs, mutual funds,

insurance companies, pension funds, venture capital funds etc; so as to make them

capable to mobilize household savings for meeting equity and debt needs of the

private corporate sector. The fact is that assets under the management of mutual

funds industry is about 5 percent of total banks deposits whereas in India this is more

than double.

Corporate Debt Market should be expanded to channelize funds toprivate sector

� The government should formulate policies to expand the corporate debt market to

help improve savings and diversify investment avenues. This would enable the

borrowers, especially the government, to raise priced financing from non-banking

source for long-term capital developments and infrastructure projects.

� At present, only few companies have issued Term Finance Certificates (TFCs) at the

stock market and most of them are hugely discounted, which discourages more

companies to enter the debt market.

� In present uncertain macro-economic condition, the banks are also reluctant to

advance long term loads to the private sector. As such, the government should

reduce the dependency of corporate sector and industries on traditional banking

sector for their financing requirements and encourage them to develop alternative

sources of financing in their own interest.

� The government should focus on developing the corporate debt market to allow

channelizing funds directly from savers (households) to the private sector.

� The government should also formulate policies to expand and strengthen the

mortgage market in order to help the corporate sector to leverage their assets for

investing in the bond market.

All Money Whitening Schemes be abolished to divert money intoinvestment schemes

� SECP may consider removing all direct and indirect whitening schemes including

Section 111 (4) of Income Tax Ordinance, 2001 which provides tax exemption under

‘unexplained income and assets’ on foreign exchange remittances through normal

banking channels. This would bring additional revenue to the government and divert

this money into saving or investment schemes.



Tax Exemption Limit on National Savings Certificates should beenhanced to attract savings

� The government should enhance the tax exemption limit on profit of National Savings

Schemes (NSS) from Rs. 150,000/- to Rs. 500,000/- to attract more household savings

and increase savings rate in the country.

� The government should transform the ‘Central Directorate of National Savings’ into

an autonomous body and expand its outreach to far flung areas of the country. This

would improve the performance of savings centers, and also enhance savings rate

that could be channelized into productive investments.

� As a motivational factor, some sort of commission may be also provided to those

saving centers which mobilize more savings from their respective areas. At the same

time, the household sector (general public) be also provided incentives on investing

their savings in National Savings Schemes.

Policy Reforms in Public Sector should be undertaken to accelerateinvestment

� The government should strengthen policy reform efforts to accelerate the

investment rate in public sector in order to foster an economic environment more

conductive for higher private sector production, investment, consumption and

savings.

� The major policy reforms that the government may consider are as under:

– Reforming the state-owned enterprises to cut losses and improve efficiency

– Making tax system more equitable and improving the tax administration

– Undertaking expenditure programs to improve quality of living of less privileged

people

– Prudent utilization of public resources for public consumption

– Improved efficiency of public sector enterprises.





34 |

Chapter 2 Assessment of Major Economic Issues

Severe Energy Crisis“The Crisis of today is the joke of tomorrow” – H.G.Wells, a Renowned Writer

Facts and Figures� Share of Electricity Generation Sources – 36% from Gas; 32% from Oil; 29% Hydel

and 3% from Nuclear. Total generation of electricity from hydel source is 6481 MW

which is only 29% of installed capacity.

� Share of Electricity Distributors – 51% by WAPDA, 9% each by KESC, HUBCO and

other IPP’s; 8% by KAPCO, 5% by UCH; 4% by ROUSCH and 2% each by Liberty and

Pakistan Atomic Energy Commission (PAEC).

� Share of Electricity Consumers: household, industry, services, transport,

government. The largest consumer is industry, accounting for about 60% of total

consumption. Pakistan’s per capita electricity consumption of 451kwh is almost one-

sixth of world average of 2730kwh (world energy statistics 2011).

Problem and its Economic Impact

� The persistent acute power shortages and load shedding in the country have led to

massive closure of industries, layoffs and un-employment, poverty and public unrest.

� The negative impact of energy crisis on the national economy is evident in shape of

low productivity, decline in GDP growth, rising inflation and flight of capital. Most of

the textile units are now moving to Bangladesh.

� The problem of energy crisis is two-fold–i.e. demand explosion and supply shortage.

There is lack of integrated and proactive planning for growth of energy generation.

� Demand for energy is rising with the growth in population and industry requirement.

The demand is around 20,000 MW whereas electricity of only 11,500 MW is being

generated in the country.

� The cost of electricity generation in very high due mainly to faulty fuel mix. This has

led to massive load-shedding and power shortages throughout the country.

� Furnace oil is the main fuel to produce thermal energy. The government is

responsible to provide furnace oil to power generating companies but it is unable to

pay fuel cost to them. Resultantly, the generating units are either closed down or run

on low capacity. Eventually, they are unable to pay to oil companies, leading to high

circular debt of around Rs. 872 billion.

� Independent Power Producers (IPPs) have not been able to share its burden by

meeting the energy shortfall but rather they have become an object of controversy.


| 35

Proposed Short and Long Term Solutions

� A Special Task Force may be formed to take immediate crack down on ‘energy thefts'

throughout the country to reduce losses in electricity transmission and distribution.

Similarly, serious efforts should be made to recover and collect due from the

government departments and private sector. Billions of Rupees can be saved by

reducing lines losses with addition funding available to government after collection

of dues.

� In those parts of country where national grid do not exist, business community may

be allowed to set up their own power projects (solar, wind based) without the prior

permission of NEPRA.

� A Committee may be formed immediately to finalize a national plan to generate

electricity through use of waste materials of crops like sugarcane bagasse, cotton

waste, rice husk and organic materials

� Instead of importing expensive oil and gas, we can move to import cheaper clean coal

for use as fuel in power generation. The price of coal is stable in international market,

which will help bring stability in electricity price.

� Reliance on Rental Power Projects should be curtailed to reduce prices. A sizeable

portion of budget should be earmarked for hydel power generation projects.

� Special focus should be given on building large number of small dams on Public-

Private Partnership (PPP) basis to generate hydel power and to boost agriculture

productivity.

� Alternate energy resources should be an important part of the energy policy of the

government (such as solar, wind, tidal, bio-mass, biodiesel and waste energy).

� Government may provide interest-free loans (to be paid in easy installments) to

public in urban areas (initially in Karachi, Lahore and Islamabad) to install small solar

panels in their homes to generate energy. For this purpose, funding can be obtained

from international donor agencies.

� The energy pricing for the industrial units should be based on their efficiency and

performance. An efficient unit may be given more electricity at cheaper rates. For this

purpose the local chambers of commerce be involved. This would encourage the

industrial units to improve performance and cost efficiency.

� The Ministry of Petroleum and Ministry of Power should be merged to make it into an

Integrated Energy Board. A long term plan for this purpose may be chalked out by the

government.

� The government and public servants should lead by example in power conservation

e.g. minimum use of air conditioners, curtailing fuel by avoiding irrelevant official

transport, using energy save bulbs etc. This would motive the general public to follow

the example.


36 | Chapter 2: Assessment of major Economic Issues

Alarming Security Situation“In any country there must be people who have to die.

They are the sacrifices any nation has to make to

achieve law and order” – Idi Amin Dada, Late President of Uganda

“Fish die when they are out of water, and people die

without law and order” – The Talmud quote

Facts and Figures

� The law and order situation has been alarming since long, marked by increased

number of organized crimes, terrorist incidents, target killings, kidnapping for

ransom, especially in Karachi – the financial hub.

� According to partial data compiled by the South Asia Terrorism Portal (SATP),

Pakistan recorded a total of at least 6,211 terrorism-related fatalities, including 3,007

civilians, 2,472 militants and 732 Security Forces (SF) personnel in 2012 as against

6,303 fatalities, including 2,738 civilians, 2,800 militants and 765 SF personnel in

2011. The first 69 days of 2013, have already witnessed 1,537 fatalities.

� According to SATP, in 2012 there were 39 suicide attacks in Pakistan, resulting into

365 deaths, as against 41 such attacks in 2011, though fatalities were at a much

higher 628. The number of explosions increased from 639 in 2011 to 652 in 2012.

� According to the South Asia Media Commission’s (SAMC) Media Monitor 2012

report, Pakistan remained the most dangerous country for journalists in South Asia.

25 journalists were killed in South Asia in line of duty in 2012, with Pakistan

registering killing of 13 journalists, followed by India (5), Bangladesh (3) and Nepal

and Afghanistan (two each).

� The government spends huge sum of money from national exchequer to improve the

deteriorated law and order situation – even much more than that spent on health,

education and infrastructure sectors. During 2011-2012, an amount of Rs. 194.33

billion were spent on improving security situation, as compared to Rs. 139.47 billion

on health and 113.33 billion on infrastructure sectors during the same period.

� According to the Ministry of Finance, Government of Pakistan, during 2010-2011 the

government spent Rs. 169.79 billion on security situation, which enhanced to Rs.

194.33 billion in 2011-2012, showing an increase of 15 percent in one year. The

break-up of Rs 194.329 billion spent in 2011-2012 reveals that the federal

government spent Rs 63.089 billion; Punjab spent Rs 58.690 billion, Sindh Rs 38.836

billion, Khyber Pakhtunkhwa, Rs 21.819 billion and Balochistan spent Rs 11.895

billion on law and order situation.


Chapter 2: Assessment of major Economic Issues | 37


� The current state of law and order is having a negative impact on the Pakistan

economy and hampering inflow of Foreign Direct Investment (FDI). Foreign and local

investors are shying from operating in Pakistan and a number of industrial units had

already shifted their operation to other countries.

� The unstable law and order situation has led to huge economic loss, which has

affected the country’s stock market as well. In addition, all main resources of revenue

in affected areas have been hurt, including agriculture, manufacturing and small

scale industry, and tourism.

� The terrorism threat has diverted resources of government to security spending,

increased the cost of doing business and created instability about business prospects

in the country. As a result, the businesses find it difficult to obtain bank loans and get

into long-term contractual obligations.


� The government should develop national consensus on measures to be taken to

extricate the country from shackles of violence, crime, arms and various mafias.

Political patronage of mafias should be dealt prudently.

� Drastic action need to be taken across the board without consideration of political,

ethnic or affiliation with any school of thought. A major de-weaponisation campaign

needs to be commenced on war-footing basis.

� Sizeable funds must be allocated for improving law and order situation. The law

enforcement machinery need to be completely revamped by inducting educated

youth as city and province levels. They may be equipped with modern technology to

deal effectively with the terrorist and criminal elements of the society.

� The Citizens-Police Liaison Committee (CPLC) may be allowed to play an active and

effective role with additional powers to take actions against ‘money extortions’ from

business areas, especially in Karachi, the trading and financial hub of the country.

� The country has to suffer business loss of billions of Rupees due to ‘strike calls’ given

by political and religious parties. As such, new government may consider imposition

of complete ban on such strike calls. A huge sum of penalty may be asked from those

parties which violates this ban.

� An Independent Police Complaints Commission (IPCC) be established (as existing in

UK as per Police Reform Act) to investigate serious complaints and allegations of

misconduct against police, as well as to handle appeals from people not satisfied with

the way police have dealt with their complaint. The proposed IPCC should be self-

governing, making decisions entirely independently of police, government and

complainants. It will provide a powerful legal regulatory framework making the

police accountable for their actions.



Depleting Foreign Reserves

When a government is dependent upon bankers for money; they and not the

leaders of the government control the situation, since the hand that gives is

above the hand that takes” – Napoleon Bonaparte, Emperor of France

Facts and Figures

� The forex reserves are depleting fast. The total liquid foreign exchange reserves of

Pakistan has declined sharply from USD 18.24 billion in 2010-2011 to USD 15.29

billion in 2011-2012. Out of this amount, USD 10.81 billion are net reserves with State

Bank and USD 4.48 billion are net reserves with the banks (see Table).

� The SBP’s foreign exchange reserves have been declining consistently from USD

14.78 billion in 2010-2011 to USD 10.80 billion in 2011-2012. The SBP forex reserves

continued to decline in 2013 i.e. from USD 8.7 billion at end -January 2013 to US$6.7

billion as of 5th April 2013, mainly due to debt payments.

� The SBP reserves has fallen by US$4.163 billion in the nine and half months of the

current fiscal year 2012-13, which is the fastest-ever decline in a decade. The current

account deficit of nine months is over US$ 1 billion which is expected to further

expand in next few months.

� The private banks have reserves of over US$ 5 billion by as per existing law; the State

Bank has no right to utilize the deposited amount of reserves in the private accounts.

� Pakistan has recently paid four installments of over US$650 million to IMF as principal

amount of Stand-By Arrangement (SBA) and Extended Credit Facility (SCF) which

resulted in massive decline in forex reserves. On February 26, 2013 Pakistan paid

US$391 million to the IMF on account of 10th SBA installment, while 11th and 12th

SBA installments worth US$250 million was repaid on March 28, and April 1, this year

respectively.

� The rupee fell to an all-time low level of Rs 100 against the dollar in the open market

in February 2013 due to debt repayment to the IMF under SBA loan facility.

(Value: In Million US Dollars)

END PERIOD NET RESERVES WITHSBP

NET RESERVES WITHBANKS

TOTAL LIQUID FXRESERVES

2004-05 9,804.7 2,792.9 12,597.6

2005-06 10,765.2 2,357.2 13,122.4

2006-07 13,345.4 2,301.8 15,647.2

2007-08 8,577.0 2,821.7 11,398.7

2008-09 9,117.9 3,307.3 12,425.2

2009-10 12,958.2 3,792.2 16,750.4

2010-11 14,783.6 3,460.2 18,243.8

2011-12 10,803.3 4,485.3 15,288.6

By 11 October 2013 4,075.4 5,131,9 9,207.3

(Source: State Bank of Pakistan)




� The country is in serious trouble to make repayments to IMF and meet the widening

current account deficit. Experts say that mismanagement and lack of strategy have

pushed the country closer to default.

� The country is presently in a vicious circular flow of borrowing and repaying foreign

exchange to the IMF in order to stabilize the forex account. Though Pakistan had

opted for IMF bailout program in 2008, it is being forced again to approach the IMF

due to instability in foreign exchange account after repayment of loan.

� Pakistan has to pay US$4.8 billion to IMF under Stand-by Arrangement (SBA) loan

facility till June 30, 2014. Similarly, by 2015, Pakistan has to pay 3.497 billion SDR

(Special Drawing Rights) to IMF amounting to US$5.3 billion, which is likely to put

more pressure forex reserves of the country and may lead to payment default.

� The declining trend in forex reserves is having a negative impact on local currency and

encouraging rupee holders to buy dollars or gold to save their reserves from melting

on a day-to-day basis. This situation is a threat to the economy and requires

immediate remedy.

� The unstable foreign reserves will push the rupee further lower against the dollar,

which will lead to an increase in the import bill as well as create more challenges on

external and internal economic fronts.


� The new government would have to take tougher steps and undertake deep

structural reforms to put the economic conditions in shape, especially for building

stable foreign exchange reserves of the country.

� The government needs to restrict borrowing from the State Bank of Pakistan to

stabilize the forex reserves.

� The government should stop its policy of knocking at the door of IMF and other

international donor agencies and instead seek help from its friendly countries, like

China and Saudi Arabia, to obtain external funding.

� A comprehensive foreign exchange savings policy needs to be developed by engaging

economic experts.

� A huge portion of foreign exchange is spent on importing oil. It is imperative that oil

consumption in the country be controlled to reduce import bill. This could be done by

importing clean coal, instead of furnace oil, for electric generation; use of railways for

goods transportation; switching to cheaper modes of electricity production e.g.

hydro-electric, wind and solar power. These measures will ease pressure on reserves.

� Imports of luxury items should be restricted to stabilize the forex reserves. Moreover,

lucrative incentives should be given to exporters to enhance exports which would

bring foreign exchange to the country.



Declining Investments“Investors are like birds; they settle wherever there are good trees and

an appropriate environment.”- Anonymous

Facts and Figures

� The Foreign Direct Investment (FDI) into Pakistan has been continuously falling since

last five years, which is a matter of concern. The FDI inflow into Pakistan is less than

1% of total FDI made globally.

� The total FDI which stood at US$5.41 billion in 2007-08, declined to US$3.72 billion in

2008-09; US$2.15 billion in 2009-10; US$ 1.64 billion in 2010-11 and drastically falling

to US$0.81 billion in 2011-12. In the first nine months (July-March) of 2012-13, the

FDI fell further to US$0.62 billion.

� As per BOI data, in 2012-13 (July-March), countries which made major direct

investment into Pakistan include Hong Kong ($182.5 million), USA ($150.5 million),

UK ($143.5 million) and Switzerland ($112.9 million).

� During 2012-13 (July-March) few countries transferred their FDI out of Pakistan

which includes Norway, Netherlands, Singapore and UAE. It means their FDI inflow

was limited than their outflow during this period.

� The major investing countries in Pakistan include USA, UK, U.A.E., Japan, Hong Kong

and Switzerland.

� The major sectors which have attracted FDI inflows are oil and gas, financial business,

construction, trade, power and communication sectors.

� FDI flow from USA has been on a decline since 2008-09. In 2007-08, total FDI inflow

from USA was $1309 million which reduced gradually to $870 million in 2008-09;

$468 million in 2009-10; $238 million in 2010-11 and $233 million in 2011-12. During

July-March 2012-13, FDI inflow from USA stood at only $ 151.

� FDI flow from United Kingdom has also shown a declining trend from $860 million in

2006-07 to $295 million in 2009-10 and $207 million in 2011-12. During July-March

2012-13, FDI inflow from UK stood at $144 million.

(Value: In Billion US Dollars)

Year Total FDI

2007-2008 5.41

2008-2009 3.72

2009-2010 2.15

2010-2011 1.64

2011-2012 0.81

2012-2013 (July-March) 0.62

(Source: Board of Investment -Pakistan)




� The negative growth in Foreign Direct Investment has and continues to adversely

affect country’s economic growth as FDI plays a vital role in the development of any

country.

� The falling FDI will also result in limited technology transfer and creation of new

employment opportunities.

� Research suggests that a country which attracts higher FDI inflows can boost its

exports and thus achieve higher level of economic growth. Thus, exports are likely to

suffer due to declining investment in Pakistan.

� The declining FDI trend will also give a negative signal to the new global investors to

come to Pakistan.


� The major hurdles which are hindering FDI inflows into Pakistan viz. energy crisis and

unstable security situation need to be tacked by the government on war-footing

basis.

� The government should adopt long-term consistent economic policies to woo

investors, as frequent changes in policies distract foreign investors. Similarly, it

should ensure providing an investor-friendly climate.

� The economic governance need to be improved to attract foreign and domestic

investment. There should also be coordination in policies of different government

agencies, accountability and transparency.

� The government should hold consultation with the existing investors in Pakistan to

overcome their business bottlenecks. If they are satisfied, other international

investors will follow suit.

� The government should provide some kind of tax and other incentives to the

domestic investors to expand their business. This would encourage the foreign

investors to bring their capital into Pakistan.

� The government should make an assessment of regulatory impediments that are

depriving foreign investors to come to Pakistan and remove them on an urgent basis.



Spiraling Inflation“Inflation is like sin; every government denounces it and every

government practices it” – Sir Frederick Leith Ross, Renowned UK Economist

“Inflation is one form of taxation that can be imposed

without legislation” – Friedman Milton, American Economist

Facts and Figures

� The skyrocketing Inflation has become a major economic ailment for Pakistan and

has made it difficult for the common man to survive and make their both ends meet.

� Historically, from 1957 to 2013, the inflation rate in Pakistan averaged 8.03%,

reaching an all time high of 37.81% in December, 1973 and a record low of -10.32% in

February, 1959. From 2003 to 2012, inflation rate averaged 10.60%, reaching an all

time high of 25.33% in August, 2008 and record low of 1.41% in July, 2003.

� Inflation rate refers to general rise in prices measured against a standard level of

purchasing power. The most well known measures of Inflation are the CPI which

measures consumer prices, and the GDP deflator, which measures inflation in the

whole of the domestic economy.

� Inflation rate in Pakistan is reported by the Pakistan Bureau of Statistics (PBS).There

are four Price Indices viz. Consumer Price Index (CPI); Wholesale Price Index (WPI);

Sensitive Price Index (SPI) and GDP deflator. CPI covers retail prices of 374 items in 35

major cities and reflects changes in living cost of urban areas.

� According to PBS data, the average inflation in Pakistan during July-January of FY

2012-13, climbed to 8.3%. In April 2013, the inflation rate stood at 5.80%.

� Major categories in CPI include food and non-alcoholic beverages (35%); housing,

water, electricity, gas and fuels (29%); clothing and footwear (8%); transport (7%);

furnishings and household equipment (4%); education (4%); communication (3%);

health (2%) and recreation and culture, restaurants and hotels, alcoholic beverages

and tobacco and other goods and services (8%).

� Deficit budgeting is a one of the major causes of inflation in Pakistan as printing and

circulation of more paper currency in the market gives rise to inflationary pressure.

The government resorts to currency printing in view of the fact that it is unable to

cover the budget deficit from tax collections and foreign aid.

� The government has constituted a National Price Monitoring Committee under the

chairmanship of Secretary Finance, which is mandated to review the price and supply

position of essential items in consultation with provincial governments and

concerned Federal Ministries and Divisions.




� Inflation growth is much higher than the income, which is declining the standard of

living of people.

� Inflation is having a negative impact on distribution of wealth and balance of

payment position of Pakistan.

� Inflation is eroding the viability of all segments of the economy and lowering the

economic growth rate.

� Inflation is reducing the money value, leading to uncertainty of value of gains and

losses of borrowers, lenders, buyers and sellers. This in turn discourages saving and

investment.

� Inflation is discouraging inflow of foreign investments into the country.

� Inflation is increasing rate of poverty and unemployment. The poor families are

forced to promote child labour so that they can at least survive and satisfy their

hunger.


� Strategic planning is required to combat inflation. A prudent monetary policy need to

be developed, backed by substantial fiscal adjustments, to ease government’s

funding requirement and control inflation.

� The government should immediately waive of all kinds of taxes and levies on

essential commodities like flour, sugar, rice, ghee, oil, vegetables and dairy products

to bring some relief to the general public.

� The government should make immediate crack down on hoarders of food items,

(irrespective of their political affiliations) that result in artificial inflation.

� Cost and Management Accountants may be given a role to carry out ‘cost-profit

analyses’ of goods available in market to discourage profiteering by producers or

middlemen or retailers.

� Government may consider forming nation-wide network of ‘Consumer Societies or

Associations’ to assert pressure on the Retailers Associations not to charge excessive

profits on essential items. The provincial government may be asked to support these

Societies.

� The government needs to encourage domestic production instead of relying on

imports and give preference to investment in consumer goods instead of luxury

items.

� The government should put in place a strong monitoring system at different levels to

have a sound evaluation of the process at every stage. The professional services of

cost accountants can be hired for this purpose.

� The government should strictly control the money supply in order to bring down

inflation. The State Bank may be asked to focus its attention to keep inflation close to

the target of five percent.

� The government should give priority to agricultural growth and improve the supply

chain of high value crops to control prices of essential commodities in the market.

� There is an urgent need to restrict government borrowing to curtail excessive

monetary growth – leading to inflationary pressure. A ceiling may be imposed by the

government itself.



Growing Fiscal Budget Deficit“Deficits mean future tax increases, pure and simple. Deficit spending should

be viewed as a tax on future generations, and politicians who create deficits

should be exposed as tax hikers” - Ron Paul, a Renowned US Author and Politician

Facts and Figures

� A fiscal budget deficit occurs when a government spending is much greater than tax

revenues.

� The budgetary estimate of fiscal budget deficit for FY 2012-13 was fixed at 4.7% of

GDP by the Finance Ministry of Pakistan. This target has now been revised upward to

6.5 percent (see Table)

� The Planning Commission, however, estimates that fiscal deficit would be over 8% of

GDP during current fiscal year, in view of massive revenue shortfall, surge in power

subsidies and high interest payments.

� The fiscal budget deficit has increased to Rs 1.286 trillion in 10 months (July-April) of

current FY 2012-13. Let’s analyze the ‘Revenue’ and ‘Expenditure’ sides of the

budgetary targets:

Revenue Side – Tax Revenue Collections

FBR had set a target for tax revenue collection at Rs. 2.381 trillion for current FY 2012-

13. However, during the first 10 months (July-April) of FY 2012-13, FBR was able to

collect only Rs. 1.485 trillion (Rs. 896 trillion left to be collected in May and June) .

Accordingly, FBR revised downwards thrice which is now Rs. 2.050 trillion.

Expenditure Side – Power Subsidies

The budgetary target for power subsidies was set at Rs. 185 billion for FY 2012-13.

However, during the first 10 months (July – April) of FY 2012-13, over Rs. 320

billion have already been doled out to the power sector under this head. It is now

estimated that actual power subsidies would go further to Rs. 320 billion. The

expenditure on interest payment stood Rs 844.52 billion during July-March

period of current FY 2012-13

� The factors that are contributing to higher budget deficit in FY 2012-13 are as under.

The cumulative impact of these risks is being estimated at one to two percent of GDP:

(a) Non-realization of FBR tax revenue target

(b) Less than budgeted realization of non-tax receipts

(e.g. Interests and Dividends from PSEs)

(c) Non-realization of external inflows impacting the budget

(e.g. License fee from sale of 3G licenses)

(d) Partial realization of programmed loans from the World Bank

and Asian Development Bank

(e) Increase in electricity subsidy due to delays in reforming

the power sector; and

(f) Non-generation of surpluses by the Provinces




� The growing fiscal budget deficit has led to gradual expansion in the revenues and

expenditures of the government, marked by below target tax revenue collections and

increased expenditures on power subsidies.

� Huge fiscal deficit has caused significant impact on inflation due to excessive growth

of domestic credit.

� Fiscal deficit has also impacted the balance of trade and foreign reserves. The trade

balance is affected indirectly through relative prices and money depreciation/

appreciation.

� Fiscal deficit has also led to increase in interest rates and crowded out private

investment.

� Fiscal deficit has reduced / squeezed the credit for the private sector.

Trend in Budget Deficit

Year(Rs. in Billion) (As percent of GDP)

BudgetDeficit

PrimaryDeficit

InterestPayments

BudgetDeficit

PrimaryDeficit

InterestPayments

1983-84 27.7 13.6 14.1 5.5 2.7 2.8

1984-85 39.4 22.9 16.5 6.9 4.0 2.9

1985-86 44.6 24.9 19.7 6.8 3.8 3.0

1986-87 48.5 24.6 24.0 6.7 3.4 3.3

1987-88 63.4 30.1 33.2 7.7 3.7 4.1

1988-89 62.1 23.9 38.1 6.8 2.6 4.2

1989-90 59.9 14.6 45.3 5.9 1.4 4.4

1990-91 97.1 47.1 50.0 8.0 3.9 4.1

1991-92 104.9 42.5 62.4 7.3 2.9 4.3

1992-93 109.1 30.3 78.8 6.8 1.9 4.9

1993-94 94.2 3.3 90.9 5.0 0.2 4.8

1994-95 110.4 13.1 97.2 4.9 0.6 4.3

1995-96 149.8 17.3 132.5 5.9 0.7 5.2

1996-97 152.7 -8.5 161.2 5.2 -0.3 5.5

1997-98 204.6 2.2 202.4 6.4 0.1 6.3

1998-99 179.2 -40.9 220.1 5.1 -1.2 6.3

1999-00 172.3 -90.0 262.2 4.5 -2.4 6.9

2000-01 164.9 -84.4 249.3 4.0 -2.0 6.0

2001-02 201.9 -73.4 275.3 4.6 -1.7 6.3

2002-03 177.4 -50.4 227.8 3.6 -1.0 4.7

2003-04 162.0 -60.4 222.4 2.9 -1.1 3.9

2004-05 217.0 -17.8 234.8 3.3 -0.3 3.6

2005-06 325.3 65.3 260.0 4.3 0.9 3.4

2006-07 502.0 115.1 386.9 5.8 1.3 4.5

2007-08 777.2 267.6 509.6 7.6 2.6 5.0

2008-09 680.4 24.1 656.3 5.3 0.2 5.2

2009-10 929.1 286.8 642.3 6.3 1.9 4.3

2010-11 1194.4 496.3 698.1 6.6 2.7 3.9

Source: Pakistan Economic Survey, State Bank of Pakistan, Fiscal Operations, Ministry of Finance




� To bring down the fiscal budget deficit, the best option is to promote economic

growth. If economy grows, the government will get more tax revenues, without

raising taxes.

� The tax net should be expanded and strict measures be taken against tax evaders. All

income should be under tax net and all exemptions should be done away with,

especially to agriculture and services sector.

� The government should cut is public spending as well as domestic borrowing to

reduce budget deficit.

� There is need to maintain fiscal discipline and bring consistency in monetary and

fiscal policies.

� The subsidies given to power sector and other Public Sector Enterprises (PSEs) need

to be reduced.

� The financial and fiscal constraints should be minimized through reforms for

generating more revenue.

� There must be equilibrium in exports and imports to overcome fiscal deficit.



Expanding Foreign Debts“Foreign aid might be defined as a transfer of money from poor people in rich countries to rich

people in poor countries” - Doug Casey, Investment guru; author of “Crisis Investing”

“Think what you do when you run into debt you give another

power over your liberty” - Benjamin Franklin, USA

Facts and Figures� Pakistan is the 3

rdlargest debt-recipient country in the region. Its external debts have

reached almost 33% of GDP as compared to 15% of India and 7% of China.

� Pakistan is currently caught in a debt trap with ratio of total loans reaching 72% ofGDP which is alarming.

� Pakistan external loans have doubled during the last five years and now stand at thelevel of US$65 billion.

� Pakistan’s debt-to-GDP ratio is around 65 percent which is exceedingly high. Themain reason of this high ratio is declining tax-to-GDP ratio, as out of 190 millionpeople, only 1.8 million pay taxes.

� Pakistan’s annual repayments are set to increase to around US$ 6 billion – over 20%of export earnings and more than half what Pakistan currently spends on health andeducation collectively.

Pakistan’s Debt and Liabilities Profile

(Value in Billion Rupees)

FY 2009 FY 2010 FY 2011 FY 2012 Q3 FY2012

Q3 FY2013

Pakistan’s Debt and Liabilities 8,746.1 10,702.2 12,530.0 14,553.4 13,733.5 15445.7

YoY Growth (In %) 30.7 22.4 17.1 16.1 16.8 12.5

As a percent of GDP 66.3 72.0 68.5 72.4 68.4 67.4

Pakistan’s Total Debt (A+B+C) 8,306.2 10,066.6 11,908.4 13,888.0 13,197.2 14,885.4

YoY Growth (In %) 28.3 21.2 18.3 16.6 17.4 12.8

As a percent of GDP 62.9 67.7 65.1 69.1 65.7 65.0


Summary of Pakistan’s External Debt Servicing(Value in Million US Dollars)

Description FY 2011 FY 2012 FY 2013(July – March)

Public debt (1+2+3) 3,152 3,693 4,009

Government debt 2,573 2,263 1,942

From IMF 442 1,318 2,058

Foreign exchange liabilities 137 112 10

Public sector enterprises (PSEs) 450 398 310

Guaranteed debt 160 40 35

Non guaranteed debt 290 358 274

Bank Borrowings 25 22 15

Private Sector 321 395 268

Guaranteed debt 0 0 0

Non guaranteed debt 321 395 268

Total Debt Servicing (A+B+C+D) 3,948 4,507 4,602


Note: Debt servicing exclude repayments of short term borrowings by scheduled banks.




� The people of Pakistan, especially those who are already under tax net, are over

loaded with more taxes by the government in order to repay the borrowed foreign

loans.

� High external debt borrowing has had a severe long term direct and indirect negative

impact on economy.

� Increase dependence on foreign debts has become a source of rising unemployment

and poverty, high inflationary pressure and slowness in economic growth of the

country.

� It has also discouraged both domestic and foreign private investment and pressure

on exchange rate.

� Pakistan has still not become in a position to formulate an independent fiscal policy

due to external debts.


� The government, with the consensus of all political parties, should use the ‘threat of

default’, like other countries to persuade the IMF, World Bank and other external

donors, to write off some of the debt and re-negotiate terms of the remaining debt

on a lower interest rate and for a longer duration. There are several international

laws which support the notion of writing off debts. Article 25 of International Law

Commission stipulates that “in case of an actual threat or a prospective peril to a

state’s essential interests, the state is excused for not performing an international

obligation”. A number of democratically elected governments like Argentina, Burkina

Faso, Peru, Mexico, Paraguay, and Ecuador had refused debt payments on the basis

of this rule. Pakistan can also decline to pay back its loans under this principle.

� The government should immediately constitute an independent ‘Debt Audit

Commission’ to undertake a comprehensive debt audit of the country and

recommend cancellation of unjust debts. The proposed Commission may include

economic experts as well as Cost and Management Accountants.

� The government should formulate a national strategy for increasing industrial

productivity and also initiate a national self-reliance scheme for self-sufficiency and

reduce its dependence on external loans.

� The tax administration need to be improved and progressive taxes on income and

wealth be introduced so that the elite and rich class of the society pays more and a

fair share of their taxes.

� The government should make strong fiscal adjustments instead of further borrowing

from foreign lenders.

� The government should take measures to stabilize macro-imbalances and mobile

domestic resources.

� There must be equilibrium in exports and imports to minimize the need for external

borrowing.

� A viable monitoring system need to be put in place to ensure proper and systematic

utilization of external borrowings for the development projects and to check mis-

management and manipulation of funds.



Unbridled Tax Evasion“The difference between tax avoidance and tax evasion is the thickness of a prison wall”

- Denis Winston Healey, former Secretary of State for Defence, UK

“Government lasts as long as the under-taxed can defend themselves

against the over-taxed” – Bernard Berenson, a Renowned Art Historian, USA

Facts and Figures

� According to Chairman NAB, estimated tax evasion per day is Rs. 7 billion which

comes to around Rs. 2.52 trillion annually. If this huge amount of tax evaded money is

collected, this could raise the tax-to-GDP ratio of Pakistan from present 9 percent,

which is lowest in region, to 20 percent.

� An estimated Rs. 12 billion is siphoned off on daily basis due to corrupt practices in

the country. This means annual loss is Rs. 4.32 trillion due to corruption which is

growing at an unchecked pace.

� According to an estimate, the influential class generates around US$15 billion of

black money every year while the unrevealed cash is estimated to be around US$200

billion. This money evasion, if collected and channeled properly into productive

sources.

� Pakistan has one of the smallest tax bases in world with only 0.5% (1.8 million) of 190

million population paying income tax. A large segment of the population, including

rich and elite class, is outside the tax net.

� During 2012, according to news, around two thirds of the country’s Parliamentarians

did not file return. It is a pity that not a single offender has been prosecuted for tax

evasion during 25 years in the country.

� State-Owned Enterprises (PSEs) like PIA, Pakistan Railways and Pakistan Steel Mills

have caused loss to the national exchequer by tune of Rs. 625 billion. The taxation

system is unjust as it is regressive and indirect.

� Agriculture sector, accounting for more than 21% of GDP, is exempt from taxation

due to political reasons. If this sector is taxed, it could generate sufficient revenue for

the government.


� Tax evasion is discouraging the honest tax payers, especially the salaried of working

class. The government is also restoring to further squeezing this class, instead of

bringing the rich and ruling class in tax net.

� Tax evasion is leading to widening gap between rich and the poor. Around 40 per cent

of the people are living below the poverty line of US$1 a day. There are frequent

cases of people committing suicide due to poverty.

� Poverty and unemployment, as a result of massive tax evasion, has led to general

frustration and worsening socioeconomic situation, which is creating a breeding

ground for social unrest and militancy in this country.

� Tax evasion is also having a negative impact on the Gross Domestic Product (GDP) of

the country.

� Tax evasion encourages the expansion in the informal or underground economy.




� A target-oriented program for tackling tax evasion should be on top priority list of the

government.

� The government should take measures to eliminate the unholy alliance between the

tax evaders and corrupt tax collectors in order to bring meaningful change in the

existing tax system.

� The government should consider introducing “Tax Payer Cards’ initially to those

individual tax payers who have filed income tax returns for the last three fiscal years.

This initiative will help discourage tax evasion and bring more people into the tax net.

The holder of tax payers card should be entitled to enjoy benefits such as discounts

and concessions in government fees (such as NIC, Passport fee etc); reduced mark-up

rates on bank loans; CVT waiver on ticket purchase’ quick processing in new utility

connections etc.

� All amnesty schemes should be done away with. It is making mockery of those who

are paying their taxes honestly at much higher rates than offered to those who evade

tax through different amnesty schemes.

� The government should make it a point to tax all income exceeding threshold. A

country with huge budget deficit and burdened with huge debts cannot have people

making billions in profits without paying tax.

� The tax network should be expanded, with particular focus on agriculture, textile,

real Estate, retail and service sectors. The taxation laws also need to be simplified.

� Tax machinery should be re-oriented for developing capability, capacity and

credibility.

� The government should strengthen its vigilance system to identify business units

which are running in losses for years but their owners are living comfortable

luxurious lives. Their living standards should be reconciled vis-à-vis their source of

income. At the same time honest tax payers should be provided level playing field.

� The FBR should educate the people in Pakistan for developing tax culture. This could

be accomplished by launching a national movement with the slogan “Let us all pay

income tax”.

� There should be better coordination with SECP and FBR so as to detect companies

which are registered with SECP but are not registered with FBR and thus are outside

the tax net.

� Individuals and companies making payments for their utility bills (electricity, gas,

water), communication bills (cell phones, PTCL) and for international travel (business

or pleasure) need to be checked whether they are in the tax net. If spending is above

a certain level then these entities should be made to pay taxes.

� The government should deal with corrupt elements in the public service with iron

hand.

� The government should take courage to sign a deal with the Swiss government to

recover the lost revenue and stolen funds which are badly needed at home.



Rising Unemployment

“A man who has no office to go to — I don't care who he is — is a trial of which

you can have no conception” – George Bernard Shaw,

a Renowned Irish Playwright and Noble Prize Winner

“I do not believe we can repair the basic fabric of society until people who

are willing to work have work. Work organizes life. It gives structure and

discipline to life” – Bill Clinton, Former US President

Facts and Figures

� In Pakistan, un-employment rate measures the number of people actively looking for

a job as a percentage of labour force. The unemployment rate has shown an increase

to 6.50% in the fourth quarter (Oct-Dec) of 2012 from 6.10% in third quarter of 2012.

By adding number of ‘contributing workers’, the unemployment rate comes close to

15% (A person who works without payment in cash or in kind on an enterprise

operated by a member of his household or other related persons is termed as a

contributing family worker)

� Historically, from 1985 to 2012, Pakistan unemployment rate averaged 5.38%,

reaching an all time high of 8.3% in 2005 and a record low of 3.10% in December of

1987.

� High population growth rate is the major cause of unemployment in Pakistan. The

annual population growth rate stands at 2.6%, whereas unemployment is growing

rapidly and every year 3 million people need jobs. According to a Labour Force

Survey, one out of every 10 people of country’s population is unemployed.

� According to Pakistan Economy Watch, almost half of Pakistani workforce is

unemployed and employment to population ratio has registered a nominal rise to

50.4% from 46.8% over the past ten years. The employment rate is almost 80% for

men. Pakistan has seen very low labour productivity due to rising labour force.

� According to Labour Force Survey, unemployment rate in urban areas has increased

slightly by only 2% this year (now it is 10.1%) whereas in rural areas it has increased

much by 16.3% (now it is 5%). This shows that in rural areas the jobless rate has

increased to a great extent.


� Rising un-employment has negatively affected the economy and industrial

productivity of the country. The jobless people, if employed, could contribute

immensely in raising production.

� Unemployment has created huge economic costs on society and put a significant

burden on public budget.

� Unemployment has also adversely affected social circumstances. It has brought

depression and frustration among the youth, which compels them to resort to

criminal activities. The youth are being exploited to become part of street-crimes,

terrorism, drug-trafficking and other social evils.

� Unemployment has resulted in a number of other societal disorders such as

corruption, dishonesty, increase suicide rates, disturbed family relationship etc.

� Growing rural jobless rate and unemployment has forced the rural population to

come to the urban areas which eventually creates other problems for the city

administration.




� The government should impose a limit on maximum number of per capita working

hours, which would force industries to hire more workers. In almost every

government office in Pakistan, workers are wasting time and not performing their

jobs, and also claiming overtimes. By this initiative, this practice would be

discouraged.

� The government should take measures to speed up industrialization and economic

growth by removing all hurdles towards creating conducive investment-friendly

environment in the country.

� The government should introduce self-employment schemes in the rural and less

developed areas with a two-pronged strategy to reduce the alarming rise in rural

jobless rate and to discourage influx of rural people to the urban cities of the country

to seek employment.

� Government should establish network of technical and vocational training institute in

the country to enhance the skill of unemployed youth so that they are able to get jobs

or start their own small businesses.

� The government should establish ‘employment offices’ to provide information to the

jobless youth on the employment opportunities available in the government and

private sector.

� The government should encourage setting-up of small industries, particularly in rural

areas and also provide infrastructure and subsidies and credit facilitates to the

people for this purpose to reduce un-employment.



Loss Making Public Sector Enterprises (PSEs)

“Public Sector Organizations have become white elephants.

With political will, they can be transformed into Golden Fish” – Anonymous

Facts and Figures

� According to Ministry of Finance, the following eight PSEs are causing huge losses of

Rs 400 billion to national exchequer and draining fiscal resources. This amounts to

around 15% of government’s total annual revenues:

1. Pakistan Railways (PR)

2. Pakistan Electric Power Company (PEPC)

3. Pakistan International Airline (PIA)

4. Pakistan Steel Mill (PSM)

5. National Highway Authority (NHA)

6. Utility Stores Corporation (USC)

7. Trading Corporation of Pakistan (TCP)

8. Pakistan Agricultural Storage Corporation (PASC)

� These 8 PSEs received more than US$ 3.5 billion in support from the federal

government during the year 2012, which is higher than the federal component of

Pakistan’s development budget.

� PIA is on top of huge loss making organizations and sustaining losses of Rs. 70 million

on daily basis whereas Pakistan Steel Mill is making losses to the tune of Rs. 50 million

every day of the year.

� The government has provided bail-out packages to PIA and PR recently. In February

2013, Rs. 100 billion bailout package for PIA was approved by the ECC of Federal

Cabinet. Similarly, Rs. 6 billion bail-out package for Pakistan Railways has been

announced by Cabinet Committee on Restructuring (CCoR).

� According to State Bank of Pakistan, the PSEs have reportedly borrowed a total

amount of Rs. 42.7 billion during the first 9 months (July-March) of FY 2012-13.

� Pakistan Railways (PR) have almost come to a standstill, still government has not laid

off a single employee out of its 110,000 staff, although it admits that PR can be

operated with only 40,000 staff. The Pakistan Steel Mills (PSM) also has surplus

workforce but none have been removed by the government.

� The government has promulgated the ‘Public Sector Companies (Corporate

Governance) Rules, 2013’ which is expected to bring about more transparency in

PSEs operations and plug their huge losses. The rules will improve the governance

framework of public sector companies and minimize political interference in them.




� The state owned or public sector enterprises are the ‘white elephants’ of the national

economy and are causing loss of billions of Rupees to national exchequer. These are

serious drain on government resources.

� According to an estimate, Pakistan is losing around 2% of GDP every year due to huge

losses by these PSEs.

� The bailout packages offered by the government to loss making PSEs is nothing but

subsidizing their poor management and corruption. The consumers have to pay for

the high price of inefficiency of these PSEs.

� The workers lose millions as a result of low wages and poor prospects in these PSEs.

� The inefficiency of these losses making public sector organizations are one of the

reasons for lack of funds required for budget purpose by the government and thus

contributing to expansion in fiscal deficit.


� The government should make major reshuffles in eight loss making state-owned

entities, including induction of independent and professional ‘board of directors’ so

as to transform them into profitable units. Private sector should be given major

representation on the board of these PSEs.

� The government should make it mandatory upon itself not to interfere in the affairs

of these PSEs in shape of political appointments, and let them operate independently

with complete autonomy under supervision of independent board of directors. They

should not be answerable to the government, but only to legislature.

� The government should identify those PSEs which may be privatized and assign this

task to the Privatization Commission to complete the privatization process with the

given time frame.

� A committee may be formed by the government to finalize a ‘Restructuring Plan’ for

the remaining PSEs. Pakistan Railways and Pakistan Steel Mill should be given priority

in restructuring process.

� Private Sector representatives with good track record of management, organization

and administrative skills, should be appointed as heads of PSEs, especially in PIA,

PSM, PR, TCP, PEPC etc.

� An independent ‘holding company’ may be formed to replace and take up the role of

different administrative ministries in controlling PSEs. They should be separated from

operational interference by the government.

� The Auditor General of Pakistan should be appointed auditor for all the State owned

Enterprises.



Rampant Corruption

“Corruption is like a snow which melts from the top” – Mohtarma Fatima Jinnah

“Corruption cannot exist without the connivance of political leadership,

even if passive” – Kimberly Ann Elliot, a renowned American Economist

Facts and Figures

� As per the Corruption Perception Index 2012 (CPI) of Transparency International (TI),

Pakistan ranks at 139th

position, out of total 174 countries. It further reveals that

police continue to be considered as most corrupt sector in Pakistan. In fact, the police

have been ranked the most corrupt institution in Pakistan for the fourth time in

surveys conducted by Transparency International in 2002, 2006, 2009 and 2010.

� Transparency International (TI) has revealed that during last three years, corruption

has cost the nation more than Rs. 3 trillion per annum in selected areas. This figure

does not include the loot and plunder of national wealth in mega scandals like Steel

Mill scam, rental power plants frauds, NICL, Hajj scandals etc.

� TI further reveals that corruption is steadily rising at the pace of 15 to 20 percent

annually in Pakistan. It further says that the country lost Rs. 1,100 billion to

corruption in 2011 compared to Rs. 825 billion in 2010 and Rs.450 billion in 2009.

� According to TI, there has been no check on corruption in Pakistan as anti-corruption

institutions i.e. NAB and FIA have sometimes been siding with the corrupt elements

by distorting and manipulating evidences.

� Former Pakistani Finance Minister, Mr. Shaukat Tareen, in a statement, had said that

corruption in Federal Board of Revenue (FBR) alone stood at Rs. 500 billion, whereas

state enterprises like PIA, WAPDA, Pakistan Steel Mills and Railways eat up Rs. 300

billion of tax payers’ money.

� In 2007, World Bank & IFC conducted ‘Enterprise Surveys’, in which 59% companies

identified corruption as a major constraint to doing business, and 48% companies in

Pakistan expect to give gifts to public officials 'to get things done'. This observation is

also shared by World Economic Forum Global Competitiveness Report 2012-2013, in

which companies indicated corruption as most problematic factor for doing business.


� Rampant corruption has eroded the efficiency in public sector enterprises, which

have become a perpetual drain on the national budget.

� Top-to-down corruption in the government has discouraged people to pay taxes, as

they expect no return in terms of social welfare, social security and better health and

education facilities.

� Corrupt environment has created injustice in the society, which has lead to violence

and criminal activities.

� Pakistan’s image as a ‘corrupt country’ internationally, has deterred foreign capital

and investment inflows.

� Corruption by the police has resulted in lack of confidence in authorities and a culture

of lawlessness.



� Corruption has hindered good governance and weakened the democratic institutions

in the country.

� Corruption has hampered economic growth as well as the ability of the government

to raise taxes. This has led to promotion of informal businesses. It is a fact that due to

corruption in tax machinery and complex tax collection procedures, the businesses

avoid getting registered for tax purposes.


� Political will is the key driver of systematic change in corruption environment. A

nation-wide anti-corruption reform should be undertaken by the new government in

public and civil services.

� NAB should be given more powers and independency to check and take action

against corruption cases. It should be truly independent of any executive or political

control to investigate into allegations of corruption against politicians, bureaucrats

etc.

� A ‘code of conduct’ should be framed for public servants and parliamentarians.

Through an act of parliament, it should be made obligatory for them to follow the

code.

� A fool-proof accountability system should be implemented. The business community

and the civil society should be associated in anti-corruption reforms and initiatives, to

keep a check and balance on NAB.

� There should be regular effective audit of personal bank accounts of politicians and

bureaucrats.

� The recruitment process in the law enforcement agencies should be strictly based on

merit and professional standards, without political interference. The pay structure

should be reasonable to discourage corruption.

� The civil society and NGOs should be associated with government agencies and

committees, in advisory and oversight roles so that they can act as “watchdogs” in

fighting against corruption.

� The government should seriously consider setting up of an independent ‘Anti-

Corruption Ombudsmen’ at federal, provincial and local levels, to deal with

complaints against the conduct of government officials and agencies dealing with

public. The proposed Ombudsmen should dispose of corruption cases, involving

abuse of power, illegal gratification and misappropriation of property, kickbacks and

commissions, expeditiously.



Growing Informal EconomyBlack money is so much a part of our white economy; a tumor

in the centre of the brain – try to remove it and you

kill the patient.” - Rohinton Mistry, an Indian-born Canadian Writer

Facts and Figures

� The unaccounted economic activity, not reflected in national statistics, is termed as

informal or unofficial, or undocumented or black economy. According to estimates,

Pakistan’s informal economy is larger than previously approximated and expanding

at rapid pace; whereas formal sector appears to be on retreat.

� A research conducted in 2012 by PIDE (Mr. Ali Kemal and Mr. Ahmed Waqar Qasim)

reveals that the size of informal economy in 2008 ranged 74% to 91% of formal

reported economy. They concluded that Pakistan’s GDP is understated by 91.44%

due to non-inclusion of informal business.

� According to a research study (Iqbal, Qureshi and Mahmood) the informal economy

in Pakistan grew annually at the rate of 27% in 1970s; 14% in 1980s and 26% in 1990s.

This means that the real GDP growth rate is usually much higher than the rates

quoted on official documents.

� A study conducted by LUMS in 2003, concluded that out of Rs100, the government

collected only Rs. 38 and Rs. 62 went to pockets of taxpayers, tax collectors and

practitioners.

� A research report prepared by Federal Board of Revenue (FBR) reveals that the

informal or underground economy in Pakistan expanded at the rate of 9% from 1977

to 2000.

� According to State Bank’s study, the size of Pakistan’s black economy presently

stands at around 30% of GDP or around US$70 billion a year. This figure might be

even more, considering low tax-to-GDP ratio.

� Dr Aqdas Ali Kazmi in his paper ‘Tax Policy and Resource Mobilization in Pakistan’

estimates that 70% part of the economy consists of 36% pure black economy; 18%

exempted economy; 9% illegal economy; 4.5% unrecorded economy and 2.5%

informal economy (unreported economy).

� Economic experts believe that cumbersome tax structure and regulatory burden is

not only preventing informal sector to formalize but also driving existing documented

firms to move to informal sector. According to tax experts, number of firms on tax

register (income tax and sales tax) has declined during last five years.

� Rampant high level of corruption in the government is considered another major

factor due to which the people and businesses are reluctant to pay taxes and avoid

documentation. Those who are in the tax net are exploited and harassed by the

authorities, even if they are honest taxpayers.


58 |


� There is a growing trend that many existing businesses in formal sector are either

completely or partially shifting production to the underground economy. This trend

was even noticed by the FBR in cigarette making sector where a sharp decline in

federal excise occurred during the year 2009-10. The same trend was also observed

in vegetable ghee and cooking oil units.

� The growing informal sector has brought up serious structural constraints in

Pakistan’s formal sector and for its overall, long term growth prospects.

� The unorganized sector expansion has caused distortions in the formulation of public

policies and investment in infrastructure such as witnessed in energy and power

sector.

� The informal economy growth has induced higher consumption, leading to more

production of goods and services in the economy that is not reflected in the national

accounts.


� The SECP should carry out a candid survey of the underlying reasons which restricts

the informal or unlisted sector, especially the SMEs, to come under the ambit of

corporate structure. The SMEs should be provided adequate financial services to

encourage them to register as corporate entities.

� The regulatory framework should be simplified to attract the informal and unlisted

businesses. Extensive awareness campaign should be initiated to promote the

benefits of corporatization.

� The taxation structure is quite distorted and leads to tax evasion. This should be

rationalized and the registration process be made simpler and user-friendly to speed

up corporatization.

� The concept of presumptive taxation be gradually reduced and only real income

should be taxed. The tax and corporate laws should also be made investor-friendly to

promote corporatization in the country

� The generous unjustified tax exemptions given to privileged and protected segments

of the society should be withdrawn forthwith.

� The tax rate on listed corporate sector should be brought down to 25 percent or else

a uniform tax rate of 30 percent be introduced for all businesses, irrespective of their

legal status to encourage corporatization.

� The government should make it mandatory for the profit-making listed companies to

pay dividends to their shareholders. This initiative would improve market liquidity

and enable the small investors to share in the earnings of listed companies. This will

also generate additional revenue for the government.

� The local Chambers of Commerce and Industry be asked to launch “Pay your Taxes”

campaign, in order to supplement the efforts of the government to promote the

corporate sector.


Chapter 3: Assessment of major issues of Industry, Services and Financial Sectors | 59



60 | Chapter 3: Assessment of major issues of Industry, Services and Financial Sectors

Assessment of major issues of Industry,Services and Financial SectorsChapter 3

Industry / Manufacturing Sector

Textile Industry

Facts and Figures

� Pakistan is 8th largest exporter of textile products in Asia, having share of less than

1% in global textile trade.

� Textile sector contributes 9.5% to the GDP and provides employment to about 15

million people or roughly 30% of the 49 million workforce of the country.

� Pakistan is the 4th largest producer of cotton. There are 1221 ginning units, 442

spinning units, 124 spinning units and 425 small units which produce textile products.

� Pakistan contributes 5% to global spinning capacity, with 3rd

largest capacity in Asia

after China and India.

Major Specific Issues

� Precarious Energy situation – power shortage and load shedding

� Reduced gas supply

� High input cost (e.g. raw materials and utilities)

� Unavailability of Yarn – mostly exported

� Low value addition

� High mark-up rates


| 61

Proposed Measures

� The duty free market access to Pakistani exports granted by EU under its Generalized

System of Preferences (GSP) Plus status w.e.f. 1st January 2014, would greatly

benefit our textile and clothing industry to enhance exports to EU countries. The

government should immediately resolve the power and gas shortage faced by textile

sector otherwise GSP Plus status would prove futile.

� The government should consider giving preferential treatment to the textile sector

by providing it un-interrupted electricity and gas supply. The present situation is that

around 800 units have been closed down in Punjab, causing massive unemployment

of approx. 15, 00,000 workers.

� The government should consider installation of new electricity and gas plants in

Faisalabad which is the textile hub of Pakistan, surrounded by biggest cotton belt and

attracting workers from across Punjab province in the weaving mill, spinning units

and garment factories.

� The government should encourage and incentivize the export of value added textile

products to earn maximum foreign exchange earnings, instead of relying on exports

of cotton and fabrics.

� The Trade Development Authority of Pakistan (TDAP) should be advised to support

the textile exporting companies in creating and promoting their brand names in

international market, as well as in arranging their joint ventures with world

renowned brand names in textiles.

� The textile industry may be offered zero-rated duty for import of latest equipment

and machinery to replace and upgrade their obsolete machineries in order to achieve

product competitiveness.

� The sub-rule (6) under SRO 801(I)/2002 dated 15/11/2002 should be re-enacted in

letter and spirit, enabling the SME textile industry to avail the DTRE facility.

� Under DTRE, the requirements of post dated cheques/ bank guarantee, amounting to

value of import duty and taxes as well as requirement of indemnity bond, customs

audit/ inspections should be done away with. Currently five different departments

are involved in DTRE inspections and verifications. It should be delegated to a single

authority to reduce the bureaucratic hassle.



Cement Industry

Facts and Figures

� Pakistan is the 5th

largest cement exporter country in the world.

� Cement industry is a capital intensive industry, employing around 3% of the total

workforce.

� Cement industry is contributing taxes of about Rs. 30 billion to the national

exchequer.

� Pakistan is perhaps only country in the region having surplus cement with lowest per

capita cement consumption. During 2011-12 Pakistan had surplus capacity of 12.25

million tons.

� Cement exports constitutes one third of overall cement production in the country. In

2011-12, Pakistan exported 8.57 million tons of cement to Afghanistan, India and

other countries.

� The current installed cement production capacity of 24 units in Pakistan is 44.77

million tons, whereas the production capacity of clinker is 42.64 million tons. The

existing capacity utilization of cement is 70% to 75%.


� High production cost

� Huge transportation cost

� High incidence of taxes

� Cartelization

� Declining exports to India due to non-tariff barriers

Proposed Measures

� The government should exploit the coal reserves in the country for making it

available to the cement industry, which could provide them a cheap and constant

source of energy for production.

� Petroleum coke is a fuel, commonly used universally, as a substitute of coal in cement

industry. The Government should reduce the custom duty on import of Petroleum

coke from 5% to zero percent, as given on coal, in order to reduce the input cost of

the cement industry.

� Import of Pet coke (HS Code 2713.1100) be freely allowed from India via sea and land

routes at Attari and Wagah entry points, as is being done in case of cement export

from Pakistan to India.

� Import of cement machinery should be exempted from the levy of sales tax.

� Federal Excise Duty (FED) on cement may be reduced to Rs. 200 per ton from present

Rs. 500 per ton. Similarly, the withholding tax on power bills of cement units may also

be abolished to help the cement industry bring down its huge cost of production.

� The government must seek trade concession for the cement industry by using its

favourable diplomatic relations with the Middle Eastern and Gulf countries. Trade

Development Authority of Pakistan (TDAP) should be advised to include cement in

their exhibitors’ profile.



Sugar Industry

Facts and Figures

� Pakistan is the 5th

and 8th

largest country in the world by cane cultivation and sugar

production.

� Sugar industry is the second agro-based industry of Pakistan, employing 1.2 million

work force.

� Sugar industry contributes around 22 billion to the government in shape of taxes.

� The annual sugar consumption of Pakistan is around 4.34 million tons i.e. 24 kg per

capita.

� The current installed sugar crushing capacity of around 88 sugar factories in the

country is 43.91 million tons. The average capacity utilization stands at 53.21

percent.

� During 2011-2012, total sugarcane production stood at 58 million tons, whereas

sugar production was around 4.71 million tons.

� Pakistan exported 109,000 tons of sugar by 30th

September 2012, as reported by

State Bank.


� Delay in payment to growers by Millers

� Liquidity problems faced by Millers

� Low yield due to unscientific agricultural practices

� Low sugar recovery

� Late crushing by farmers

� Late transportation of sugarcane to mills

� Late fixation of support price

� Sugar hoarding



Proposed Measures

� The Ministry of Commerce, Government of Pakistan, has allowed export of sugar vide

public notice dated December 14, 2012. Accordingly, the State Bank of Pakistan (SBP)

vide its Circular # 11 dated December 18, 2012 has notified the mechanism for

processing of such cases, whereby contracts for sugar export shall have to be

registered against irrevocable letters of credit and advance payments. However, it

has been observed by the Pakistan Sugar Mills Association (PSMA) that SBP also

entertained paper contracts which resulted in early exhaust of quota. It is therefore

suggested that the above SBP circular may be complied with strictly and contracts,

which are to be registered with SBP should only be made contingent with irrevocable

letters of credit and advance payment.

� The Government as well as sugar mills should make combined efforts to assist the

farmers, through Agricultural Research Institutes, in planting high sucrose recovery

varieties of sugar cane and in combating plant diseases through use of better

pesticides. This would improve yield per hectare.

� The government should encourage formation of ‘Supervisory Committees’,

consisting of representatives of growers, sugar mills, agricultural department and

local administration, to deal with price, supply and other related issues between the

growers and the sugar mill management.

� The government should determine the ‘support price’ of sugarcane crop on the basis

of economic factors like increase in prices of inputs and sucrose recovery, etc. to

equally protect the interest of all stakeholders.

� The government should seriously resolve the key issue of marketing of sugarcane

from grower to mill owners and of refined sugar from mill to the market. It should

strictly reduce or eliminate the role of middlemen in order to control hoarding and

artificial hike in price of sugar in the market.

� The government should provide special incentives to those sugar mills which co-

generate energy from Bagasse during off-season. This would not only create

additional revenue for the sugar mills but will also help the country in meeting the

electricity shortfall.

� The Pakistan exporters are facing great hardships in exporting sugar through land

routes to India, which is the biggest importer of our sugar. The government must take

up this issue with the Indian government to facilitate exports of sugar from Pakistan

on bilateral basis.



Automobile Industry

Facts and Figures

� Auto Industry in Pakistan contributes around US$ 3.6 billion to the GDP and earns

revenue of around US$ 0.82 billion for the country.

� Auto industry is saving around US$ 2.4 billion foreign exchange annually through

localization.

� Auto Industry has total investment of US$ 1.09 billion and provides direct

employment to around 1.4 million people. It is the second largest payer of indirect

taxes after the petroleum sector.

� There are 3200 units of automobile industry in Pakistan which are producing 200,000

vehicles and 1.8 million motorcycles annually.

� Auto industry is making exports of Rs. 128 million annually with huge potential for

further growth.


� Competition from used imported cars

� Rising interest rate

� Depreciating Pak Rupee

� High rate of duty and taxes

� High Input Cost of Raw materials (Iron and Steel)

� Lack of Skilled manpower

� Lack of auto-financing

Proposed Measures

� The government should persuade the car-assemblers to produce cheaper quality

cars in accordance with the purchasing powers of the consumers in Pakistan.

� The government must encourage the foreign auto-assemblers in Pakistan to transfer

technology in a given time frame for localization and strengthening the auto industry.

� The government should frame regulation to make it a binding on the automobile

manufacturers to offer safety measures such as anti-lock breaking system (ABS),

lower CO emissions, etc along with quality specifications in order to ensure standard

safety and quality standards in the auto industry.

� The government should develop a policy for the dealership/supply chain structure in

auto industry as these do not have any significant role and are merely acting as

agents of car manufacturers. Due to delay in deliveries, premiums are charged in

secondary markets. There is need to create a meaningful competition for the car

dealers to put in place perfect competition for the industry.

� Due to rising fuel prices globally, the government should encourage switching over to

ethanol fuel as used in Brazil and other countries. Ethanol Fuel is produced by

Molasses, which is produced in good quantity by the sugar mills in Pakistan. Since the

engines of locally assembled cars do not support ethanol, as such the government

should facilitate the industry in acquiring the technology to produce ethanol

compatible cars. In Brazil they use 90% Ethanol and 10% petroleum whereas

Pakistani cars with default engines can afford only 3% Ethanol.



Leather Industry

Facts and Figures

� Pakistan ranks 15th

in the world production of leather and the 5th

largest exporter in

the world with 3 percent share in global market of leather sector.

� Pakistan stands at 2nd position in terms of production of quality leather in the world

after Italy.

� Leather industry is the 3rd

largest export-oriented sector of Pakistan with annual

exports of around US$ 1 billion.

� Leather industry is the 2nd

largest foreign exchange earner with contribution of 4.42

percent.

� Leather industry contributes around 5% to the GDP and provides employment to

more than one million people in around 800 tanneries in the country.


� Electricity and Gas shortages

� Declining exports

� Lack of trained manpower

� Smuggling and unlawful export of live animals

� Export of wet blue leather under mis-declaration

Proposed Measures

� The government should consider realistic increase in duty drawback rates on export

of finished leather for goat/ sheep skins and cow/buffalo hides and leather as the

existing rates on these items are very low (ranging between 0.80% to 2.12%).

Similarly, the withholding tax on leather exports should also be reduced from 1% to

0.5 percent.

� The government should impose a complete ban on export of wet blue leather of all

kinds of raw hide/skin and pickled leather, in order to avoid shortage of these

essential raw materials for the local leather industry. Moreover, stringent measures

should be taken to discourage massive smuggling of live animals from the borders to

avoid shortage of hides and skins.

� The government should consider allowing duty free import of essential accessories to

the leather industry for value addition in leather products such as leather shoes,

bags, garments etc.

� The government should study incentives provided to the leather industry in India,

Bangladesh and China by their respective governments such as support for

technology upgradation, setting up of Leather Development Centers, leather and

footwear parks, combined treatment plants etc. It should also consider framing a

‘leather development plan’ like in India.



Pharmaceutical Industry

Facts and Figures

� Pakistan has the 8th

largest pharmaceutical manufacturing industry in the world with

40 biotechnology companies, involved in development and manufacturing of various

drugs.

� Pharmaceutical industry contributes around US$ 1.6 billion towards GDP of Pakistan

and provides employment to around 4 million people.

� Pakistan has about 400 pharmaceutical manufacturing units with about 70,000

registered drugs. The share market of local pharma is almost 70% while remaining are

multinational companies.

� Pharmaceutical Industry meets around 90% of country's demand of finished

medicine. Locally manufactured medicines are up to international standards.

� Pakistan is exporting pharmaceutical products worth around US@ 200 million

annually.


� Unreasonable price control strategy by Drug Regulatory Authority

� Inflation

� Rupee Devaluation against Dollar

� High Cost of Utilities

� Power shortages



Proposed Measures

� The pharmaceutical industry has a long standing demand for allowing a reasonable

price increase against inflation and heavy increase in input costs. The government

must consider their legitimate demand after carrying out mandatory cost audit of

each product through cost auditors so that the increase in prices and profits are not

so excessive that put additional burden on the common man.

� The Drug Regulatory Authority (DRA) need to be revamped and restructure to

transform it into a dynamic and professional body that may develop effective policies

for the pharma industry.

� The government should offer tax incentives to attract investments from foreign

pharmaceutical companies and also to encourage the local pharma industry to

produce quality medicine.

� The government should support research and development initiatives in the

pharmaceutical sector, like in other countries, to ensure availability of quality drugs

in the country. In this connection, the government may also consider release of

grants to pharma companies on meeting set criteria.

� The government should make it mandatory through legislation for every

pharmaceutical company to produce atleast on essential raw material in Pakistan so

as to reduce heavy dependence on imports of costly raw material from other

countries. This would not only save foreign exchange but also help bring down prices

of medicines in Pakistan which would ultimately benefit the people.

� The government must take strict measures to prevent sale of fake, sub-standard and

non-registered drugs as well as hoarding of medicines, by imposing penalties and

making legislation.



Fertilizer Industry

Facts and Figures

� Fertilizer industry constitutes around 3.4% of manufacturing of Pakistan.

� Pakistan ranks 46th

in the world in terms of fertilizer consumption.

� Fertilizer consumption in five major crops production (wheat, cotton, sugarcane, rice

and maize) in Pakistan is about 87 percent.

� Fertilizer industry in Pakistan has overall production capacity of around 7.5 million

tons annually.

� Pakistan is one of the leading exporters of urea which is trusted as high grade

fertilizer.

� Fertilizer sector in second largest consumer of gas after the power sector.


� Shortage / Shutdown of gas supply

� Low Production Capacity

� Hike in Fuel Prices

� Energy crisis

Proposed Measures

� Natural gas is an essential input in fertilizer which contributes about 80% to total

production cost as fuel and feedstock. However, continuous shortage in gas supply by

SSGC/SNGC has resulted in deep crisis for this industry. The fertilizer sector is

receiving less than 20% gas on 75% load basis whereas other industries are receiving

50% gas on full load basis, which is unjustified for this industry. The government

should direct the SNGPL to resume full and immediate gas to the deprived SNGPL

based fertilizer plants. The government should also resume gas supply to all plants on

permanent basis so that they remain viable for longer run.

� The Economic Coordination Committee (ECC) has approved a long term plan for the

fertilizer industry in 2013 under which gas supply will be made to fertilizer plants

from dedicated gas supply sources. A Committee has also been established to

develop modalities, including legal and financing arrangement for the project and to

determine better cost effective structure. Since Chemical Fertilizer industry has come

under the purview of cost audit, as such it is suggested that the government should

include the representative of ICMA Pakistan in the said Committee.

� The government should ensure strict quality control and monitoring in order to

prevent import of sub-standard fertilizer products and also to curb adulteration and

other malpractices in this sector.

� The government should make suitable arrangement for education of farmers on use

of balanced fertilizer so as to neutralize the adverse impact of constant use of

nitrogenous fertilizers.



Edible Oil Industry

Facts and Figures

� Pakistan is the 3rd

largest importer of Palm Oil and other soft oils in the world. It

imports around 2 million tons of palm oil and 1 million tons of oil seeds annually to

cater to domestic demand.

� Edible oil is the second largest import of Pakistan after Petroleum products.

� Pakistan edible oil imports stood at US$ 2.43 billion out of total import value of US$

4.49 billion during 2011-2012. The annual increase in edible oil consumption in

Pakistan is around 7.7 percent

� Edible Oil industry in Pakistan constitute 10 refining units, 160 small and medium

sized vegetable oil and ghee units with installed capacity of more than 2.7 million

tons.

� Edible oil sector has about 64 solvent extraction units which are producing 0.63

million tons by using locally planted cotton seed, rape seed, mustard seed, canola

and sun flower.

� Edible oil sector is contributing over Rs. 50 billion to government in shape of duties

and taxes.


� Dependency on Imports – Limited local production

� Rise in international prices of edible oil

� Dollar-Rupee parity

� High Import duty and taxes

� Wide gap between demand and production



Proposed Measures

� Import of edible oil is a heavy drain on our foreign exchange. Pakistan can save about

US$2 billion annually by encouraging the domestic edible oil sector. To achieve this,

the government should provide incentives for proper farming, production,

processing and marketing of oil seeds.

� The price of locally produced edible oil is fixed on the basis of cost of imported oil due

to which the farmers have to suffer as they are on mercy of industry and middlemen,

who procure their produce on this basis. As such, the farmers are less inclined to

grow oil seeds and prefer other crops for better gain. The government should,

therefore, resolve this issue on an urgent for the benefit of the farmers and increase

in production of oil seed crop in the country.

� The yield per acre of all oil seed crops (i.e. cottonseed, sunflower, canola, rapeseed

and mustard) ranges between 15% to 45% of their potential due to water scarcity and

lack of application of latest technology and farming techniques. The government

should take measures to remove these bottlenecks to increase output.

� There is good potential for olive oil cultivation in Potohar region and Balochistan. The

government should take up this project in collaboration with the private sector to

start commercial production of olive oil in bulk that will help the trend of fortifying

edible oils with olive oil.

� The government should consider doing away with the import duty on crude palm oil,

as in India and Bangladesh, in order to promote the local refining industry.



Oil and Gas Industry

Facts and Figures

� Oil and Gas are major components of Pakistan's energy mix, meeting over 77.4% of

energy needs.

� Pakistan has estimated crude oil reserves of 303.63 million barrels while its current

production is 65,531 barrels per day.

� Pakistan has estimated gas reserves of 28.32 Trillion Cubic Feet (TCF) while its current

production is 4 billion cubic feet per day.

� Over 700 wells have been drilled by local and foreign exploration and production

companies with over 250 discoveries – Success ratio is one discovery per 3.22 wells

drilled, one of the best in the world. US$ 810 million was spent in 2010 alone on

drilling activities with 30 new wells drilled.

� Pakistan is endowed with vast sedimentary area of over 800,000 square kilometers of

which over 70% is yet to be explored. Till 31st

July 2012, 250 oil and gas fields (58 oil

and 192 gas) have been discovered in various basins of Pakistan with a success rate of

1:3.22.

� Pakistan imported oil to the tune of US $15 billion, which constituted 36% of overall

import bill of the country. Pakistan meets about 18% of its oil demand from local

sources. Pakistan produced oil worth US$2.4 billion and gas worth US$4.3 billion.

� The number of CNG vehicles has reached two million, giving Pakistan the distinction

of having the highest number of natural gas vehicles in the world. In 2011, total

investment of US$ 833 million was made in the CNG sector in Pakistan.


� Heavy dependence on imported oil

� Decrease in oil/gas discovery size

� Security concerns

� Circular Debt Issue in Energy Sector

� Negative reserve placement

� Lack of R&D in exploration activities

� Lack of Skills and technology



Proposed Measures

� The government should give high priority to investments in the oil and gas sector for

which it should devise a set of incentives to encourage the petroleum companies to

explore, develop and exploit petroleum resources to achieve greater self-reliance in

energy supplies.

� There are abundant untapped reserves of oil and gas available in Sindh, Balochistan

and other parts of the country which need to be explored to end the existing energy

crisis. The government should capitalize upon this huge potential as an increasing gap

between supply and demand of oil and gas in the country would be a big challenge in

years to come.

� The production from existing oil and gas reserves are on steep decline and rapidly

exhausting. According to an estimate, we are left with oil reserves for only 10 years

and gas reserves for about 15 to 20 years. The government should, therefore, take

this seriously and ask the oil and gas exploration companies to discover new oil and

gas fields.

� The government should take immediate measures for removing all the grievances of

the oil and gas exploration companies which are hindering it in adding new

discoveries, such as security issues.

� The government should frequently revise the petroleum policies, keeping in view the

global oil/gas exploration – production scenario and domestic ground realities.

� The government should also facilitate in providing training to geo-scientists and

engineers in latest exploration and production skills and also in promoting intra-

industry and intra-academia synergies.



Services Sector

Information Technology Sector

Facts and Figures

� Pakistan stands at No.2 position in global IT services. Pakistan is also included in the

list of best IT countries, which points to the rapid growth made by this industry.

� Pakistan's IT industry's global share is around US$2.8 billion, including global sales

revenue of US$1.6 billion.

� The annual growth rate of IT Sector is 33% with 41% growth in employment of

professionals.

� Pakistan’s IT industry consists of 110,000 skilled professionals, out of which 24,000

are engaged in exports.

� Seven multinational companies have 'Development Centers' in Pakistan. 110 ISO

9001, 23 CMMi and 11 ISO 27001 certified companies. Nine STPs are offering around

700,000 square feet of IT-enabled office space.

� Pakistan Software Export Board (PSEB) has more than 1500 IT companies, out of

which two are listed on Karachi Stock Exchange (KSE), 2 on National Association of

Securities Dealers Automated Quotations (NASDAQ) and 1 on Dubai International

Financial Exchange (DIFX). These companies possess expertise in custom software

development, ERP, financial solutions, mobile content, document management,

enterprise computing and business process outsourcing (BPO).

� Government incentives to foreign outsourcing community include 100% equity

ownership, 100% repatriation of capital and dividends, and income tax exemption for

IT companies till 2016.


� Lack of adequate trained manpower

� Inadequate telecommunication infrastructure

� Moving abroad of IT professionals from Pakistan

� Lack of special financing schemes for IT businesses

� Lack of acceptability of IT services in public sector organizations



Proposed Measures

� The government should devise a national IT policy which should focus on both the

private and public sector. This is important if we want to tap the true potential of IT

industry in Pakistan.

� The government should support the IT industry in marketing software internationally

in order to get maximum projects and investment in research projects.

� The government should issue directives to all federal and provincial governments,

affiliated departments and semi government organizations to procure software only

through local IT companies.

� The government should exempt IT businesses from corporate income tax till 2020.

Similarly, tax relief be granted to business units on amounts spent on software

applications and related equipments.

� Government should establish effective Information Technology Parks (ITPs) in

Federal & Provincial Capitals on Public Private Partnership basis so that IT companies

concentrate on their core business and not on peripheral issues related to facilities.

ITPs should also act as a showcase to the investors

� The government should invest in various fiscal and non-fiscal incentives to nurture,

develop, and promote the use of IT in organizations, to increase their efficiency and

productivity.

� The IT companies should be provided credit from banks on soft and easy terms to

promote IT industry.

� The threshold level for floating IT companies on the local stock market should be

lowered to encourage listings of as many IT companies on the stock exchange.

� The professional Institutes, especially those in IT subjects, should produce high-

quality graduates to meet growing demand both locally and internationally.



Telecommunication Sector

Facts and Figures

� The telecom industry in Pakistan is growth fast, with total cellular subscription r

reaching the mark of 122 million subscribers. By March 2013, the total subscribers of

all mobile companies in Pakistan stand at 122,127,717.

� According to Pakistan Telecommunication Authority (PTA), the telecom sector had

remained one of the most potential sectors during the last six years and it

contributed more than Rs 687 billion during this period, besides providing a large

number of employment opportunities.

� In 2011-12, the telecom industry contributed Rs. 133.4 billion to the national

exchequer.

� There are around 1,800 franchises of mobile phone operating companies working in

the country.

� PTCL is dominant player in broadband market and its products viz. EVDO and DSL are

the popular technologies for broadband users in Pakistan. EVDO attains 35% share in

broadband market.

� The telecom industry attracted the highest 54% share out of total FDI made in

Pakistan during the year 2005-2006. However, since then FDI share in telecom is

continuously falling i.e. 36% in 2007-07; 27% in 2007-08; 22% in 2008-09; 17% in

2009-10 and only 5% in 201-11.

Annual Cellular Subscribers in Pakistan(Source PTA)

Mobilink Ufone Zong Instaphone Telenor Warid Total

2003-04 3,215,989 801,160 470,021 535,738 — — 5,022,908

2004-05 7,469,085 2,579,103 924,486 454,147 835,727 508,655 12,771,203

2005-06 17,205,555 7,487,005 1,040,503 336,696 3,573,660 4,863,138 34,506,557

2006-07 26,466,451 14,014,044 1,024,563 333,081 10,701,332 10,620,386 63,159,857

2007-08 32,032,363 18,100,440 3,950,758 351,135 18,125,189 15,489,858 88,019,812

2008-09 29,136,839 20,004,707 6,386,571 34,048 20,893,129 17,886,736 94,342,030

2009-10 32,202,548 19,549,100 6,704,288 0 23,798,221 16,931,687 99,185,844

2010-11 33,378,161 20,533,787 10,927,693 0 26,667,079 17,387,798 108,894,518

2011-12 35,953,434 23,897,261 16,836,983 0 29,963,722 13,499,835 120,151,235

Jul-12 35,678,830 23,050,993 17,144,681 0 29,903,055 13,199,210 118,976,769

Aug-12 35,719,433 23,691,492 17,517,108 0 29,945,115 12,897,738 119,770,886

Sep-12 36,073,988 23,829,009 17,801,032 0 30,162,943 12,646,458 120,513,430

Oct-12 36,388,770 24,072,203 17,951,385 0 30,428,972 12,761,009 121,602,339

Nov-12 36,600,076 24,314,561 18,930,012 0 30,809,667 12,942,886 123,597,202

Dec-12 36,141,241 23,809,099 18,700,507 0 30,564,465 12,731,050 121,946,362

Jan-13 35,922,299 23,553,444 18,567,308 0 30,175,322 12,600,847 120,819,220

Feb-13 36,011,288 23,345,258 18,659,009 0 30,423,114 12,524,160 120,962,829

Mar-13 36,316,427 23,609,365 18,822,169 0 30,841,111 12,538,645 122,127,717




� Lack of proper regulatory governance

� Delay in third generation mobile spectrum

� Cellular suspensions for security reasons

� Restriction on SIMs issuance at retail outlets

� Saturating cellular market

Proposed Measures

� The government should announce an integrated and focused ICT policy for a period

of 10 years, rather than segmented policy frameworks. Emerging cross -cutting

segments e.g. mobile financial services should be a part of such policy.

� The 3G/4G spectrum auction in 1900/2100MHz frequency bands should be

completed in 2013. The pending spectrum auction (of over 600MHz in

1.9GHz/3.1GHz bands to existing FLL, WLL & CVAS operators) should also be finished

this year so that operators get more spectrums to expand.

� The government should offer an incentive package to telecom industry on issues like

unverified SIMs, illegal international incoming traffic and same International Mobile

Station Equipment Identity (IMEI) number for cell phones. The government should

play an active role to stop this destructive competition environment.

� The government should not allow or grant more licenses until the maturity of present

telecom sector, which is already going through astronomical survival pressures.

� The government should consider special subsidy/incentives to the telecom sector for

providing services in the war zone where the losses are very high due to loss of

revenue, high repair and maintenance cost and destruction of installation.

� The government should encourage the telecom companies to expand their service

network to rural areas in addition to universal service fund (USF).

� Main services providing exchanges must be exempted from load shedding to

facilitate uninterrupted, smooth and regular supply of services to all the

important/vital installations, service users.

� The concept of convergence of regulatory bodies should be introduced so that all

types of telecom services may be dealt with under a single umbrella

� Excise duty on telecommunications services is quite high and need to be revised

downward to 16% so as to bring the telecom services at par with other services

subjected to FED. This will also provide some relief to public at large.



Housing and Construction Sector

Facts and Figures

� The construction industry contributes 13.5% to the world GDP and employs around

7% of the total employed labour force in the world.

� Construction industry is the prime source of employment generation for Pakistan,

offering job opportunities to millions of unskilled, semi-skilled and skilled workforce.

� The construction industry has provided growth to the supporting allied industries in

Pakistan such as cement, iron, steel, marble, electrical works, sanitary works,

horticulture and transport sector.

� The total share of construction in the GDP of Pakistan has declined from 4.2% to 2.4%

during last two decades due mainly to exorbitant increase in prices of raw material,

funds shortage for PSDP projects and scarcity of financing opportunities.

� The State Bank of Pakistan (SBP) estimates housing backlog of 8 million units with

increase of 300,000 more units every year.

� According to an estimate, there is annual shortage of 0.45 million to 0.55 million

housing units in Pakistan. The urban housing need in the country is estimated at over

3.1 million and this figure is increasing due to increasing trend of urbanization and

legal and illegal immigration. The housing needs for Karachi Region, based on

conservative estimates, are 126,000 housing units per annum.


� Rising prices of building materials

� Accumulation of housing backlog

� Shortage of housing finance

� Increased cost of construction

� Freeze on gas connection by SSGC for high rise buildings

� Cuts in Public Sector Development Program (PSDP) Funds

� Absence of system-based construction technologies



Proposed Measures

� The government should encourage investment in the construction industry of

Pakistan which will bring the country out from the current economic turmoil.

� The House Building Finance Company (HBFC) is the main authority for extending loan

for house building. Due to slow disbursement of loans by HBFC, many projects have

been delayed. The government and State Bank should come forward to finance

projects, requiring large money, on easy terms. This could facilitate in development

and expansion of the construction industry.

� Banks and DFIs should extend credit facilities for balancing, modernization and

replacement of machinery used in housing and construction industry and the State

Bank should direct the Commercial Banks to allocate a certain percentage of the

credit to housing sector.

� The HBFCL and other financial institutions should prepare and introduce packages at

preferential mark up to provide affordable credit to low income groups.

� Sui Southern Gas Company (SGC) has put a freeze on gas connections for high rise

buildings. This restriction should be removed immediately to provide relief to

construction industry.

� The Government must ensure implementation of all recommendations of the

National Housing Policy 2001 for the development of construction industry.

� The presumptive tax on construction companies should not be more than 1% on

yearly receipts. Similarly, the stamp duties and registration fee be adequately

reduced to an aggregate 1% which will in turn increase government revenue as more

documentation will take place.

� The government should advise the HBFC to invest minimum Rs. 10 Billion on annual

basis in small housing i.e. apartments smaller than 1500 sq. ft. and 120 sq. yards

bungalows

� The annual disbursement of HBFCL loans should be substantially enhanced to Rs. 20

Billion to overcome the housing shortage.

� The Government should not charge stamp duty, registration fee etc on housing

mortgage. Duties and taxes on construction materials be rationalized and reduced to

make construction affordable.

� Import of important plant and machinery required for the construction industry

should be allowed at zero rated duty such as tower cranes, batching plants, elevators,

solar panels etc

� The Government must initiate steps to eradicate the menace of land grabbing,

encroachment, kidnapping for Ransom, threat to life and property of builder and

their staff.

� The Government of Sindh should abolish ‘Sales Tax on Services imposed on builders

and developers in provincial Budget for 2011-2012 as builders and developers are not

service providers and they have been wrongly included in this category. Additionally,

the builders and developers already pay taxes which add up to 7%. These taxes

include stamp duty, Registration Fee, CVT etc. Any addition to these dues will make

property expensive and out of reach of the common man.



Transport and Logistics Sector

Facts and Figures

� Pakistan has gained worldwide recognition as a regional gateway to international

trade markets. The country has been facilitating the transportation of all types of

goods across its territory.

� Road transport is the backbone of Pakistan’s transport system. The 9,574 km long

National Highway and Motorway network – which is 3.65 % of total road network–,

handles 80% of total traffic.

� Major transport in Pakistan is by land. The total length of the roadways is 258,340 km,

out of which 167,146 km is paved roads (including 711 km of express ways) and

91,194 km is unpaved roads.

� Road transport services are largely in the hands of private sector, which handles

about 95% freight traffic. There are over 350,000 heavy cargo trucks in goods

transportation business in Pakistan.

� The trucking sector carries 96% of the total freight traffic. The trucking sector is

characterized by the presence of a small fleet of owners who generally own less than

five vehicles.

� The number of vehicles on Pakistani roads is estimated to be 4.2 million vehicles

including 250,000 commercial vehicles.

� Pakistan railways provide an important mode of transportation for the people and

freights. The total railroad length in Pakistan is 8,163 km (2006).

� Pakistan’s domestic airlines connect major cities in the country. There are 146

airports in Pakistan and 92 of them have paved runways while 54 have unpaved

runways.

� Port traffic in Pakistan has been growing at 8% annually in recent years. Two seaports

– Keamari Port and Port Qasim – handle 95 % of all international trade.

� According to World Bank, annual revenue generation from transport sector of

Pakistan is estimated at USD 17 billion, contributing 10.5% to GDP. It provides over

6% of employment.

� According to Logistics Performance Index of World Bank, Pakistan’s performance on

logistics indicators, including quality of trade and transport infrastructure, is worse

than that of other Asian countries.

� Pakistan’s transport sector suffered massive damages in the recent floods with a

World Bank and Asian Development Bank Saturday reporting a need for more than $2

billion for recovery.




� Government has not declared transport sector as an ‘Industry’

� Lack of proper investment in transport infrastructure by the government

� No government licensing authority for freight cargo transporters

� No official law/ Act enacted for Transport Sector in Pakistan

� Outdated legal framework for carriage of goods by roads

� Lack of rail services and logistics to transport containers from Ports

� Damages or roads and other infrastructure due to floods

� Dilapidated roads and transport network

� Restrictions on provision of bonded transport

� High Cost for Less than Container Load (LCL)

� Non-operation of Pakistan Railways on commercial basis

� Lack of Road Safety Devices (RSD) – main cause of accidents

Proposed Measures

� The government should make proper investments in the transport infrastructure to

allow goods and services to be delivered on time and to make traveling convenient

and time saving.

� Indus River System should be developed as a way for transporting goods from Karachi

to rest of country.

� Short-term investments in improving existing roads and railways infrastructure need

to be initiated. In long-term, new roads and railway tracks should be built in both

urban and rural areas.

� Pakistan needs more traffic lights since in many parts of Pakistan there are no lights

except in the major cities, which is a hindrance for drivers at night.

� The government must ensure a strong and safe transport and traffic system of

Pakistan to allow the country to have a smooth journey towards socio-economic

development.

� The government should encourage the business community to come forward and

take initiative to improve the air, sea, rail and road logistics and supply chain system

in the country. For this purpose, the government should announce some kind of

incentives and tax concession as well.

� The government should make legislation to regulate carriage of goods through air,

sea, rail and road routes within and outside the country. This would help put in place

a regulatory mechanism for transport logistics and supply chain in the country.

� The government should establish a proper cargo complex to house costly export

goods including leather, textile, surgical and sports goods as well as livestock.



Financial Sector

Banking Industry

Facts and Figures

� The banking system of Pakistan is a two-tier system including the State Bank of

Pakistan (SBP), commercial banks, specialized banks, DFIs, Microfinance banks and

Islamic banks.

� The total number of scheduled banks operating in Pakistan was 44 as on June 2012.

Total liabilities/ assets of all Scheduled Banks stood at Rs 12,931.8 billion at end June

2012.

� As on 30th June 2012, there were 17 banks involved in Islamic banking with a network

of 874 branches in the country.

� There are 20 commercial banks which are listed on stock market. In 2012, these

banks posted a combined profit-after-tax of Rs118 billion against Rs107 billion in

2011, showing 9% growth.

� The Big-6 banks (UBL, NBP, HBL, MCB, ABL and BAFL), with combined assets of Rs500

billion, posted a net profit of Rs96 billion in 2012, up by a modest 9% YoY.

� There are about 20 million bank accounts in different banks operating in Pakistan. For

a country with 180 million people, this figure is quite small.

� As per SBP data, total deposits with banks in January 2013 stood at Rs 6.61 trillion, of

which around 38 per cent were in saving accounts.

� In Pakistan, 80% of aggregate revenue of banks is generated through Net Interest

Income.

� Pakistani banks are enjoying the highest spreads in the Asian region (7% to 7.5%), as

compared to 3.21 per cent in India, 3% in China, and just about 2.17 per cent in

Thailand.

� SBP reduced the discount rate from 12.5% to 9.5% in 2012, creating opportunities for

increased investments and lending in the economy.

� SBP increased the minimum profit rate on deposits to 6% from 5%. This allowed

consumers higher returns on their savings.


� Reliance on net interest income, instead of fee-based transaction and other sources

� Uncontrolled government borrowing from banks

� Decline in Discount rates

� Shrinking banking spread

� Acute liquidity crunch

� High mark-up rate



Proposed Measures

� The government should advise all banks, through the SBP, to introduce fee-based

products and tap Small and Medium Enterprises (SMEs), and the huge

undocumented economy, where all the transactions are ‘cash-based’ with no place

for banking.

� Banks should play a role in the economic growth of the country, and not as a source of

financing government activities. The government should take a policy decision to

make the banks perform ‘prudent banking,” by restraining themselves from investing

in government papers. Presently, almost half of banks’ deposits are invested in

Treasury-Bills. To discourage this present practice, the government may consider

levy of higher tax on income derived by banks from investment in T-bills.

� Banking sector needs to be encouraged especially with the help of consolidation.

Pakistan needs at least 5 big investment banks to support capital markets

development and economic growth.

� Banks should play an instrument role in mobilizing domestics’ savings which are

critical to increase the overall investment levels.

� SBP needs to ensure prudential regulations are in line with the need of the economy.

SBP can play a critical role in promoting venture capital for greater

entrepreneurialism especially in SME sector.

� The SBP should decide about a mechanism in rules whereby banks may verify the

actual nature of remittance and no duty is deducted except in cases where

remittance is in the nature of royalty/ technical or franchise fee.

� The SBP should reduce the high mark up rates to bring down the cost of doing

business.

� Banks should provide finance to SMEs in simple and soft terms with simplified

documentation process to encourage expansion of small business sector.

� Rates of Return / Profits on Deposits should match the current rate of inflation. The

financing rates may be revised and should be equal to Export Refinance rates.

� The banks should improve their online services to save time of consumers. Banks

should upgrade their systems and invest in infrastructures and hardware/software.

ATMs installed in banks branches should be constantly checked by banks to keep

them workable 24 hours a day.

� There should be no Minimum balance limit/ condition for maintaining any kind of

bank account to encourage the documentary economy. Cheque Books should be

available free of cost.

� Cash withdrawal limit exemption to be enhanced to Rs.100, 000/- in one day under

section 231/a.



Insurance Industry

Facts and Figures

� Life Insurance Industry is among fastest growing Industries in Pakistan. State Life

Insurance Corporation (SLIC) dominates insurance market in Pakistan with 63%

market share / life premiums.

� Pakistan’s current insurance penetration (measured as total premiums to GDP)

stands at only 0.7% which is the third-lowest in Asia as against 4.1% of India. The

insurance density in Pakistan is recorded at around US$ 6.13, which is one of the

lowest in the world.

� Pakistan’s general insurance penetration level (0.3%) is lower than the regional

average (1.6%).

� The total number of active non-life insurance companies in Pakistan is 40 whereas

number of active insurance companies (life and non-life), including Pakistan

Reinsurance Company, stands at 50.

� Pakistanis spend around Rs 48 billion on life insurance per annum which put per head

contribution to Rs 266. Similarly, per capital expenditure on non-life insurance stands

at Rs 327.The combined life and non-life insurance spending for each person stands

at Rs 593.

� Almost 85% premium is written by private sector insurance companies. The customer

base is predominantly corporates.

� In 2005, government issued “Takaful Rules”. At present, the share of takaful

companies in the insurance market in Pakistan stand at 2% as compared to 1% of

takaful share in global insurance.

� Pakistan is the second country after Indonesia to officially allow takaful windows,

which enable firms to offer sharia-compliant and conventional products side by side,

provided client money is segregated. Takaful share of the total insurance market

there is only 2 to 3 per cent.


� Dismal performance of Non-Life Insurance sector

� Lack of insurance penetration in remote and rural areas

� Lack of general awareness about insurance / Takaful

� Declining motor premiums

� Falling Non-Life penetration and density



Proposed Measures

� There is much potential and prospects for insurance growth in rural areas. The

insurance companies should devise an aggressive marketing strategy to explore the

untapped market.

� The Securities and Exchange Commission of Pakistan should issue more licenses to

non-life insurance companies to expand health and other general insurance business.

After 2009, the SECP has granted license in 2013 to Sahara Insurance Co. Ltd. (SLIC), a

wholly owned subsidiary of Employees Old-age Benefits Institution (EOBI) allowing it

to conduct non-life insurance business in the country.

� The government and the Insurance Association / Institute should make a collective

action plan to improve the insurance penetration and density figures that is one of

the lowest in region.

� The conventional insurance companies should not be granted permission to operate

Takaful Operations, which will destroy the true essence of takaful business and also

affect the business of Takaful companies, which is basically their domain.

� The general insurance companies should upgrade their operating platform by

exploring other untapped avenues and reducing their reliance on the banking sector

as a tool to mitigate risks associated with the credit exposures.

� The non-life insurance companies must comply strictly with the law to ensure that

their insurance agents have completed foundation course from Pakistan Insurance

Institute within three years. The agents working in life insurance companies are

required to complete a three-month-long foundation course to be organized by the

relevant insurance company.



Chapter 4 Assessment of Taxation Policies

Income Tax

1. Tax on Companies

1.1 Reduction in Corporate Tax Rate

The corporate Income tax rate of 35% in Pakistan is comparatively much

higher in the region. This proposal is long pending and the tax collectors and

taxpayers have common opinion that this should be brought down to promote

business.

ICMA Pakistan strongly recommends that the corporate tax rate should be

brought down to 25% or else a uniform tax rate of 30% be introduced for all

businesses, irrespective of their legal status, so as to encourage

corporatization and expansion of companies. This would help attract

investment; promote industrialization; increase tax elasticity; improve tax

compliance and reduce tax evasion and corruption in businesses.

1.2 Tax Rebate for Listed Companies

The effective corporate tax rate for listed companies is 30 percent which

discourages listing of companies on the stock exchanges.

ICMA Pakistan suggests that the tax rate on listed companies be reduced to

25% to provide them an edge over unlisted companies. This would not only

help maintain a differential between listed and non-listed sector but would

also provide financial incentives for the companies to go public and expand

their corporate ownership structure.

1.3 Levy and collection of Workers Welfare Fund (WWF)

A tax on account of workers welfare fund is deducted at 2% of profit before

deduction of income tax. After 18th Amendment in Constitution of Pakistan,

1973, levy and collection of Workers Welfare Fund as an Income Tax Levy is no

more a Federal Jurisdiction.

ICMA Pakistan proposes that the FBR should issue immediate instructions to

their RTO's not to issue notices for collection of provincial levy.


| 87

2. Tax on Dividends (Section 5)

2.1 Imposition of Tax based on period of holding Shares

Under Section 5 of Income Tax Ordinance, 2001, a 10% tax is imposed (as

specified in Division III - Part I of First Schedule) on every person who receives

dividend from a company.

ICMA Pakistan suggests that investors who hold their shares for more than

one year may be charged a tax rate of 5%; those holding shares from one

month to one year may be charged tax at present rate of 10% and those

holding shares for one month or less at 20%. The proposed dividend tax

structure would further help develop the stock market and discourage short-

term speculative investors and increase longer term investment.

3. Deductions not Allowed (Section 21)

3.1 Enhancement in Threshold of payment through Cash

Under Section 21(l) of Income Tax Ordinance, 2001, deduction for single

transactions exceeding Rs. 10,000 and aggregate in Rs. 50,000 has not been

allowed in single account paid otherwise than crossed. It is to be pointed out

here that under section 73 of the Sales Tax Act, 1990, payment through cash in

single transaction is allowed up to Rs. 50,000 and there is no limit for

maximum number of transactions.

ICMA Pakistan suggests that to harmonize the tax laws under new system of

Inland Revenue, the threshold of payment of single transaction should be

allowed up to Rs. 50,000 and aggregate transaction in single account should

be extended up to Rs. 200,000.

4. Contribution to an Approved Pension Fund (Section 63)

4.1 Enhancement in amount of Annual Contribution made by Employer

Under Section 63, Part X on ‘Tax Credits’, in calculation of tax credit allowed to

a person for a tax year, as given in ‘C (ii)’, the age limit has been mentioned as

40.

It is proposed that the age limit be reduced to 25 to encourage saving habit in

youngsters.

5. Tax Credit for Enlistment (Section 65C)

5.1 Increase in Tax Credit Rate for Enlistment

Under Section 65C of Part X ‘Tax Credits’, a tax credit equal to 15% of the tax

payable has been allowed to a company which pays tax for a tax year in which

it is enlisted with any registered stock exchange in Pakistan.

ICMA Pakistan proposes that the tax credit rate should be 15% for three

consecutive years. This would help to increase tax collections.


88 | Chapter 4: Assessment of Taxation Policies

6. Minimum Tax on Turnover (Section 113)

6.1 Reduction in Minimum Tax rate to 0.2% on Total Turnover of Taxpayer

Under Section 113 of Income Tax Ordinance, 2001, Minimum Tax is levied @

one half percent on the turnover of taxpayer, where no tax is payable either

due to loss during the year or due to brought forward losses of previous years

or if the tax payable is less than the minimum tax on turnover. However,

reduction in tax is available to certain companies/persons e.g. for distributors

of cigarette, it is reduced by 80% (Section 7 – Part III – Second Schedule) etc.

This regime is effectively negating the provision of Section 57 that allows for

losses in tax year to be set-off against future profits and forcing the taxpayer

to pay more corporate tax that would otherwise have been due.

To maintain a level playing field, ICMA Pakistan proposes that other than the

companies and sectors to whom the reduced rate or exemption is already

available; the general rate of minimum tax be reduced to 0.2% on the total

turnover of the taxpayer.

6.2 Exemption of Refineries and OMCs from Turnover Tax

A turnover tax @ 0.5% is applicable on Refineries and Oil Marketing

Companies (OMCs) u/s 113 of Income Tax Ordinance (read with Section 9, Part

III of Second Schedule). OMCs and refineries operate under controlled pricing

mechanism whereby its prices are controlled by OGRA. The margins of OMCs

are from 2% to 3%. As such, OMCs end up paying tax at an effective rate of 70-

80% of profit as against normal tax rate of 35% of taxable income.

It is proposed that OMCs and refineries be exempted from applicability of

turnover tax u/s 113 of Income Tax Ordinance or turnover tax should be on

the basis of Gross Profit.

This would help OMCs and refineries to present investment projects for

expansion/up-gradation, mandatory under the directives of Ministry of

Petroleum and Natural Resources.

7 Advance Tax paid by Taxpayers (Section 147)

7.1 Reversal of Advance Tax Payment Dates to 15th

of next month of each

quarter

Section 147 of Income Tax Ordinance, 2001 required companies to pay

advance tax on the basis of estimates of current year’s income. In case, the

company fails to pay advance tax including tax deducted at source is less than

90% of the tax chargeable for the relevant tax year, additional tax @ 18% per

annum is levied on the amount of tax so chargeable or the amount by which

the tax paid by the company falls short of the 90% as the case may be.

Through the Finance Act 2010 a change has been introduced in the payment

dates of advance tax i.e. 25th

day of each quarter and reduced time period by

20 days. Before the amendments it was become due on 15th

of next month of

each quarter. Due to said reasons, it is difficult to estimate the exact amount

of tax payable of tax year; therefore it may create refund or short fall of 90%.

Further, these revised dates are creating immediate liquidity problems in

present depressed market condition to discharge the advance tax liability

before the end of each quarter.


Chapter 4: Assessment of Taxation Policies | 89

ICMA Pakistan suggests that advance tax payment dates should be

preferably brought back to previous position in order to allow the tax payer

to overcome liquidity problem.

This would provide much needed cash flow to invest in business and generate

more income that could be subsequently taxed.

8 Withholding Tax on Imports (Section 148)

8.1 Re-instatement of Final Discharge of Liability on Imported Edible Oil

Under Section 148 (8) of Income Tax Ordinance, 2% withholding tax was

applicable on import of edible oils before 30th June 2009 as ‘Final discharge of

liability and the tax paid on import of packing material was refundable to the

manufacturers. Through Finance Bill, 2009, the tax rate was increased to 3% as

‘Minimum tax liability’ instead of Final Discharge. The tax paid on import of

packing material has been converted as tax payable under section 148(8),

which has adversely affected edible oil industry.

It is suggested that the previous status of 148(8) as ‘final discharge’ of

liability should be reinstated and tax paid on packing material should be

refunded as per previous practice.

This would reduce the cost of production on Vegetable Ghee/Cooking Oil for

consumer benefit and simplify the book keeping procedure for the

manufacturers.

9 Tax on Salaried Individuals (Section 149)

9.1 Rectification of anomalies in Tax Slabs for Salaried Persons

The tax slabs for salaried persons, as amended through the Finance Act, 2012,

contained serious anomalies in tax slabs 4, 5 and 6. The Federal Tax

Ombudsman (FTO) in its suo moto verdict dated 17-8-2012 observed that tax

computation mechanism that militates against the principles of horizontal

and vertical equity clearly violates Articles 4 and 25 of the Constitution. Being

arbitrary, unreasonable, unjust and discriminatory, such a treatment

tantamount to maladministration as defined in section 2(3) of the FTO

Ordinance, 2000. Accordingly, the FTO passed order for revision of these tax

slabs. However, this anomaly has still not been rectified by the FBR.

ICMA Pakistan proposes that the tax slabs should be suitably amended in

accordance with recommendation of FTO, to give some relief to salaried

class.

9.2 Tax Credit for Salaried Persons

The income tax on gross salary income of salaried persons is deducted at

source, without allowing any deductions. It is a fact the salary of employees,

especially in the private sector, in not increased in line with the current

inflation in the country.

ICMA Pakistan therefore suggests that the salaried persons be allowed tax

credit on utilities and the expenses paid on education of their children so as

to provide them compensation and improve their living standard.



9.3 Extension in Date of Filing Tax Returns

The date of filing of Income Tax Return for salaried person is August 31, of

subsequent year which is very short. As a result, FBR has to extend the date

every year.

It is suggested that the date of filing of return should be extended to

September 30 in order to increase number of return filers and ease

compliance for the salaried persons.

9.4 Extension in Date of Filing Annual Statements under Section 149 and 165

Similarly, the date of filing of annual statements under section 149 and 165 of

the Income Tax Ordinance is August 31 which is too short.

ICMA Pakistan suggests that the date of filing annual statements should be

extended to September 30, which would help increase the compliance level.

9.5 Allowing Credit to Salaried Person under Section 62 and 63

ICMA Pakistan suggests that the salaried person should be allowed tax credit

under section 62 and 63 of the Income Tax Ordinance, 2001, in order to

relieve tax burden on them. Accordingly, the IT Form 3 should be amended to

effect this change.

9.6 Adjustment of Refund to Salaried Person

ICMA Pakistan proposes that refunds through Income Tax returns should be

allowed as adjustment by the employer. This would relax the tax burden on

salaried persons.

10 Withholding Tax on Payment for Goods, Services &Contracts (Section 153)

10.1 Adjustment of tax collected against final tax liability

Under Section 153 (a), 3.5% withholding tax is deducted on supplies made by

Distributors for consumer products and 1% for Pharma products and

cigarettes. The tax is deducted by persons who fall in the category of

withholding agents. Such deduction of 3.5% & 1.0% is treated as final tax

liability and exceeds even gross and net margins of some distributors/traders.

For persons dealing in products with government fixed prices, this additional

impact cannot be added to the selling prices. The general perception is that

the tax so deducted is adjustable against final tax liability which is contrary to

the fact.

ICMA Pakistan, therefore suggests that the tax so deducted from supplies

made by Distributors, Dealers & Whole sellers be made adjustable against

the final tax liability.



11 Withholding Tax on Payment to Traders andDistributors (Section 153A)

11.1 Withdrawal of Withholding Tax Collection under Section 153A

A new Section 153A was inserted in the Income Tax Ordinance, 2001, through

Finance Act, 2012, whereby every manufacturer has to collect withholding tax

@ 0.5% of gross amount of sales at the time of sale to all distributors, dealers

and wholesalers, whether registered or unregistered. This was done with a

view to document the economy. However, it may be pointed out here that

certain categories of taxpayers e.g. Oil Marketing Companies (OMCs),

motorcycle dealers, distributors of fertilizers, pharmaceutical and consumer

goods, having huge turnover and also liable to pay minimum tax under Section

113 of the Ordinance are facing liquidity problem because of huge differential

in tax deduction rate u/s 153A and ultimate liability u/s 113 of the Ordinance.

Secondly, many Distributors, Dealers and Wholesalers are already

documented and in tax net with valid NTN/STRN.

It is, therefore, proposed that tax deduction u/s 153A should be

permanently withdrawn through Finance Act, 2013, to improve liquidity

position of OMCs, and other distributors and also avoid double taxation as

well as accumulation of refund of tax with the FBR.

12 Withholding Tax on Petroleum Products (Section 156A)

12.1 Sale of Petroleum Products by OMCs to Petrol Pumps in AJK

Under section 156A of Income Tax Ordinance, 2001, the Oil Marketing

Companies (OMCs) are required to withhold tax @ 10% on discount or

commission allowed and deposited to government treasury. The OMCs

making sales from the territory of Pakistan to petrol pumps located in the area

of Azad Jammu & Kashmir deposit said tax into treasury of Government of

Pakistan as per instruction/clarification. However, AJK Council is demanding

that tax on commission or discount allowed on sales to petrol pumps located

in AJK should be deposited into treasury of AJK council in-spite of sales from

area of Pakistan.

It is therefore proposed that FBR should make clear laws for deposit of tax

deducted at source on commission allowed to petrol pumps located in area

of AJK under section 156A of Income Tax Ordinance. This would bring clarity

in tax laws and avoid adjudication.

12.2 Interpretation of Discount allowed to customers

Under Income Tax and sales tax laws, the discount allowed to customers is

allowable and not chargeable to tax. Certain field formation has interpreted

discount allowed to customer as sales promotion and asked to deposit tax @

20% under section 156A of the Ordinance.

It is proposed that section 156 should clearly disclose that discount allowed

to customer does not attract withholding tax @ 20%. This would harmonize

tax laws; increase economic activity in the country and create healthy

competition between suppliers.



13 Withholding Tax Exemption (Section 159)

13.1 Doing Away with Requirement of Withholding Tax Exemption Certificates

Section 159 Sub sec (1) of Income Tax Ordinance, 2001 requires filing of

application with the Income Tax Commissioner to make payments without

deduction of withholding tax or at a lower rate. This requirement was

abolished vide Finance Bill 2008 but later vide Corrigendum to Circular No. 5

dated 27 August 2008; the requirement for submission of application for Nil

rate withholding tax cases was restored.

ICMA Pakistan suggests that requirement of filing application to avail

exemption for withholding tax obligations should be done away with in

order to avoid undue hassle and harassment for taxpayers. The taxpayers

may alternately be required to file intimation only in respect of cases where

no withholding tax obligations arise in terms of relevant tax treaties for

avoidance of double taxation.

14 Payment of Tax Collected or Deducted (Section 160)

14.1 Extension in period for deposit of tax collection amount by

Withholding Agents

Section 160 states that any tax that has been or to be collected or deducted, is

required to be paid to the Commissioner by the person making the collection

or deduction within the time and in the manner as may be prescribed. Rule 43

provides that where the tax has been collected or deducted by a person is

required to deposit treasury within seven days from the end of each week

ending on every Sunday vide SRO 392(I)/2009.

The Government must realize that all the withholding and collecting agents

are providing service voluntarily and this restriction of payment within seven

days in quite cumbersome and creating hardship.

ICMA Pakistan therefore proposes that the deposit of withholding tax

should be allowed within seven days from the end of previous month.

15 Statements (Section 165)

15.1 Filing of Monthly Statements of Withholding of Tax

Under Section 165, every person collecting or deducting tax from a payment is

required to furnish the monthly statement by 15th day of the month following

the month to which withholding pertains. This procedure is not only

increasing volume of work but also creating high cost of compliance.

Moreover, the date for filing monthly sales tax return is coinciding with filing

of monthly statement of income tax.

It is proposed that the date for filing of monthly statement under Section

165 be changed to 25th day of the month, following the month to which

withholding pertains. Furthermore filing of monthly statements should also

be substituted with quarterly.



16 Refunds (Section 170)

16.1 Reducing period allowed to Commissioner from 60 days to 15 days for

Refund

Under clause 4 of Section 170 of Income Tax Ordinance 2001, theCommissioner has been allowed maximum 60 days after receipt of refundapplication, to serve an order in writing of the decision to the person applyingfor refund (after providing him an opportunity of being heard). Though theOrdinance is very tough against taxpayers for recovery of due tax amount, butit is quite lenient towards its own officials who commit delays in refunds orother rights of taxpayers. Under Section 170, the taxpayers’ interests or rightsin respect of obtaining refund of tax paid in excess to the amount they arechargeable to tax under the Ordinance are not adequately taken care by theDepartment.

It is therefore recommended that Section 170(4) may suitably be amendedin view of the above proposed amendments, particularly substituting the 60days with 15 days within which the Commissioner shall pass the order, andin case of his failure to pass the order within the stipulated period of 15 days,the refund application be deemed to have been accepted by him. Similarly,provision be made in section 170 (2)(c); whereby the Commissioner may beauthorized to admit an application made after the expiry of the stipulatedperiod of 2 years on genuine reason.

17 Notice to obtain Information or Evidence (Section 176)

17.1 Notices be issued after verification of Data available at PRAL

Under Section 176 of Income Tax Ordinance, 2001, the tax authorities areempowered to call for any information/ documents from assesses as andwhen required. This also includes verification of tax deducted at source, taxdeduction Challan and tax certificates issued to different vendors. Despiteimplementation of electronic / automatic filing of monthly and annualstatements of tax deduction and maintenance of database at PRAL, noticesunder section 176 are still issued to the taxpayers for verification of dataalready available at the PRAL. This results in duplication and unnecessaryhassle for the taxpayers.

It is proposed by ICMA Pakistan that field formations of FBR should firstlyverify the data from its own data base and in case of any discrepancy found,it should be forwarded to the concerned parties. This would minimizepaperwork and facilitate the taxpayers.

18 Offences and Penalties (Section 182)

18.1 Insertion of new provision of penalty on offences by Tax Officers

Under Section 182 of Income Tax Ordinance, 2001, a list of penalties has beenprovided for different offences committed by the tax payers. However, thereis no mention of any provision in case any offence is committed by the taxofficers. It is a fact that non–compliance of Act by the tax officer causesmistrust, loss in faith of law and shakes the confidence of tax payers andinvestors.

It is suggested that a new clause/ provision be inserted in Section 182, whichshould provide appropriate actions against non-compliance or latecompliance from FBR officials, to fix the responsibility and to place propercheck and balance. This would give equal rights and opportunities to the taxpayers.



19 Appointment of Income Tax Authorities (Section 205)

19.1 Disclosure of Imposition of Withholding tax on Sale of Air Tickets

Under Section 205(3) of Income Tax Ordinance, 2001, a person who fails to

pay tax as required under Section 160 on or before the due date for payment

shall be liable for default surcharge at 18% per annum on unpaid amount. This

rate is too high.

It is proposed that the rate should be brought down to 15% in order to save

the taxpayer from any inadvertent mistake that may be committed by him.

20 Cash Withdrawal from a Bank (Section 231A)

20.1 No advance tax deduction from cash withdrawal by NTN holder

Under Section 231A of Chapter XII on ‘Transitional Advance Tax Provisions’ of

Income Tax Ordinance, 2001A, every banking company has been allowed to

deduct tax at the rate specified in Division VI of Part IV of the First Schedule, if

the payment for cash withdrawal, or the sum total of payments for cash

withdrawal in a day, exceeds Rs. 50,000/=

It is proposed that under Section 231A, a clear distinction should be made

between the taxpayer and non-taxpayers by imposing higher rate of taxes.

The advance tax collected indiscriminately be withdrawn from the tax payer

holding a valid NTN certificate whereas from non-taxpayers a tax @ 1% of

cash amount withdrawn from bank should be collected.

21 Advance Tax on Brokerage and Commission (Section 233)

21.1 Disclosure of Imposition of Withholding tax on Sale of Air Tickets

Under Section 233 of Income Tax Ordinance, 2001, airlines are required to

withhold tax on commission allowed to travel agent. As per clause 43-B of

second schedule of IT Ordinance, travel agents are exempted from

withholding tax on sale of air tickets subject to condition that airlines have

already deducted tax on commission allowed to travel agent. However,

companies purchasing air tickets are unable to ascertain whether air lines

have deducted tax on commission allowed to travel agent or not.

It is suggested that section 233 and clause 43-B should clearly disclose

imposition of withholding tax and exemption allowed to the clearing agent.

This will minimize anomalies in the income tax laws.

21.2 Tax Credit for Withholding Agents on Performing State Duty

The Withholding agents collecting income tax and sales tax on behalf of the

FBR; deposit them in government treasury without any compensation. They

have to bear substantial costs in hiring accountants and utilizing their own

resources in this respect.

It is recommended that the withholding agents may be provided ‘tax credit’

@ 5% of annual tax withhold and deposited with the FBR, as compensation

for performing the state duties. This would help improve the performance of

the withholding agents.



22 Telephone Users (Section 236)

22.1 Imposition of tax on Mobile Connection

Section 236 under Chapter XII on ‘Transitional Advance Tax Provisions’ of

Income Tax Ordinance, 2001, calls for collection of advance tax (at the rate

specified in Part IV of First Schedule) on the amount of telephone bill, prepaid

cards and sale of units through any electronic medium.

ICMA Pakistan suggests that a new clause may be inserted in Section 236 for

imposing annual tax on mobile connection, to be collected at the time of

renewal of Sims.

According to an estimate there are around 60 million Sims in Pakistan and if a

tax @Rs. 100 per year per sim is imposed, it would generate Rs. 6 billion as

revenue to the government. This would be helpful in security as well by

locating dummy Sims.

23 Second Schedule – Part II

23.1 Withdrawal of Tax Reduction on Import of Gold, Silver and Mobile Sets

Under Section 148 of Income Tax Ordinance, 2001, the Collector of Customs

has been allowed to collect advance tax from every importer of goods on the

value of goods. Presently Clause (13G) of Part II on ‘Reduction in Tax Rates’ of

Second Schedule provides that tax under section 148 on import of Gold,

Mobile telephone sets and Silver, shall be collected at the rate of 1% of import

value as increased by Customs Duty, Sales Tax and Federal Excise Duty, if any

levied thereon.

Since all above items are being used by the well to do segment of the society

and do not justify any reduction in rate of tax, as such, it is suggested that tax

rate on these items be either withdrawn or brought at par with other goods

imported for commercial purposes.

23.2 Tax Incentive for handicapped Tax payer

Clause 1A of Part III of the 2nd

Schedule provides that where the taxable

income, in a tax year, of a taxpayer aged 60 years or more on the first day of

that tax year, does not exceed Rupees one million, his tax liability on such

income shall be reduced by 50%.

It is proposed that similar incentive may be announced for the handicapped

taxpayers.

24 Sixth Schedule – Part 1

24.1 Enhancement in amount of Annual Contribution made by Employer

In the Sixth Schedule, Part 1 on ‘Recognized Provident Fund”, under Rule 3:

Employer's annual contributions, when deemed to be income received by

employee, states that the contributions be made by employer in excess of

one-tenth of salary or Rs.100, 000, [whichever is low] of the employee.

ICMA Pakistan proposes that this amount be increased to Rs. 200,000/- in

view of the fact that the existing amount of Rs. 100,000 was inserted in 2008

and almost five years has passed since then. At that time, exempt salary was

Rs.180, 000/- which has now reached Rs.400,000/-



Sales Tax

1 Definitions (Section 2)

1.1 Enhancing the exemption limit for Cottage Industry

Under clause (5AB) of Section 2 of Sales Tax Act, 1990, a ‘cottage industry’ has

been defined as a ‘manufacturer whose annual turnover from taxable supplies

made in any tax period during the last twelve months ending any tax period

does not exceed five million rupees or whose annual utility (electricity, gas

and telephone) bills during last twelve months ending any tax period do not

exceed 700,000 rupees’.

ICMA Pakistan feels that the limit of cottage industry as defined in the above

law has become outdated in view of consistent inflation, devaluation of

Pakistan rupee and increasing trend of cost of doing business. It is proposed

that the exemption limit for cottage industry should be enhanced from Rs. 5

million to Rs. 10 million and the utility limit should be increased from Rs. 0.7

million to Rs. 1.2 million to counter increase in inflation and utilities tariff

and devaluation of Pak currency. This would help the government to collect

more taxes from cottage industry.

2 Change in the Rate of Tax (Section 5)

2.1 Reduction in Sales Tax Rate

The current rate of sales tax is 16 percent which is comparatively higher in the

region.

ICMA Pakistan strongly recommends that sales tax rate should be brought

down to 15% and gradually to 10%. This would give boost to economic

activities and control inflation.

3 Determination of Tax Liability (Section 7)

3.1 Allowing Input within one year from Invoice Date for Refineries and OMCs

Under Section 7 of Sales Tax Act, 1990, a registered person is allowed to

deduct input tax paid or payable during the tax period for the purpose of

taxable supplies made, or to be made, by him from the output tax that is due

from him in respect of that tax period. In this connection, it is to be pointed out

that local purchase from refineries and imports of all the Oil Marketing

Companies (OMCs) are subject to sales tax, which is subsequently deducted

from output tax at the time of sale. Generally the quantum of input tax for

OMCs is higher than output tax due to zero rating in case of supplies to EPZ,

foreign flight/vessels refueling, exports etc.

It is therefore proposed that input should be allowed within one year from

the date of invoice in order to avoid accumulation sales tax refund. This

would help minimize the sales tax refundable position of OMCs and reduce

litigations between tax payers and tax authorities. Non-refundable position of

OMCs will also be favorable for government treasury.



4 Adjustable Input Tax (Section 8B)

4.1 Allowing 100% Input Tax Adjustment

Under section 8B of Sales tax act, 1990, the tax payers (excluding under SRO

647(I)/2007) are allowed adjustment of input tax up to 90% of output tax for

that period.

ICMA Pakistan proposes that 100% input should be allowed in tax period for

avoidance of accumulation of fund with Government in such adverse

economic situation of the country.

5 Debit and Credit Note (Section 9)

5.1 Relaxation or Extension in Time Restriction for issuing Debit/Credit Notes

Under Section 9 of Sales Tax Act, 1990, a registered person is allowed to raise

Debit or Credit Notes in order to adjust output tax due to any adjustment/

change in value of supply, cancellation of supply or return of goods. However,

such an adjustment is only allowed to be made within 180 days of date of

actual invoice.

It is proposed that this time restriction on issuance of Debit / Credit note

may either be relaxed or the time period of 180 days may be extended to 365

days to facilitate taxpayers.

6 Refund of Input Tax (Section 10) – Including e-refund claims

6.1 Integration of STARR System with FBR e-Portal for speedy Sales Tax Refunds

A major hurdle in timely refund of claims is due to lack of integration between

STARR and FBR e-portal. The sales tax refunds, being processed on Sales Tax

Automated Refund Repository (STARR) Computer System of FBR, have not

been integrated with e-portal, which results in rejection of various valid

claims. There is a need to rectify errors in STARR system on an urgent basis. A

completely harmonized system should be introduced or manual over-ruling

be allowed in current setup, in case where there are system related issues. For

instance, if blockage of taxpayer is cleared in e-portal by FBR, it continues to

show as blocked unit in the PRAL/STARR.

It is, therefore, proposed that an amendment be made in e-portal should

automatically be updated in STARR/PRAL system and vice versa.

6.2 Streamlining of Flawed Automated STARR System of Sales Tax Refund

Claims

The STARR Computer System of FBR defers some of the sales tax refund claims

on ground of discrepancies in filing of sales tax returns on the part of suppliers

of refund claimant. The discrepancies indicated by STARR System are mainly

due to not matching of supplier’s data or missing of supplier’s declaration such

as non-filer, non-existence of data, blocked/non-active taxpayers, timing

difference etc.

ICMA Pakistan proposes that entire refund verification and sanctioning

process, which is full of logical error, should be completely streamlined;

especially the deferred claims where genuine taxpayers are not made to

suffer.



This would help taxpayers avoid unnecessary and time-wasting exercises to

get their discrepancies removed from STARR system.

6.3 Allowing Listed Companies to avail PRAL system of claiming Refunds

The manufacturer-cum-exporters are currently eligible for expeditious refund

processing through the Pakistan Revenue Automated System Limited (PRAL),

developed for improving Sales tax collection.

ICMA Pakistan proposes that all the listed companies should be entitled for

processing of refund claims through PRAL.

This will improve refund processing system and minimize accumulation of

funds of exporter.

6.4 Allowing Offsetting Income Tax Liabilities / Refunds against Sales Tax

The Inland Revenue, income tax, sales tax and excise have been integrated

and being operated under a single window. However, offsetting for income

tax and sales tax refunds/ liabilities is still not allowed. Due to processing

delays on part of the tax department, the tax payers have to suffer financial

brunt.

It is, therefore, suggested that a system should be introduced whereby a tax

payer can adjust/ offset his income tax liabilities/ refunds against sales tax

and vice versa.

This would lead to timely processing of refund cases and help the taxpayers in

management of cash flows in an efficient way and ultimately enhance

business activities in the country.

6.5 Allowing Option of Duplicate Invoice in Sales Tax Act

In case of invoice being misplaced or destroyed due to any reason, there is no

option for issuance of duplicate invoice under Sales tax act, 1990. It creates

problems for input claimants.

It is proposed that, option of duplicate invoice should be incorporated in the

sales tax act, 1990 for proper documentation of input claims and avoidance

of harassment for taxpayers.

7 Assessment of Tax (Section 11)

7.1 Rectification of mistake in Assessment Orders

Under section 221 of Income Tax Ordinance, 2001, the rectification

application may be filed for rectification of mistake in any assessment order

issued by tax authorities. The Federal Government has harmonized the

Income tax and Sales tax laws through ordinances issued in the year 2009 and

Finance Act, 2010.

It is proposed that option of rectification of mistake of any kind should be

incorporated in Sales Tax Laws in line with the Income Tax Laws.

This would help minimize adjudication and rectification of error in assessment

order.



8 Sales Tax Exemption (Section 13)

8.1 Exemption to OMCs from Payment of Sales Tax on import of POL products

Oil Marketing Companies (OMCs) import POL products in bulk quantity for

which it has to pay heavy amount of sales tax during the month of arrival of

vessel for import of POL products. It is difficult for OMCs to adjust input tax in

the same month.

It is suggested that sales tax levy on import of petroleum products (input tax)

be waived and it should be levied only at the time of sales/supply of

petroleum products by OMCs. This would avoid accumulation of input tax

paid on import of POL products. It would also provide sufficient time to

OMCs for import of POL product and avoid short fall of POL products.

8.2 Exemption of the Vegetable Ghee/Cooking Oil from Sales Tax

The Vegetable Ghee/ Cooking Oil industry is paying sales tax /FED @ 16% at

the import stage. Vegetable Ghee and Cooking Oil importers/manufacturers

are paying 16% Federal Excise Duty (FED) under Sales Tax Mode and Re.1 per

kg Fixed Value Addition which is final. Vegetable Ghee/Cooking Oil, being an

essential food item of daily use should also be given exemption from sales tax

as being offered on import of other essential products e.g. Flour (Atta), Rice,

Pulses etc.

It is proposed that levy of Sales Tax/FED on import/manufacturing stage

should be waived off or else reduced to atleast 8%. This will result in

reduction of the market prices of Vegetable Ghee/Cooking Oil and will bring

a sizable relief to the masses.

9 Sales Tax Return (Section 26)

9.1 Declaration of Exports in Sales Tax Return

From March 2012 onwards, those shipping bills, having data in PRAL system

are allowed to be entered in Annexure ‘D’ of sales tax return. It may be noted

here that shipping bills data of certain sites like Custom Station Chamman is

not updated in PRAL system. Also, shipping bills issued against supplies to

vessels as provision and export under Section 24 of Customs Act, 1969 is not

updated in PRAL. Hence, said export cannot be declared in annexure-D of

Sales Tax Return.

It is, therefore, proposed that manual entries of all shipping bills should be

authorized in annexure-D of sales tax return in accordance with the sales tax

laws. This would lead to proper declaration of exports in the sales tax return.

9.2 Amendments in Sales Tax Return format through E-Portal

Following amendments are proposed in the Sales tax return format on e-

portal of FBR:

— Option of Sales Tax Withholding should be created in line with payment

of withholding tax under the Income Tax Ordinance, 2001.

— Option of Withholding tax certificate be created in line with Income Tax

Ordinance 2001



— Debit / Credit Note annexure I should be improved for easy uploading

data. An option for downloading of debit credit note summary be also

created.

— Option for downloading of customer wise summary from annexure ‘C’

of sales tax return for the purpose of verification of sales to customers.

— Procedure for declaration of duty paid exports be incorporated in sales

tax return.

9.3 Allowing Manual Feeding of Computerized Payment Receipts (CPR) for E&Ps

The date of payment of duties and taxes and filing of sales tax return for the

Exploration and Production Companies (E&Ps) is 25th

of subsequent month. In

case payment is made on the last date (i.e. 25th

of subsequent month), the CPR

does not appear in ‘CPR FEED’ window, resultantly return cannot be filed in

accordance with sales tax laws.

ICMA Pakistan proposes that manual feeding of CPR should be allowed for

timely filing of return. This will help in timely compliance of tax laws.

10 Power to Call for Information (Section 38A)

10.1 Withdrawal of discretionary powers of Commissioner for seeking

information

Under Section 38A of Sales Tax Act, 1990, the Commissioner has been given

blanket permission to require any person, including a banking company to

furnish information or statement in connection with any investigation. This

discourages faith of depositors in banking companies.

It is proposed that this discretionary power given to the Commissioner may

be withdrawn so as to maintain the account holders’ trust on banks. It may

be noted here that the Lahore High Court has already given its decision against

SBP’s BPRD Circular No.22 dated 30-6-2003 seeking information regarding

financial matters of accounts holders.

11 Refund to be Claimed within One Year (Section 66)

11. 1 Extension in period of claiming Input Tax

Under Section 66 of Sales Tax Act, 1990, refund of un-claimed input tax is

allowed to be claimed within one year from the date of invoice.

ICMA Pakistan proposes that period of claim of refund of un-claimed input

tax should be extended up to two years from the date of invoice. The

rationale is to protect the fundamental right of claim of input tax of

taxpayers.

12 Delayed Refund (Section 67)

12.1 Allowing ST Department to release amount at time of refund claim

Under section 67 of Sales tax act, 1990, the department is required to pay

additional amount equal to KIBOR per annum on delayed processing of refund

claims (time as mentioned under section 10) under section 10 of the sales tax

act, 1990.



It is proposed that necessary amendment be made in Section 67 so as to

allow the department to release itself the amount at the time of processing

of refund claims.

This would facilitate expeditious payment of delayed refund claims.

13 Certain Transactions not admissible (Section 73)

13.1 Extension in limit of payment

Under section 73 of Sales tax act, 1990, payment above Rs. 50,000 is allowed

to be made through banking channel from business account of customer to

business account of supplier with 180 days from the date of invoice.

ICMA Pakistan proposes that limit of payment should be extended to Rs.

200,000 and time limit should be extended up to one year, in view of high

inflation rate.

14 New Areas for Generating Tax Revenue

14.1 Tax on revenues of Ship breakers

The Ship breakers are paying sales tax only on 70.5 % of the weight of scrap

ship. No Customs duty or sales tax at 16% is paid by them on remaining 29.5%

expensive and cash revenue generating items e.g. Copper Scrap, Brass Scrap,

Aluminum, machinery, kitchen stainless items, ropes, chains, wood, BUNKERS

OIL, Lubricants, paints, ship tackles, electric cables, switches, etc.

It is suggested that this 29.5% unpaid amount which translates into huge

untaxed revenue going into the pocket of ship-breakers, be recovered and

brought under the tax net.



Custom Duty

1 Duty and Tax Remission for Export (DTRE)–[Chapter XII (7)–Custom Rules 2001

1.1 Simplification of DTRE Approval Process

In sub-chapter 7 of Chapter XII of Custom Rules, 2001, DTRE scheme has been

introduced under which exporters can procure goods on ‘zero-rate basis’ from

the local market and then export the same as ‘zero rated goods’ to foreign

buyers. The Custom authorities have also introduced software namely 'PACCS'

to route DTRE approval applications.

DTRE was a significant measure to boost exports, however, obtaining DTRE

approvals from the Collectorates and fulfilling the requirements of tax

authorities to avail the benefits of DTRE has proved to be a real hardship and a

time consuming activity for the exporters.

ICMA Pakistan recommends that the process of granting DTRE approvals

should be simplified so that more exporters can benefit from this facility.

This would facilitate export earnings thereby leading to increase in foreign

exchange reserves for the country.

1.2 Provision of DTRE Facility to SME Garment Sector

Under Rule 297, the DTRE facility is available to garment exporters for re-

exports of fabrics (not available locally) in the form of finished goods. DTRE

Scheme is admissible if the manufacturer is having complete in-house

production facilities including all incidentals, auxiliary and ancillary processes.

Due to this ruling, only large-scale manufacturing are able to utilize this facility

whereas the small and medium garment exporters (SMEs) are unable to do so.

Even if exporting companies require a small process outside (such as industrial

washing), they are unable to take benefit from DTRE scheme. Similarly,

according to sub-rule (6) of Rule 297 of Pakistan Customs Rules, 2001, a DTRE

exporter was allowed to get his finished good from anywhere in Pakistan. This

Rule was later amended through SRO 801(I)/2002 dated 15/11/2002. Later

on, certain amendments were introduced in the DTRE Rules vide SRO

563(I)/2005 dated 6/6/2005 through which sub-rule (6) of Rule 297 was

omitted, thereby withdrawing the vendor’s facility to the DTRE users. Now

therefore outsourcing is not permissible for availing DTRE facility.

ICMA Pakistan suggests that the small scale garment manufacturers should

also be provided DTRE facility. Further, sub-rule (6) under SRO 801(I)/2002

dated 15/11/2002 should be re-enacted in letter and spirit, enabling the

SME industry to avail DTRE facility.

This would enhance exports earnings contributions made by the SME garment

sector.

1.3 Doing away with Requirement of Bank Guarantee/ Indemnity Bond etc for

DTRE Approval

Under Rule 300 of Customs Rules 2001, a Regulatory Collector is entitled to

grant DTRE approval on satisfaction with the bonafides of DTRE applicant. In

case of suspension, there is a requirement of post dated cheques / bank

guarantee amounting to the value of import duty and taxes, indemnity bond,

customs audit / inspections.



ICMA Pakistan proposes that the above requirements should be done away

with as currently there are five different departments involved in DTRE

inspections and verifications. Alternately, these powers be delegated to a

single authority to reduce the bureaucratic hassle.

1.4 Extension in DTRE utilization Period to two years

Through the Finance Bill 2012, DTRE utilization has been decreased from two

years to one year.

It is suggested that utilization period should be extended to two years as per

previous laws.

This would result in proper utilization of input purchased under DTRE and

decrease the frequency of DTRE approval from Custom Department.

1.5 Application of DTRE Scheme for Vegetable Ghee/Cooking Oil Exporter

DTRE coverage is no longer available to importers of raw-edible oil which they

process for export of vegetable ghee/cooking oil, against the “export orders”

in hand.

ICMA Pakistan suggests that DTRE scheme be extended to those ghee and oil

manufacturers which use imported raw edible oils and capable /eligible for

export to Afghanistan and Central Asian States (CAS) countries for earning

foreign exchange. This would provide incentive to exporters of ghee and oil

made from imported raw edible oils.

2 General Power to Exempt from Custom Duties[Section 19–Customs Act 1969]

2.1 Duty Exemption on Import of Palm Stearin

There is an existing rate of 10% custom duty on import of Palm Stearin by local

vegetable ghee and cooking oil industry.

To give protection to industry and provide relief to the general public in

shape or reduction in prices, it is suggested that custom duty exemption be

granted on import of Palm Stearin.

3 Reduction in Custom Duty

3.1 Reduction in Custom Duty on Imported edible oil

Vegetable Ghee/Cooking Oil industry is mainly dependent on imported edible

oils fixing local prices in market depends on the prevalent high prices of this

product in the international market. To bring down the prices of ghee and oil

for relief of common people, the government has no option but to reduce

duties and taxes on this product. Presently, the total duties/taxes paid by

Vanaspati Manufacturers are around Rs.26,000/M.Ton. In 2010-11 and 2011-

12, Pakistan imported Edible Oils to the quantum of 2.01 and 2.2 million M.

Tons, and in 2012-13, import of Edible Oils stood at 1.9 million M. Tons.

It is suggested that a reduction of Rs. 3000 per ton in the custom duty on RBD

Palm Oil / Palm Olein and Soyabean Oil be considered by the government to

bring relief to the common man.



3.2 Reduction in Custom Duty on Imported Tinplate

Tinplate importers are paying custom duty @20% on C&F price of imported

Tinplate, in addition to sales tax of 16 percent. According to PVMA, M/s.

Siddique Sons, manufacturer of tin plate, have increased packing price of

container by Rs. 30/per container of 16kg packing which is comparatively

higher than increase in price of imported tin plate. Due to increase in

imported price of tinplate used for fabrication of containers for packing

Vegetable Ghee/Cooking Oil, the packing cost of 16 kg container now stands

at around Rs.125, due to which per kg packing cost of ghee and oil is about

Rs.8/- which also increase sale price of Ghee/Cooking Oil to that extent.

ICMA Pakistan suggests that custom duty on imported tinplate be reduced

to 5% to provide relief to manufactures of ghee and cooking oil in shape of

reduced packing cost of product.

This would lead to decrease in retail price of the product in the market for

benefit of people.

4 Warehousing Period [Rule 350, Chapter XV – Customs Rules 2001]

4.1 Enhancement in Warehousing Period for Ghee and Oil

The Vegetable Ghee manufacturers were liable to pay 1% surcharge on import

of edible oils in addition to Customs Duty, FED, Advance Tax, etc. Later, the

government, on recommendation of PVMA in Finance Act, 2007 (SRO

626(I)/2007 dated 21 June, 2007) reduced the warehousing surcharge to

0.25% in spite of the fact that the warehousing cost is paid by importers of

Edible Oil to the terminals for handling of imported edible oils involving no

government activity.

ICMA Pakistan proposes that warehousing period be enhanced from existing

30 days to 60 days @ 0.25% and after 60 days upto 90 days @ 0.75%. This

would help mitigate the negative impact of fluctuating international prices

and provide relief to the ghee and oil industry.



Federal Excise

1 Levy, Collection and Payment of Duty – [Section 3]

1.1 Basis of Charging and Recovery of Federal Excise Duty

The First Schedule under Section 3 of Federal Excise Act, 2005, Federal Excise

Duty (FED) is chargeable on value of certain goods or it is chargeable on

quantity of certain goods. Also, FED is recoverable for dutiable goods,

whereas, recovery of FED is not available on specific goods.

ICMA Pakistan suggests that a harmonious approach, based on fixed levy per

liter, should be applied to charge FED so as to simplify the procedure of

charging FED.

1.2 FED on Franchise Services (Tariff Heading 9812.9410)

In Table II ‘Excisable Services” of First Schedule under Section 3 of FE Act,

2005, the franchise services falling under PCT heading 9812.9410 are

chargeable to Sindh Sales Tax @ 10% of the value of services with effect from 1

July 2011 and @ Punjab Sales Tax @ 16% of value of taxable services effective

from October 01, 2012. Under serial no. 11 of table II of First Schedule of

Federal Excise Act, 2005, the Franchise Services are also liable to Federal

Excise Duty. It creates the ambiguity among the tax payers regarding legal

standings whether it is still a Federal Levy or now comes under Provincial

domain. Further, it is double taxation.

ICMA Pakistan proposes that Federal Excise Duty Act, 2005 should be

amended in accordance with 18th

amendments to remove this

ambiguity/double taxation and bring clarity in law.

1.3 Rate of provincial sales tax on Franchise Services

The Sindh Government has imposed sales tax @ 10% on Franchise Services

whereas the Punjab government has imposed sales tax @ 16% on same

services.

ICMA Pakistan suggests that Punjab Sales Tax on Franchise Services should

also be decreased to 10% in line with Sindh Sales Tax on Franchise services.

This will harmonize provincial tax and give equal treatment of taxpayers in

different provinces.

2. Deposit, pending appeal, of duty demanded orpenalty levied [Section 37]

2.1 Refund of FED on Export for Tax Payers

Under Section 37 (1) of Federal Excise Act, 2005, there is a mandatory

requirement for the taxpayer that prior to appeal before the Office of

Commissioner Inland Revenue (Appeals) or Appellate Tribunal; he should

deposit the impugned duty demanded or penalty imposed in the appealable

order. This requirement is considered as a hindrance in the dispensation of

justice.

ICMA Pakistan therefore proposes that the registered persons should be

allowed to file appeal without the mandatory requirement for payment of

disputed demand.



3 Refund of Duty – [Section 44]

3.1 Refund of FED on Export for Tax Payers

There are certain ambiguities in rules for processing of refund of Federal

Excise Duty (FED) on the export for tax payers, other than manufacturers.

ICMA Pakistan proposes that laws and rules should be updated for clear

procedure of processing of refund claims of FED for exporter other than

manufacturer.

��

ICMA Pakistan submitted these taxation proposals, prepared by its Research

Department, to the Member Legal/ Tax Policy FBR vide letter dated 16th

May 2013 to

consider for inclusion in the Federal Budget 2013-2014. It is now published with this

Booklet as a record and reference of our members)



ICMA Pakistan’s Suggestions for10-Point Agenda of New Government of Pakistan

Muslim League (PML)

S.#

Priority Agenda Short Term Measures(First 100 Days)

Long Term Measures(Next 2 to 3 Years)

1. Meeting EnergyShortfall

(Energy concerns)

1. A Special Task Force may be formedto take immediate crack down on‘energy thefts' throughout thecountry to reduce losses inelectricity transmission anddistribution.

4. Instead of importing expensiveoil and gas, we can move toimport cheaper clean coal foruse as fuel in power generation.The price of coal is stable ininternational market, which willhelp bring stability in ourelectricity prices.

2. In those parts of country wherenational grid do not exist, businesscommunity may be allowed to setup their own power projects (solar,wind based) without the priorpermission of NEPRA.

5. Focus on building large numberof small dams on Public-PrivatePartnership (PPP) basis togenerate hydel power and toboost agriculture productivity.

3. A Committee may be formedimmediately to finalize a nationalplan to generate electricity throughuse of waste materials of crops likesugarcane baggasse, cotton waste,rice husk and organic materials.

6. Government may provideinterest-free loans (to be paid ineasy installments) to public inurban areas (initially in Karachi,Lahore and Islamabad) to installsmall solar panels in theirhomes to generate energy. Forthis purpose, funding can beobtained from internationaldonor agencies.

2. Improving Lawand Order(Security

Concerns)

1. The Citizens-Police LiaisonCommittee (CPLC) may be allowedto play an active and effective rolewith additional powers to takeactions against ‘money extortions’from business areas, especially inKarachi, the hub of trading activity.

3. An Independent PoliceComplaints Commission (IPCC)be established (as existing in UKas per Police Reform Act) toinvestigate most seriouscomplaints and allegations ofmisconduct against the police,as well as handle appeals frompeople not satisfied with theway police have dealt with theircomplaint. The proposed IPCCshould be self-governing,making decisions entirelyindependently of the police,government and complainants.It will provide a powerful legalregulatory framework makingthe police accountable for theiractions.

2. The country has to suffer businessloss of billions of Rupees due to‘strike calls’ given by political andreligious parties. As such, newgovernment may considerimposition of complete ban on suchstrike calls. A huge sum of penaltymay be asked from those partieswhich violates this ban.

3. Bringing DownInflation

(Public concerns)

1. Government should immediatelywaive of all kinds of taxes and levieson essential commodities like flour,sugar, rice, ghee, oil and dairyproducts to bring some relief to thegeneral public.

4. Government may considerforming nation-wide network of‘Consumer Societies orAssociations’ to assert pressureon the Retailers Associationsnot to charge excessive profitson essential items. Theprovincial government may beasked to support theseSocieties.


108 | Annexure

2. Government should makeimmediate crack down on hoardersof food items, (irrespective of theirpolitical affiliations) that result inartificial inflation.

5. There is an urgent need torestrict government borrowingto curtail excessive monetarygrowth – leading to inflationarypressure. A ceiling may beimposed by the governmentitself.

3. Cost and ManagementAccountants may be given a role tocarry out ‘cost-profit analyses’ ofgoods available in market todiscourage profiteering byproducers or middlemen orretailers.

4. RestoringConfidence of

BusinessCommunity

(Businessconcerns)

1. A Joint Government- BusinessForum (JGBF) may be formed,comprising of Ministers of Finance,Commerce, Industry, andInvestment (from Governmentside) and Presidents/ Chairmen ofChambers of Commerce andindustry Associations (from privatesector) that meet regularly onquarterly basis to resolve problemsfaced by trade and industry as wellas to seek their proposals inframing economic policies. Apermanent secretariat of thisforum may also be set up.

3. Government may announce aspecial package of incentives forthe overseas Pakistanis whowish to invest in Pakistan infeasible projects. They may alsobe allowed incentives for settingup SMEs in the Special EconomicZones in Pakistan. The increasedflow of remittances will not onlyimprove balance of paymentposition, but also give impetusto industrial and economicgrowth.

2. A renowned business personality ofeach province may be nominatedas ‘Special Advisor’ to the ChiefMinister for advising him about thebusiness concerns and to identifyareas for future business growth.FPCCI should be taken intoconfidence.

4. The Corporate tax rate oncompanies may be reduced to25% or else a uniform tax rate of30% be introduced on allbusinesses, irrespective of theirlegal status to encouragecorporatization.

5. TacklingCorruption andInefficiencies of

PSEs(Governance

concerns)

1. Private Sector representatives withgood track record of management,organization and administrativeskills, be appointed as heads ofPublic Sector Entities (PSEs) likePIA, Railways, Pakistan Steel Mill,PEPCO, NHA, PASSCO, TCP, UtilityCorporation etc

4. Political will is the key driver ofsystematic change in corruptionenvironment. An anti-corruption reform beundertaken in public and civilservices.

2. A ’single government holdingcompany’ may be formed toreplace and take up role ofdifferent administrative ministriesin controlling PSEs. Independentboards of directors may be formedand empowered to govern thesePSEs with clear mandates, targetsand accountability.

5. NAB should be given morepowers and independency tocheck corruption cases. Itshould be truly independent ofany executive or politicalcontrol to investigate intoallegations of corruption againstpoliticians, bureaucrats etc.

3. A ‘code of conduct’ should beframed for the public servants andparliamentarians. Through an act ofparliament, it should be madeobligatory to follow the code.

6. The business community andthe civil society may beassociated in anti-corruptionreforms and initiatives, to keepa check and balance on NAB.

7. There should be continuous andeffective audit of personalaccounts and bank accounts ofpoliticians and bureaucrats.


Annexure | 109

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Proposed St Rage Gy for Economic Growth

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