Ali Habib – Director Pakistan Business Council 1
Pakistan ushering into a new era of growth 24 th largest economy by 2016 20 th largest economy by 2030 surpassing Australia and Thailand 16 th largest economy by 2050
Pakistan ushering into a new era of growth 50% growth in the power sector – solving the Distinction b/w filer and non filer energy crisis through development of projects Auto policy leading to new entrants with a capacity of more than 11,000MW Large Infrastructure projects in the pipeline – Generating power from indigenous resources such as Investment of US$6BN plus Thar Coal Major improvement in law and order 2 LNG Terminals commissioned – overcoming natural bolstering investor confidence gas shortage SEZs and CPEC major opportunity to make and CPEC US$60BN investment for mega development export from Pakistan projects over the next 15 years.
Key areas that require immediate attention Pakistan’s manufacturing sector has not lived up to its expected potential as evident from its stagnant share of 20 to 21% in overall GDP since 2013 ( 1.1% contribution to the GDP Growth rate over 5YRS ). Currently the following critical issues impede the growth of manufacturing in Pakistan & actions need to be taken to move upwards on the value chain and the productivity ladder. Pakistan’s government needs to take a a very (1) Poorly negotiated FTAs enhanced facilitative approach to revive the (2) Heavy Taxation manufacturing sector. (3) Fiscal Policy not supportive of scale (4) Cascading Tariffs (5) Valuation of Imports (6) Value Added Tax Structure (7) Unfair competition from the informal sector (8) Full & Final Tax (9) Unfriendly Business Environment 4
12 Recurrent Cycles of External Account Crises Since ’88, Pakistan has been to IMF 12 times. 9 8.1 8 7 7 Import Cover in Months 6 5.2 5 4.7 4.5 4.5 4.4 4.1 4.1 4 3.9 3.2 3.6 3.1 3.2 3.1 3 3 1.9 1.7 2 2 1.9 1.7 1.7 0.9 1.36 1.36 1 0 1993 1994 1995 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 manufacturing sectors not lived up to its potential 5
Context: imports up, exports down, trade deficit rising … and Pakistan losing share of world exports Pakistan’s Share of World Exports Down, Bangladesh’s 50 48.5 More than Doubled since 2003 41.7 41.4 41.3 40 40.4 40.2 Imports 0.24 0.25 30 25.1 24.7 24.8 0.2 24.1 22 21.9 20 0.16 0.15 10 Exports 0.13 % Share 0 0.09 0.1 2012 2013 2014 2015 2016 2017 -10 0.05 -15.4 -15.7 -16.6 -17.3 Trade Deficit -19.3 -20 -26.6 0 -30 2003 2016 Pakistan's Share Bangladesh's Share manufacturing sectors not lived up to its potential 6
Manufacturing and its share in exports is declining Country De-Industrializing Prematurely Share of Manufacturing in Exports Declining 14.42 15 13.76 13.45 14 13.28% 14% 12.40% 13 12.24% % Share in GDP 12% 10.59% 11.5 12 12.29 10% 8.70% Exports (% of GDP) 11 10.38 8% 10.7 10 6% 9 4% 8 2% 8.34 7 0% 2012 2013 2014 2015 2016 MFG Share LSM Share manufacturing sectors not lived up to its potential 7
FTAs are not supportive Growth in Import Reliance, Mainly on China Poorly Negotiated Trade Agreements Imports Imports Growth Est % from Trade Balance Trade Balance Items 2007* 2016* Countries Year Signed Multiple China Then 2016 US$MN US$MN Footwear 34 103 3X 90% Srilanka 2005 US$0.094 BN US$0.24 BN Pumps 47 171 3.6X 61% China 2006 US$(3.2) BN US$(15.32) BN Glassware 13 74 5.6X 90% Indonesia 2013 US$(1.06) BN US$(1.86) BN Tiles 50 170 3.4X 75% Blankets 17 46 2.7X 98% Fans 25 69 2.7X 80% Caution with Proposed FTAs with Turkey and Thailand 1. Significant mismatch between Pakistan’s export capability with those of Turkey (1:3) and Thailand (1:4) 2. Pakistan already enjoys relatively low tariff access to both countries 3. Both countries desire access to Pakistan’s automobile, auto ‐ parts, chemicals, plastics and rubber markets, which would undermine existing industry 4. Turkey is one of the highest users of trade defenses, even against its FTA partners! (1) Poorly negotiated FTAs 8
Manufacturing is over-taxed and its growth lags neighbors Industry Carries Disproportionate Burden of Taxes Pakistan Lags Behind South Asia in Manufacturing Growth 14% 11.90% Manufacturing Sector-Growth Rate % Share in GDP % Tax Rev 12% 11.69% 9.96% Agriculture 19.5% <1% 10% 9.05% 8% Manufacturing 13.5% 58% 7.90% 5.45% 6% 4.99% Retail/Wholesale 18.5% 1% 4% 2.09% Services Total 59.6% 37% 2% 0% 2012 2013 2014 2015 2016 Pakistan India Bangladesh Vietnam (2) Heavy Taxation 9
Taxes are high, fiscal regime complex and not supportive of scale Complex Tax System High Tax Rates Doing Business ‘18 Payments Corp Tax % VAT/GST% Time (Hours Countries PAYING TAXES Rank (Number Per Year) (Out of 190) Per Year) 38%* 17% Pakistan 17% 7% Pakistan 172 47 311.5 Singapore 15% 12% India 119 13 214 Sri Lanka Bangladesh 152 33 435 25% 15% Bangladesh 22% 10% Vietnam Sri Lanka 158 47 168 Includes WWF/WPPF/Super Tax Vietnam 86 14 498 Fiscal Policy Not Supportive of Scale 1. Super Tax 2. Tax on retained profits > 40% 3. Cascading tax on inter-corporate dividends 4. Effective Tax Rate of 55% for shareholders of holding companies 5. Restricted group loss relief 6. Minimum tax on turnover, even in initial years 7. Corporate tax higher than tax on sole traders/AOPs 10 (3) Fiscal Policy not supportive of scale
Tax revenue is reliant on imports and presumptive taxes 1600 Break-up of Indirect Taxes More than 50% of 53% TAX COLLECTION PKR (BILLION) 1400 55% Sales Tax collected at Import Stage 1200 55% 58% 1000 56% 56% 800 53% 23% 51% 600 20% 50% 21% 49% 20% 48% 400 20% 51% 21% 20% 8% 21% 8% 20% 8… 20% 11% 8… 24% 21% 8% 12% 1… 9… 200 12% 15% 15% 17% 15% 11% 16% 16% 10… 16% 14% 16% 19% 20% 17% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Indirect on Income (FTR*) Customs Sales Excise (3) Fiscal Policy not supportive of scale 11
Non-cascading tariff hurts manufacturing, footwear, an example Parity duty on inputs and finished goods Import Duty Before RD Raw & Intermediate materials Soles 20% Heels 20% Laminate Fabrics 20% PU Chemicals 25% Insole Board 20% Zipper 20% Finished Goods Shoes 20% (4) Cascading Tariffs 12
RD on RM/intermediates undermines industry Welding Electrodes Brake Drums 50 50 40 40 30 RD, 20 30 RD, 30 RD, 30 20 20 10 CD, 20 10 CD, 21 CD, 11 CD, 11 0 0 Raw Mat Finished Goods Raw Mat Finished Goods CD RD CD RD Shock Absorbers Shoes 50 50 40 40 30 RD, 25 RD, 25 30 RD, 30 20 CD, 36 20 10 10 CD, 20 CD, 20 CD, 11 0 0 Raw Mat Finished Goods Soles and Heels Shoes CD RD CD RD 13 (4) Cascading Tariffs
Inappropriate tariffs for commercial importers hurts manufacturing & government revenue AVG Duty paid OEM Unit Incremental PCT As per Pakistan Custom Tariff As per ruling 661 Parts AVG Net Value Avg. ($) AVG OEM Duty & Values as Per by Commercial S. No. Part Description Revenue to Heading Weight (KG) Taxes Ruling Importer Ruling GOP per unit 661 1 Oil Pump & Parts 8413.3030 By Unit By Unit 22.15 3.8 1.50 15.73 5.43 11.93 2 Water Pumps & Parts 8413.3030 By Unit By Unit 42.16 1.22 0.81 29.93 1.75 28.71 3 Spark Plug* 8511.1000 By Unit By Unit Unit 1.84 0.71† 0.17 0.45 0.54 Lamps / Head Light / 4 8512.3010 By Unit By Unit Unit 62 3.18 Lens 44.02 3.30 40.84 5 Oil Filter *** 8421.2310 By Unit By Unit 2.75 2.64 *** 0.63 2.01 *** 0.20 0.65 6 Air Filter *** 8421.3110 By Unit By Unit 8.65 8.30 *** 0.63 7.67*** 0.18 0.65 Proposal Increase Valuation per KG in Ruling 661 to reflect actual C&F of Part Assess High Tech and High Value Parts on per unit basis and increase valuation on unit basis. As per ruling 661 prices are fixed based on Parts Weight: ** 35 % Custom Duties + 20 % GST + 5.5 % Income Tax. *** 15 % Add Duty Item - Custom Duty 10 % only for Spark Plug 14 (5) Valuation of Imports
Manufacturers pay sales tax on entire value addition vs. importers on import value only Commercial Local Sales Tax: 17% Importer Manufacturer Value Added Tax: 3% Total Sales Tax: 20% Charged at the Conversion of CNF Product Price CNF Price of the Product Product SALES TAX CHARGED NO SALES TAX ON ALL THE EXPENSES ON ANY OTHER Warehouse Freight Costs INCURRED BY THE EXPENSES LOCAL INCURRED Distribution MANUFACTURER Distribution Costs Sales Tax: 17% Marketing Marketing Extra Tax: 3% Further Tax: 2% Total Sales Tax: 21% Charged on all the expenses Profit Profit incurred by the Local Manufacturer (6) Value Added Tax Structure 15
Under-invoicing of Imports is Rampant and Significant Extent of Under-Invoicing* Under-Invoicing as % of Import Source US$ MN Pakistan’s Reported Imports China 3,552 26 EU 1,006 21 UAE (non-oil trade) 324 35 UK 220 35 USA 100 5 Thailand 88.4 10 Turkey 86.8 33 Under-invoicing is differential between Pakistan’s reported imports vs the exporting country’s reported exports to Pakistan. (7) Unfair competition from the informal sector 16
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