Daily The Business

LCCI proposals for federal budget in post-COVID-19 scenario -I

Irfan Iqbal Sheikh
Pakistan’s economy is passing through a challenging phase due to the outbreak of COVID-19 pandemic. The most impacted section of our society is the businesses. The manufacturers, traders, retailers, importers/exporters and other segments of business community are in a distress and facing huge financial losses due to current emergency situation as no business activity is going on in the country.
These extra-ordinary circumstances require extra-ordinary policy decisions. LCCI’s policy recommendations for the Federal Government Budget (2020-21) in post COVID-19 economic scenario are as follows.
Deferring the interest payments of businesses: In order to improve the cash flow of businesses and inject more liquidity in the economy in this crunch time, the interest payments of the businesses should be deferred for six months.
Support for salary expense of businesses: The government should bear the complete salary expense of businesses across all sectors for six months. The businesses should be allowed to pay back to the government in easy installments within two years.
Tax exemptions for BMR of existing units: The exemption from the payment of Sales Tax on imported plant, machinery, equipment and components should be granted for Balancing, Modernization and Replacement (BMR) of all existing Industrial units, including SMEs.
The government should re-allow BMR (Balancing, Modernization and Replacement) Tax Credit of 10 percent under section 65B of Income Tax Ordinance. Although the government has taken an excellent measure of making the banking finance available at seven percent for establishing new Industries, we are of the view that similar measures should also be announced for existing industries so that they can upgrade themselves through BMR (Balancing, modernisation and replacement). This would enhance our export competitiveness.
Energy cost: The exorbitant rise in energy rates (electricity and gas) has increased the cost of business for industry and hence dented our competitiveness.
o The electricity tariff for all the sectors should be reduced to7.5 cents/kwh through elimination of taxes, in line with the recent decline in global oil prices. The gas tariff should also be reduced for the industry.
• Deferring of energy bills: Keeping in view the liquidity situation of the businesses, the electricity and gas bills of all businesses should be deferred for six months.
No questions about income source: For increasing the investment in this lockdown period and removing the economic distress, the source of income should not be asked on any kind of investment in any sector of the economy for the next two years.
Income tax: The income tax rate should be reduced to 15 percent for the businesses for the next one year. Income Tax Exemption certificates on electricity bills should be allowed for all the businesses.
Tariff rationalisation–Raw materials and intermediate goods:
o All raw materials not manufactured locally must attract zero custom duties. Government must eliminate Regulatory Duties (RD) and two percent Additional Custom Duty (AD) on raw materials so that local industry is able to compete with smuggling and mitigate the effect of low tariff FTAs.
o Custom Duties (CD) on intermediary products should be reduced so that our industry is able to import quality materials, components and machinery from the rest of the world at the same duty rate at which it imports through different FTAs.
Interest rate: The State Bank policy rate is still on the higher side at nine percent. The government should take steps to reduce the interest rate to five percent in line with the regional economies since the high policy rate has made borrowing expensive for private sector and discouraged investment. The regional interest rates (e.g. India 4.4 percent, Bangladesh six percent, China 3.85 percent, Sri Lanka six percent and Malaysia 2.50 percent) should be set as a benchmark.
Interest free loans for SMEs and traders: SMEs are the backbone of our economy but get only seven percent of the private sector financing. To improve the access to finance for SMEs, the government must introduce a scheme of interest free loans for the registered SMEs. The credit limit for registered SMEs should be ten times of their respective electricity bills.
o Special consideration for providing interest free loans should be given to the registered small traders whereby they should be given loans of Rs3-5 lakh on the guarantee of the presidents of the relevant markets.
Extension in credit limits of businesses: The existing credit limits of the businesses who have taken loans from various banks should be enhanced by 25 percent so that they are able to utilise this finance to resume their businesses after the economic activity starts in a few months.
Supportive measures for shopkeepers in rent payments: This liquidity crunch owing to COVID-19 propagation has made it impossible for the shopkeepers to pay their full rents. In this scenario, supportive measures for the shopkeepers across the country should be introduced so that they only have to pay 50 percent of their rent each month for the next six months while the remaining rent is waived off.
Port demurrage and detention charges: The restrictions on movement of transport are resulting in heavy demurrage charges at the port. Furthermore, the shipping lines are imposing container detention charges. Due to this prevailing situation, the importers have to bear huge financial losses.
The writer is the President of Lahore Chamber of
Commerce and Industry (LCCI)
To be continued

The instructions to relevant authorities including KPT, PQA and private terminal operators be issued to waive the port demurrage and container detentions charges till May 31,2020.
SOPs for opening of businesses: The sector-wise SOPs for opening of businesses across all sectors should be finalised in consultation with the Lahore Chamber of Commerce (LCCI).
• Refund payments: An efficient system of refund payments should be made, tested and implemented on permanent basis to solve the issue of Refund payments of Businesses to avert any liquidity crisis.
Exchange rate: Devaluation of more than 30 percent has taken place since August 2018.This massive devaluation has increased the cost of doing business as many of our industries import vital raw materials and machinery.
o Government should take steps to strengthen our local currency and mitigate the impact of recent devaluation.
o To remove uncertainty among the businesses, the currency rate should be fixed on quarterly basis.
o State Bank should keep a buffer of five percent to manage the fluctuations in the exchange rate.
 Reduction in withholding tax: To reduce the cost of doing business, government should reduce the rate of withholding tax. Since most of the Businesses operate on very low profit margins, this rate of 4.5 percent should be brought down between zero percent and one percent to make sure that businesses do not face liquidity problems.
• Elimination of Advance Income Tax at import stage or Implementation of final tax regime:
o For the facilitation of importers to make sure that imports of vital raw materials are not affected, the advance Income Tax at import stage (Withholding Tax) should be eliminated for six months. Otherwise, the final tax regime should be implemented. It will help to curtail smuggling, reduce the cost of doing business, enhance Tax Revenues and increase the exports.
• CNIC condition: The disallowance of input tax relating to supplies made to an  unregistered person without disclosing his CNIC is filled with complications. This can result in a potential misuse of CNICs which has resulted in fraudulent transactions of billions of rupees as reported in media from time-to-time.
o The condition of disclosing CNIC for sale to unregistered person should be abolished in the larger interest of small businesses in the country in this crunch time.
• Exemption from audits for next two years: In these extra-ordinary economic circumstances caused by the COVID-19 outbreak when the businesses are already struggling for financial space, no Audits should be conducted for the next two years. This will help improve the business climate.
 Tax incentives for new companies:
o There should be Holiday for all taxes and levies (Federal and Provincial) for  three years for the newly registered companies, especially SMEs.
o There should be exemption from Audit for 3 to 4 years for the newly registered businesses.
• Simplification of taxation system:
o One page return form should be introduced.
o No Audits should be conducted for two years. After that, there should be a single Audit for Sales Tax, Income Tax and Withholding Tax. The frequency of this single Audit should be reduced to once in three years.
o The Tier-1 retailers who enter into online integration of their Points of Sales (POSs) with FBR’s computerized system should be given exemption from Income Tax Audits for previous six years and from Sales Tax Audits for previous five years.
o Furthermore there should also be exemption from Audits for Tier-1 Retailers who enter into online integration for coming two years.
• Testing laboratories and standard certification:
o Export-oriented industries should be given financial support for getting the costly international certifications through EDF and other means.
o Up-gradation of existing Testing Laboratories should be done through EDF funding to bring them at par with international standards for serving the export needs of industries like Pharmaceuticals. Halal food, leather and rice etc.
o The facility of testing laboratories and standard certification should be  provided, especially in the Special Economic Zones (SEZs), Export Processing Zones (EPZs) and Industrial Estates.
• Discretionary  powers/audits:
o Discretionary powers under Section 177, 214C, 138, 175 of (Income Tax) and 40B, 25 37, 38A, 40 and 48 of (Sales Tax) be minimised in consultation with stakeholders.
o Risk-based audits (with one month prior notice) rather than random Audits to stop harassment. The frequency of Risk-Based Audits should be once in three years.
o The criteria for conducting Audits (Income Tax, Sales Tax and Withholding Tax) should be published.
• Consistency in Macro-Economic and Sector-Specific Policies: To remove uncertainty among businesses and to letting our industry grow to fetch export revenues, there should be consistency  in economic policies (both Macro-economic and Sector Specific) regardless of the change in Government.
• Exports:
New Markets: There is a dire need to diversify the exports in terms of markets as about 55 percent of Pakistan’s exports go to ten countries namely, USA, China, UAE, Afghanistan, UK Germany, France, Bangladesh, Italy and Spain. USA has largest share in exports (16 percent) followed by European Countries (11 percent) in total exports.
o There is an ample potential of increasing exports to the other world markets where Pakistan is an under achiever – South America, Africa, Central Asian Republics (CARs) and Russia where the combined share of Pakistan’s exports is less than 10 percent of its total exports. This can be done by organising road shows, single country exhibitions, export oriented delegations and exchange of information between the trade bodies of Pakistan and these countries.
o New Products/Value Addition through Export Oriented SEZs and EPZs: To capture a larger share in the world trade, Pakistan has to make a strategic shift in the composition of its exports which requires promoting exports of medium/high technology products. Pakistan’s exports are highly concentrated in few items like Textile goods, leather, rice which account for about 70 percent of our total exports.
– There should be special focus on developing Export Processing
Zones(EPZs)and Export Oriented Special Economic Zones (SEZs) for technology intensive products like Engineering goods, Value Added Textiles, Surgical Instruments and Sports Goods etc.
– The EPZs and Export Oriented Special Economic Zones should be equipped with latest facilities like Water Treatment Plants, Certification Labs, One Window Facilitation and Solid Waste Management
– Land in the Export Oriented SEZs and EPZs should be provided on
lease to private sector on concessional rates
– Export targets should be given to the companies in the EPZ and Export Oriented SEZs. There should be a penalty for missing the export targets and incentives for meeting/exceeding the export targets.
o Potential Sectors: There should be a special focus on tapping the export potential of vibrant sectors like Halal Food, Information Technology (IT) and Value Added Textiles.
– Information technology: Pakistan’s IT exports are merely around $1 billion while the country has more than 5,000 IT Companies, presence of more than 300,000 English speaking IT professionals and 20,000 IT graduates are produced every year. The areas in IT which can be focused to enhance our IT exports are Software Houses, IT Parks, Incubation Centres and E-Commerce.
– Halal meat: There is also an immense potential to enhance our halal food exports as we have abundant availability of livestock. Currently our meat exports are $219 million while the global halal food market is well above $1 trillion and dominated by non-Muslim countries. The government should focus on development of state of the art slaughter houses according to the international standards and modernisation of post-harvest storage (refrigeration, heat treatment, modified atmosphere packaging and marketing systems, etc).
• Agro-based growth strategy: The agriculture sector contributes 18.5 percent to GDP and provides employment to 38.5 percent of the workforce. The growth rate of agriculture however remains stifled at 0.85 percent which is a big stumbling block in our overall economic growth. Crop and Livestock productivity are lower than in other Asian countries. LCCI therefore recommends that there is a dire need of structural reforms for
o Restoring agriculture competitiveness through innovations that renew growth in on-farm productivity (through modernising farm management) and improve efficiency and quality throughout the post-harvest value chain.
o Investing in efficient irrigation practices to increase availability of water.
o Reducing price volatility of inputs, especially fertilizers.
o Enhancing the targeted availability of agriculture credit to small farmers.
o Development of high yielding Hybrid Seed Varieties and improvement in provision of certified/tested seeds. This will help us to curtail our import bill, especially of edible seeds.
o Establishing modern agriculture research institutes by engaging international experts.
o Increasing livestock productivity, quality and ensuring disease free livestock for export of halal meat.
 Ease of doing business:
o The total number of taxes should be reduced to five by clubbing
– Labour-related taxes e.g. EOBI, PESSI, WPPF,WWF
– Professional and property tax
– Federal and provincial sales tax.
o The frequency of tax payments should be reduced by reducing the frequency of the tax payments of EOBI, PESSI and SalesTax
Sr Proposed Number of Taxes
1 Corporate Tax
2. Labour Tax (By Clubbing EOBI, PESSI, WPPF, WWF)
3. Property Tax (Clubbed with Professional Tax)
4. Vehicle Tax
5. Sales Tax (By Clubbing Federal and Provincial Sales Tax)
Total Number of Taxes: 5

Break-up Tax / Mandatory Contributions Tax Payments
According to World Bank Proposed
Frequency of Tax Payments
Corporate Income Tax 1 1
Employer paid -Pension contributions (EOBI) 12
1
Social security contributions (PESSI) 12
Education cess 1
Property tax 1 1
Professional tax 1
Vehicle tax 1 1
Stamp duty 1 0
Fuel tax 1 0
Goods and Sales Tax (VAT) 3 1
Total 34 5
• Trust deficit: The government must take all steps to curtail the trust deficit that is prevalent between the business community and government.

The writer is the President of Lahore Chamber of Commerce and Industry (LCCI)

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