Ali Habib Director Pakistan Business Council 1 Pakistan ushering - - PowerPoint PPT Presentation

Ali Habib – Director Pakistan Business Council

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Pakistan ushering into a new era of growth

24th largest economy by 2016 20th largest economy by 2030

surpassing Australia and Thailand 16th largest economy by 2050

Pakistan ushering into a new era of growth

50% growth in the power sector – solving the energy crisis through development of projects with a capacity of more than 11,000MW Distinction b/w filer and non filer

Generating power from indigenous resources such as Thar Coal 2 LNG Terminals commissioned – overcoming natural gas shortage CPEC US$60BN investment for mega development projects over the next 15 years. SEZs and CPEC major opportunity to make and export from Pakistan Major improvement in law and order bolstering investor confidence Large Infrastructure projects in the pipeline – Investment of US$6BN plus Auto policy leading to new entrants

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 enhanced facilitative approach to revive the manufacturing sector.

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Key areas that require immediate attention

(1) Poorly negotiated FTAs (2) Heavy Taxation (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

12 Recurrent Cycles of External Account Crises

Since ’88, Pakistan has been to IMF 12 times.

manufacturing sectors not lived up to its potential

1.7 3.2 1.9 0.9 1.36 1.36 1.9 1.7 3.6 7 8.1 5.2 4.1 3.9 4.4 2 4.1 4.7 3.1 1.7 3.1 3.2 4.5 4.5 3 1 2 3 4 5 6 7 8 9 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

Import Cover in Months

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40.4 40.2 41.7 41.4 41.3 48.5 24.7 24.8 25.1 24.1 22 21.9

• 15.7
• 15.4
• 16.6
• 17.3
• 19.3
• 26.6
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• 20
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10 20 30 40 50 2012 2013 2014 2015 2016 2017 Imports Exports Trade Deficit

Context: imports up, exports down, trade deficit rising … and Pakistan losing share of world exports

Pakistan’s Share of World Exports Down, Bangladesh’s More than Doubled since 2003 manufacturing sectors not lived up to its potential

0.16 0.13 0.09 0.24 0.05 0.1 0.15 0.2 0.25 2003 2016 % Share Pakistan's Share Bangladesh's Share

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10.38 14.42 13.76 13.45 8.34 12.29 11.5 10.7 7 8 9 10 11 12 13 14 15 % Share in GDP MFG Share LSM Share

Manufacturing and its share in exports is declining

Country De-Industrializing Prematurely Share of Manufacturing in Exports Declining

12.40% 13.28% 12.24% 10.59% 8.70% 0% 2% 4% 6% 8% 10% 12% 14% 2012 2013 2014 2015 2016

Exports (% of GDP)

manufacturing sectors not lived up to its potential

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FTAs are not supportive

Poorly Negotiated Trade Agreements

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!

Growth in Import Reliance, Mainly on China

(1) Poorly negotiated FTAs

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Countries Year Signed Trade Balance Then Trade Balance 2016 Srilanka 2005 US$0.094 BN US$0.24 BN China 2006 US$(3.2) BN US$(15.32) BN Indonesia 2013 US$(1.06) BN US$(1.86) BN Items Imports 2007* US$MN Imports 2016* US$MN Growth Multiple Est % from China Footwear 34 103 3X 90% Pumps 47 171 3.6X 61% Glassware 13 74 5.6X 90% Tiles 50 170 3.4X 75% Blankets 17 46 2.7X 98% Fans 25 69 2.7X 80%

Manufacturing is over-taxed and its growth lags neighbors

% Share in GDP % Tax Rev Agriculture 19.5% <1% Manufacturing 13.5% 58% Retail/Wholesale 18.5% 1% Services Total 59.6% 37%

Industry Carries Disproportionate Burden of Taxes Pakistan Lags Behind South Asia in Manufacturing Growth

2.09% 4.99% 5.45% 7.90% 9.96% 11.69% 9.05% 11.90%

0% 2% 4% 6% 8% 10% 12% 14%

2012 2013 2014 2015 2016

Manufacturing Sector-Growth Rate Pakistan India Bangladesh Vietnam

(2) Heavy Taxation

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Taxes are high, fiscal regime complex and not supportive of scale

Corp Tax % VAT/GST% Pakistan 38%* 17% Singapore 17% 7% Sri Lanka 15% 12% Bangladesh 25% 15% Vietnam 22% 10% Includes WWF/WPPF/Super Tax

High Tax Rates

Countries Doing Business ‘18 PAYING TAXES Rank (Out of 190) Payments (Number Per Year) Time (Hours Per Year) Pakistan 172 47 311.5 India 119 13 214 Bangladesh 152 33 435 Sri Lanka 158 47 168 Vietnam 86 14 498

Complex Tax System

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

(3) Fiscal Policy not supportive of scale

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Tax revenue is reliant on imports and presumptive taxes

200 400 600 800 1000 1200 1400 1600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

16% 21% 20% 20% 21% 20% 21% 20% 20% 21% 20% 23% 24% 20% 19% 17% 16% 15% 15% 16% 14% 16% 17% 15% 51% 48% 49% 50% 51% 53% 56% 56% 58% 55% 55% 53%

10… 11% 12% 1… 12% 11% 9… 8% 8… 8… 8% 8%

TAX COLLECTION PKR (BILLION)

Break-up of Indirect Taxes

Indirect on Income (FTR*) Customs Sales Excise

(3) Fiscal Policy not supportive of scale

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More than 50% of Sales Tax collected at Import Stage

Non-cascading tariff hurts manufacturing, footwear, an example

(4) Cascading Tariffs

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%

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CD, 11 CD, 20 RD, 30 RD, 20 10 20 30 40 50 Raw Mat Finished Goods

Welding Electrodes

CD RD CD, 11 CD, 21 RD, 30 10 20 30 40 50 Raw Mat Finished Goods

Brake Drums

CD RD CD, 11 CD, 36 RD, 30 10 20 30 40 50 Raw Mat Finished Goods

Shock Absorbers

CD RD

RD on RM/intermediates undermines industry

CD, 20 CD, 20 RD, 25 RD, 25 10 20 30 40 50 Soles and Heels Shoes

Shoes

CD RD

(4) Cascading Tariffs

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Inappropriate tariffs for commercial importers hurts manufacturing & government revenue

(5) Valuation of Imports

• S. No.

Part Description PCT Heading As per Pakistan Custom Tariff As per ruling 661 Parts AVG Net Weight (KG) OEM Unit Value Avg. ($) AVG OEM Duty & Taxes Values as Per Ruling AVG Duty paid by Commercial Importer Ruling 661 Incremental Revenue to GOP per unit

1 Oil Pump & Parts 8413.3030 By Unit By Unit 1.50 22.15 15.73 5.43 3.8 11.93 2 Water Pumps & Parts 8413.3030 By Unit By Unit 0.81 42.16 29.93 1.75 1.22 28.71 3 Spark Plug* 8511.1000 By Unit By Unit Unit 1.84 0.71† 0.45 0.17 0.54 4 Lamps / Head Light / Lens 8512.3010 By Unit By Unit Unit 62 44.02 3.30 3.18 40.84 5 Oil Filter *** 8421.2310 By Unit By Unit 0.20 2.75 2.64 *** 0.65 0.63 2.01 *** 6 Air Filter *** 8421.3110 By Unit By Unit 0.18 8.65 8.30 *** 0.65 0.63 7.67***

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

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Manufacturers pay sales tax on entire value addition vs. importers on import value only

(6) Value Added Tax Structure

SALES TAX CHARGED ON ALL THE EXPENSES INCURRED BY THE LOCAL MANUFACTURER

Commercial Importer CNF Product Price Warehouse Distribution Marketing Profit Local Manufacturer Conversion of Product Freight Costs Distribution Costs Marketing Profit

Sales Tax: 17% Value Added Tax: 3% Total Sales Tax: 20% Charged at the CNF Price of the Product Sales Tax: 17% Extra Tax: 3% Further Tax: 2% Total Sales Tax: 21% Charged on all the expenses incurred by the Local Manufacturer

NO SALES TAX ON ANY OTHER EXPENSES INCURRED

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Under-invoicing of Imports is Rampant and Significant

(7) Unfair competition from the informal sector

Under-invoicing is differential between Pakistan’s reported imports vs the exporting country’s reported exports to Pakistan.

Import Source Extent of Under-Invoicing* US$ MN Under-Invoicing as % of 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

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Under-invoicing is a major drain on tax revenue & undermines manufacturing

(8) Full & Final Tax

TAX EVASION AT POINT OF ENTRY 100% Compliant 60% under-invoiced PKR PKR Full value PKR 100 100 Declared/assessed value PKR 100 40 Customs Duty 20% 20 8 Regulatory Duty 25% 25 10 S Tax on duty paid value 20% 29 12 Presumptive tax 6% 10 4 Total Tax Levy at import stage PKR 84 34 Tax evaded at import stage PKR

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Tax evaded at import stage as % of Tax due

• 60%

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Presumptive tax creates an uneven playing field for manufacturing and results in total tax loss of 67%

Tax evasion as a result of presumptive Tax Regime Manufacturer 60% under-invoiced commercial importer

Landed cost in the books without input sales tax PKR. 145 Assume 50% mark up PKR 73 Sales Value before output sales tax PKR 218 Output Sales Tax 17% 37 Price to customer PKR 254 Net Profit for Compliant Manufacturer PKR 73 Tax at 30% thereon PKR 22 Add difference of output and input sales tax PKR 8 Total taxes and import levies PKR 104 34 Extent of evasion/avoidance PKR

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Evasion/avoidance as % of tax liability

• 67%

(8) Full & Final Tax

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Change ‘17

• ver ‘10

Inflation pa Labor X 2.5 times 14% pa Electricity X 2.3 times 13% pa Gas X 2.5 times 14% pa

Inflation in Pakistan’s Input Costs since 2010

Input costs are uncompetitive

US$/month Pakistan Multiple Pakistan 143 Bangladesh 65 X 2.2 times India 81 X 1.8 times US Cents/ KwH Pakistan Multiple Pakistan 14 Bangladesh 11 X 1.3 times India 8 X 1.75 times

Labor Cost / Month Electricity Cost / KwH Gas Cost / MMBTU

(9) Unfriendly Business Environment

US$/ MMBTU Pakistan Multiple Pakistan 5.72 Bangladesh 2.52 X 2.3 times India 2.80 X 2 times

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Construction Permits Days Getting Elect Days Taxes Number Taxes Days Taken Time to Export Days Time to Import Days Karachi 260 215 47 311 406 129 South Asia Avg. 194 137 28 277 369 113

And it is not easy to manufacture/do business…

(9) Unfriendly Business Environment

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Pakistan needs to work together with key stakeholders (government, policy makers & industry) & develop a comprehensive sector specific strategy to enable our manufacturing sector to scale production & start exporting. The country needs to produce consumables, semi-durables & durable goods locally (presently being imported) to feed into the demand of a population of 200MN plus & growing which is currently being fed through competition from the informal sector, undocumented trade channel & poorly negotiated FTAs. In the next 5YRS it is imperative for Pakistan to: (1) Reach scale in manufacturing (2) Reduce reliance on imported goods & (3) Start exporting by being competitive at a world wide level Pakistan’s manufacturing sector has to grow to become a more prominent part of the economy leading to an improved trade balance.

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3 Acute Needs One Solution Make in Pakistan

(1) Strengthening Domestic Industry will lead to job creation. (2) Larger Scale will reduce cost and improve competiveness (3) Leading to Increased Exports & (4) Consequently greater Economic Activity in the country will enhance the much required Tax Revenue. Jobs in Manufacturing & Services Value Added Exports & Import Substitution Higher Taxes from a Broader Base

Strong Domestic Industry with a Consumer Base of 207MN+

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Make in Pakistan

Protecting inefficient industry at consumers’ cost. Protecting inefficient industry at consumers’ cost. Denying exporters inputs at competitive prices. Denying exporters inputs at competitive prices. Creating monopolies in the name of scale. Creating monopolies in the name of scale. Exploiting Labour Exploiting Labour

Not About Is About

Long term policies to encourage manufacturing. Reversing reliance on imports. Creating jobs and upgrading human capital. Broadening export products and destinations. Leveraging 207 million consumers to build scale.

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Realizing the Potential : Manufacture Locally to feed the demand of a surging population of 166MN.

• 19,742

23,826 28,020 33,668 60,451

• 10,000

20,000 30,000 40,000 50,000 60,000 70,000 1st 2nd 3rd 4th 5th

Average Monthly Wage (PKR) Quintiles

Pakistan Household Wages (HIES 2016)

Pakistan needs to capture the 1st to 4th Quintile of the population (166 MN +) who consume a large proportion of items (LSGs) which are currently being imported (as given below)

939 103 200 3 22 1 2 1 40 82 132 7 15 936

• 100

100 300 500 700 900 1,100 1,300 1,500 Clothing Footwear Waterpumps Utensils Crockery Cutlery Heaters Geysers Fans Refrigerator Tiles Sanitary Ware Furniture Vegetables

US$ Million

Note: 41.5MN people in each Quintile

At present the above LSG* (Low-Sophistication Goods) amount to US$2.5BN of our declared import bill. Pakistan needs to start manufacturing the above LSGs to serve the growing domestic market & build scale over the next 5-7YRS to be competitive & start exporting at an International Level. With a demographic dividend of a young population & an

• pportunity to cater to 166MN local consumers – the manufacturing sector can drive substantial growth and contribute to

the annual growth of 6 to 7% to the economy.

166 MN

*PRODY Index Source: PBS HIES 2016 Source: UN Comtrade Undocumented trade Composition of Imported Items’16

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Regional Comparison & Outlook

1.1% 1.1% 1.2% 1.6% 1.9% 1.2% 1.3% 1.2% 1.4%

3% 3% 4% 4% 5%

0.0% 2.0% 4.0% 6.0% 2012 2013 2014 2015 2016

Regional Growth of Items (as % of Total Imports)

IND VNM PK

The selected items (LSGs: Fans, Footwear, Crockery etc.) represent 5% of Pakistan Imports. In comparable regional economies it is as low as 1.4%.

45 45.1 45.8 44.7 52.9 24.5 25.1 23.7 20.8 20.4 10 20 30 40 50 60

FY13 FY14 FY15 FY16 FY17 USD (Bn.)

Pakistan: Imports and Exports

Imports Exports

Source: UN Comtrade & PBS

Reduced import bills, and increase exports

Pakistan should aggressively work on its agenda to revive the manufacturing sector and aim at building scale and driving imports down by serving the domestic market locally.

5000 10000 15000 20000 25000 Import Export Import Export Import Export Import Export Import Export 2012 2013 2014 2015 2016

US $MN.

Trend of Indian LSG Imp-Exp (2012-16)

Clothing Fans Furniture Geyser Heater Kitchen Refrigerator Sanitary Ware Tiles Waterpump Vegetables

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1: Stop Undermining domestic industry though ill

negotiated trade agreements

Action Points Timeline

1. Complete the renegotiation of the Pak China FTA. 2. Move with caution on agreements with Turkey and Thailand. 3. Factor impact on jobs and tax collection into future agreements. 4. Encourage value-added exports, not just of commodities Ongoing Immediate Immediate Immediate

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2: Create a more level playing field for manufacturing

Action Points Timeline

• 1. Withdraw the presumptive tax regime. All in taxable activity to file returns.
• 2. Cascading tariffs on raw materials, intermediates and finished goods with

special provisions for manufacturers who use high tariff inputs

• 3. Remove RD on raw materials and intermediates
• 4. Impose quantitative duties to check under-valuation.
• 5. National Tariff Commission to be continuously functioning.
• 6. Levy import duty and GST on goods in transit to Afghanistan, refundable on

export from Pakistan. Immediate Immediate Immediate Immediate Ongoing MT

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3: A long-term consistent export policy to replace knee-jerk, short term packages

Action Points Timeline

• 1. Replace the 12-18-month export package with a 5-year, broad -based export

policy to promote investment in capacity and capability building.

• 2. Factor exchange rate and input cost disparity into export rebates
• 3. Encourage value-addition and export destination diversification through more

graduated rebates.

• 4. Automate rebates to ease cash

MT Immediate Immediate Immediate

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4: Fiscal policy should encourage corporatization, capital formation,

accumulation, consolidation and investment

Action Points Timeline

• 1. Withdraw Super Tax
• 2. Abolish tax on less than 40% profit distribution
• 3. Remove cascading tax on inter-company dividends
• 4. Encourage risk-taking by withdrawing minimum tax on turnover for first three

years of a business and then half the rate for the following two years.

• 5. Promote corporatization through parity taxation of company profits with

individuals and AOPs in business.

• 6. Restore the group taxation regime enacted in the Finance Act 2010 to promote

holding companies and wider shareholder participation. Immediate Immediate Immediate Immediate Next budget Next budget

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5: Develop policies and zones for the promotion of specific industries

Some Specific Industries Timeline

• 1. Value-added/technical apparel/textiles, including man-made fibers
• 2. Engineering, including but not limited to, auto-parts
• 3. Bodies and components for domestic appliances
• 4. Meat and milk processing
• 5. Petro-chemicals e.g. Naphtha Cracker to feed plastics
• 6. Low Sophistication Goods : such as footwear, crockery, fans, utensils etc.

MT

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