CONSUMER welfare can be addressed by looking at the subject through various perspectives and angles in the prism. And specifically, consumer protection, a significant aspect of consumer welfare, can be achieved by dual approach of bottom up — through the activities of consumer-focused bodies — and top down, through laws as well as government measures.
This article sheds light on the top-down approach for achieving consumer protection and here too, from an enforcement of competition norms, or an anti-trust perspective.
The Competition Ordinance 2007 re-promulgated in November 2009, is the single, most significant and comprehensive charter or a sort of Magna Carta for protecting the consumer from anti-competitive behaviour. In a holistic fashion, this law sets out principles and norms of sound competitive behaviour as well as the mode in which these norms are to be enforced.
The Ordinance is inspired by the principles enshrined in the Treaty of Rome and global best practices, known to mankind. Our law is really at the cutting edge because it has benefited from “late-mover advantage” i.e., learning from the mistakes and successes of other jurisdictions over the past several decades.
First, ex-ante, it tries to prevent competition reducing mergers and acquisitions through a mandatory mergers clearance regime. Second, ex-post, the law provides for action against abuse of dominance by a single business undertaking as also collusive behaviour or cartelisation on the part of several undertakings. Third, the law makes adequate provision for action against deceptive marketing practices.
All this is apart from the positive steps required to be taken to create an awareness of competition issues and a culture of competition through advocacy and persuasion i.e., try to promote competition norms through means other than law enforcement.
It is obvious that all these operational provisions in the law, if properly implemented, would effectively protect the consumer from anti-competitive behaviour as well as benefit the consumer by way of enhanced productive efficiency arising out of greater competition on a level playing field.
Action against abuse by undertakings dominant in the market as well as action against instances of collusive behaviour or cartelisation are certainly beneficial for the consumer, and the benefits derived are both direct and indirect. Equally beneficial and protective for the consumer are actions against deceptive marketing practices, the impact of which is usually more direct and obvious. These issues are important to “put the consumer first”.
The inclusion of deceptive marketing practices completes the picture with respect to enforcement of competition norms and is covered by Section 10 of the Competition Ordinance. The CCP “Office of Fair Trading” addresses issues related to deceptive marketing practices.
The Commission has dealt with several cases of deceptive marketing including three landmark orders. These orders have laid down certain principles that constitute important elements of our jurisprudence on this subject. Our orders demonstrate the progressive and enlightened approach and are wholly in keeping with our law and our circumstances, tilting in favour of the consumer.
Some of the principles in our orders are as follows:
First, in the matter of deceptive advertisements, CCP has kept the onus squarely on the undertakings that publish the impugned deceptive advertisements This has been done by construing the word “consumer” in its widest amplitude as the “ordinary” consumer and not qualified the term “consumer” by the prefixing of words like “reasonable” or “prudent” or any other expression that would pass on some duty of care or diligence or caution to the consumer and thus provide an escape route for the undertaking. Under our law, the duty not to deceive the consumer is unfettered and absolute, and must not be diluted.
Second, we have held that in cases of deceptive advertisements, actual deception need not be established or proved. It is sufficient if it can be shown that the advertisement has the tendency or potential to deceive and the capacity to mislead. Also, that disclaimers in fine print are insufficient to rectify or correct deceptive impressions in the main body of the advertisement. Incomplete or half statements in advertisements could also be tantamount to being misleading or false.
Third, as opposed to other jurisdictions (e.g., the US), it is not necessary to show that the claim being made in the deceptive advertisement was in any way material to the consumer’s decision to consume the product in question nor it is necessary to determine what would be deduced from the advertisement if the consumer was reasonable.
Fourth, the word “goods” used in Section 10 of the Ordinance extends to both goods and services.
Fifth, we have held that actual harm need not be established in order to be culpable in cases of deceptive advertising.
Sixth, we have held that advertisements pertaining to financial products must, as far as practicable and applicable, use the US Truth in Savings Act as a benchmark. There must be no lack of clarity regarding the rate of return being offered.
Returning to a more general note, there is considerable empirical evidence to show that competition in the marketplace is beneficial for consumers and good for business. Competition between different companies and individuals through free enterprise and open markets is the basis of a robust economy. When firms compete with each other, consumers get the best possible prices, quantity, and quality of goods and services. Anti-trust laws encourage companies to compete so that both consumers and businesses benefit.
The Commission has, over the past two years of its existence, successfully implemented the competition law in its entirety and this has been recognised in global competition forums and networks. The Commission has moved decisively against cartelisation in various sectors, collusive tendering, abuse of dominance, unacceptable concentrations, and deceptive marketing practices.
The parties affected include several banks, cement companies, sugar mills, the largest refinery, all three stock exchanges, cellular companies, a leading business school, a government sponsored trust, several leading newspapers, a professional association, PIA, a leading Islamic insurance company, TCP, and two fertiliser companies held by an Army Trust.
As a consequence, there is a lot of bitter opposition to the competition law, and the Commission, by rich, powerful and influential parties -- those that have been adversely affected or are likely to be adversely affected by the Commission’s proactive actions in favour of the consumer.
Given our cutting edge law and its benefits to business, consumers and retail consumers, it is imperative that our law continues to be enforced. Otherwise the country’s economic productivity will continue to stagnate as it has for the past many, many years.
Efforts are being stepped up to either destroy the law or weaken the Commission. The big question is: will the influential succeed? The people against the competition regime are powerful whereas those supporting it are weak. The media, the civil society, right-thinking business elements, and above all, the government need to lend full support to continued enforcement of the competition law in its present shape and form.
The writer is the Chairman of the Competition Commission of Pakistan.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/consumer-comes-first-930
Tuesday, March 30, 2010
Can proposed VAT mode deliver? By Dr Summaira Riaz
THE proposed value-added tax bill is a departure from the globally VAT approved parameters. VAT requires simplified procedures, lesser involvement of the Federal Board of Revenue in day-to-day affairs and devolving of functions at grass roots level.
VAT has failed in those countries or resulted in corruption where the tax collecting functionaries are invested with immense discretionary powers.
First, VAT is built around local trade practices. VAT also ensures that basic products, daily used domestic food items, medicine, and agricultural products are not brought under its net. Second, VAT is imposed on moveable goods. It would be interesting to see how the proposed VAT has addressed these issues in Pakistan. The other important question is whether or not the FBR has fixed the nuts and bolts of the machinery that will administer VAT.
A draconian provision has been introduced in which tax fraud means tax evasions. Tax fraud in all over the developed economies is willful evasion of tax and it does not cover tax avoidance. Tax evasion could result from data feeding errors, and it is well known to the Board that the person being shown as short filer or stop filer has actually filed the returns.
The FBR and its IT team PRAL has failed to ensure that all the payments and returns filed are correctly reflected in its database. Now a person can go behind the bars for three years if FBR fails to capture his returns as well as payments. Is it sensible to enlarge the scope of tax fraud to such an extent that it empowers the board to scare the people for their lives?
If we look at the list of exemptions, all food items except for unprocessed peas, wheat and wheat flour are now taxable. It implies that now 40 per cent of the population living below the poverty line would be whipped to pay tax n all the items that they consume just to stay in existence. Even all kind of vegetables and pulses will be taxable. How can the board collect from the sales of such basic items? It will be ridiculous to note that donkey cart holders will have to pay taxes on sales made on carts. Lo and behold, taxes have to be paid on medicines..
The FBR claimed that it has engaged international consultants to develop and draw the framework of VAT system. However, there are many new rules that do not make sense in the proposed VAT bill. For example, retailers have to indicate the registration number of such buyer who is not required registration. But how a retailer can mention registration number of an unregistered person? Is there any country where retailers maintain such record? The proposed bill has assigned the function of refund processing, registration and revising of the returns to the board. It is not understood; if the board has to perform basic functions then what role its field offices of more than 30,000 workforces shall play. If the board has developed the capacity and skills then what is stopping it now from processing of thousands of pending refund claims. The only plausible reason may be that it is not willfully releasing refunds just to recover its pathetic tax collection, which is less than nine per cent of GDP.
The proposed VAT bill has also empowered the FBR to cancel the registration where it has found that registration is not required or where the declaration in form of returns are not reliable. What kinds of tools are available with the board to check the credentials of the taxpayers? It is however not defined what is reliable return. The taxpayers shall remain at the mercy of the FBR. Strangely as per section 69 of the bill, audit can only be initiated where tax fraud is suspected. It is very naive to assume that a person like Micheal Keen could agree with the proposal to restrict the audit only to the suspected fraud cases. In VAT, audit is a normal exercise, which instills deterrence amongst taxpayers. Instead of building of the writ of the field enforcement system, the bill portrays as if the board has developed some invisible data mining system through which it will do all the magical works..
The tax invoices have to be issued when transaction is made between two registered persons. As we understand that the registration contains all the vital information of the person, such as his CNIC number and address. Still in the invoice he has to write again all this information. This is classical example, how a simple thing could be made complicated.
We understand that other than the corporates, all the tax payers have to maintain records manually, now just to meet VAT demands, he will have to employ another person just to write down CNIC numbers and addresses of its buyers. This information is of no use to the board as it has already acquired it in its database.
The criticism on the existing GST by the local consultants generally from income tax background and from Carlos Silvanni was that it was a distorted version of VAT. The distortion was in the form of local zero-ratting. But strangely, they have introduced the concept of withholding agents in Section 36 of the bill. The withholding concept is alien to VAT. Previously, FBR introduced the tax on the sales of second-hand cars. It failed for the simple reason that it is a clear case of double taxation.
However the board either does not have the institutional memory or does not learn from its past experiences. And this is evident from the fact that it has introduced the tax on second-hand goods as per Section 21. This section provides for the tax of sales of the goods that are purchased from an unregistered person. The law does not restrict sale of goods to unregistered person. So any taxable good that has already suffered taxes on sale to unregistered person shall again be subject to tax when any person purchases from him and then sells it. Clearly this law shall attract protracted litigations. The board has abolished the tax on advance payments though it has won the case from Supreme Court. It was abolished for the reason that it created liquidity crunch as well as accounting problems but the bill has again introduced the taxes on advances.
The bill has fixed the threshold for registration at Rs7.5 million. The sales tax registration data in terms of different categories, manufactures, exporters, importers, wholesalers etc. It helps the board in evaluating and risk profiling of such persons. However deviating from such categorisation, it has introduced the concept of the registered person without indicating actively. This section shall create lot of problems for large number of taxpayers transacting below Rs7.5 million.
For example, a registered person could only make all supplies to the government department. Now these people have to go for voluntary registration. The board will have no data on business status-wise. Again there is an anomaly that any person importing goods lesser than Rs7.5 million is not required to register. The question arises whether such person is exempt from the sales tax at the import stage. It is strange that the international consultants have consented to such anomalous provisions of law.
In 2005, the FBR zero-rated the input goods of five major exporting sectors. The reason for zero-rating was that the board had paid refunds of more than Rs42 billion in 2004 and 2005 and collected just Rs32 billion. This was done to facilitate genuine exporters and to stop fraudulent refunds. The board has done away with this provision on the plea that it is departure from VAT.
The one question that these gurus needs to note is that France was the pioneer in introducing VAT and till to date zero-rates the indirect exporters. Facing the same dilemma, England has successfully implemented reverse charging on business-to-business transactions. They need to note that the gospel of VAT, sixth directive of EU provides for different options to address local peculiar issues. If the board did not have the capacity in 2005, it definitely has not demonstrated to have it in 2010 when it has failed to settle refunds only of packing material. It is the norm with the present government to push and then retract from serious issues. However, such nonchalant approach while fiddling with the fiscal system needs to be noted by all the stakeholders with utter seriousness. When the government levied taxes on electricity it widened the poverty pool. The present VAT will add to their misery beyond imagination.
Whereas, admittedly the tax-to-GDP ratio is very low but then what the FBR has done to plug the evasion that it claims to be around Rs800 billion apart from dismantling the old system; it needs to put its house in order, check the fraudulent input adjustments and on top of it, have all together fresh look in its IT syndrome.
Pushing the things with speed is good initiative, but not at the cost of propriety and quality of system. The VAT needs to build around local trade conditions as well as a blend of best international practices. The standing committees of the National Assembly and the Senate need to engage private professionals before firming up their opinion on the bill.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/can-proposed-vat-mode-deliver-930
VAT has failed in those countries or resulted in corruption where the tax collecting functionaries are invested with immense discretionary powers.
First, VAT is built around local trade practices. VAT also ensures that basic products, daily used domestic food items, medicine, and agricultural products are not brought under its net. Second, VAT is imposed on moveable goods. It would be interesting to see how the proposed VAT has addressed these issues in Pakistan. The other important question is whether or not the FBR has fixed the nuts and bolts of the machinery that will administer VAT.
A draconian provision has been introduced in which tax fraud means tax evasions. Tax fraud in all over the developed economies is willful evasion of tax and it does not cover tax avoidance. Tax evasion could result from data feeding errors, and it is well known to the Board that the person being shown as short filer or stop filer has actually filed the returns.
The FBR and its IT team PRAL has failed to ensure that all the payments and returns filed are correctly reflected in its database. Now a person can go behind the bars for three years if FBR fails to capture his returns as well as payments. Is it sensible to enlarge the scope of tax fraud to such an extent that it empowers the board to scare the people for their lives?
If we look at the list of exemptions, all food items except for unprocessed peas, wheat and wheat flour are now taxable. It implies that now 40 per cent of the population living below the poverty line would be whipped to pay tax n all the items that they consume just to stay in existence. Even all kind of vegetables and pulses will be taxable. How can the board collect from the sales of such basic items? It will be ridiculous to note that donkey cart holders will have to pay taxes on sales made on carts. Lo and behold, taxes have to be paid on medicines..
The FBR claimed that it has engaged international consultants to develop and draw the framework of VAT system. However, there are many new rules that do not make sense in the proposed VAT bill. For example, retailers have to indicate the registration number of such buyer who is not required registration. But how a retailer can mention registration number of an unregistered person? Is there any country where retailers maintain such record? The proposed bill has assigned the function of refund processing, registration and revising of the returns to the board. It is not understood; if the board has to perform basic functions then what role its field offices of more than 30,000 workforces shall play. If the board has developed the capacity and skills then what is stopping it now from processing of thousands of pending refund claims. The only plausible reason may be that it is not willfully releasing refunds just to recover its pathetic tax collection, which is less than nine per cent of GDP.
The proposed VAT bill has also empowered the FBR to cancel the registration where it has found that registration is not required or where the declaration in form of returns are not reliable. What kinds of tools are available with the board to check the credentials of the taxpayers? It is however not defined what is reliable return. The taxpayers shall remain at the mercy of the FBR. Strangely as per section 69 of the bill, audit can only be initiated where tax fraud is suspected. It is very naive to assume that a person like Micheal Keen could agree with the proposal to restrict the audit only to the suspected fraud cases. In VAT, audit is a normal exercise, which instills deterrence amongst taxpayers. Instead of building of the writ of the field enforcement system, the bill portrays as if the board has developed some invisible data mining system through which it will do all the magical works..
The tax invoices have to be issued when transaction is made between two registered persons. As we understand that the registration contains all the vital information of the person, such as his CNIC number and address. Still in the invoice he has to write again all this information. This is classical example, how a simple thing could be made complicated.
We understand that other than the corporates, all the tax payers have to maintain records manually, now just to meet VAT demands, he will have to employ another person just to write down CNIC numbers and addresses of its buyers. This information is of no use to the board as it has already acquired it in its database.
The criticism on the existing GST by the local consultants generally from income tax background and from Carlos Silvanni was that it was a distorted version of VAT. The distortion was in the form of local zero-ratting. But strangely, they have introduced the concept of withholding agents in Section 36 of the bill. The withholding concept is alien to VAT. Previously, FBR introduced the tax on the sales of second-hand cars. It failed for the simple reason that it is a clear case of double taxation.
However the board either does not have the institutional memory or does not learn from its past experiences. And this is evident from the fact that it has introduced the tax on second-hand goods as per Section 21. This section provides for the tax of sales of the goods that are purchased from an unregistered person. The law does not restrict sale of goods to unregistered person. So any taxable good that has already suffered taxes on sale to unregistered person shall again be subject to tax when any person purchases from him and then sells it. Clearly this law shall attract protracted litigations. The board has abolished the tax on advance payments though it has won the case from Supreme Court. It was abolished for the reason that it created liquidity crunch as well as accounting problems but the bill has again introduced the taxes on advances.
The bill has fixed the threshold for registration at Rs7.5 million. The sales tax registration data in terms of different categories, manufactures, exporters, importers, wholesalers etc. It helps the board in evaluating and risk profiling of such persons. However deviating from such categorisation, it has introduced the concept of the registered person without indicating actively. This section shall create lot of problems for large number of taxpayers transacting below Rs7.5 million.
For example, a registered person could only make all supplies to the government department. Now these people have to go for voluntary registration. The board will have no data on business status-wise. Again there is an anomaly that any person importing goods lesser than Rs7.5 million is not required to register. The question arises whether such person is exempt from the sales tax at the import stage. It is strange that the international consultants have consented to such anomalous provisions of law.
In 2005, the FBR zero-rated the input goods of five major exporting sectors. The reason for zero-rating was that the board had paid refunds of more than Rs42 billion in 2004 and 2005 and collected just Rs32 billion. This was done to facilitate genuine exporters and to stop fraudulent refunds. The board has done away with this provision on the plea that it is departure from VAT.
The one question that these gurus needs to note is that France was the pioneer in introducing VAT and till to date zero-rates the indirect exporters. Facing the same dilemma, England has successfully implemented reverse charging on business-to-business transactions. They need to note that the gospel of VAT, sixth directive of EU provides for different options to address local peculiar issues. If the board did not have the capacity in 2005, it definitely has not demonstrated to have it in 2010 when it has failed to settle refunds only of packing material. It is the norm with the present government to push and then retract from serious issues. However, such nonchalant approach while fiddling with the fiscal system needs to be noted by all the stakeholders with utter seriousness. When the government levied taxes on electricity it widened the poverty pool. The present VAT will add to their misery beyond imagination.
Whereas, admittedly the tax-to-GDP ratio is very low but then what the FBR has done to plug the evasion that it claims to be around Rs800 billion apart from dismantling the old system; it needs to put its house in order, check the fraudulent input adjustments and on top of it, have all together fresh look in its IT syndrome.
Pushing the things with speed is good initiative, but not at the cost of propriety and quality of system. The VAT needs to build around local trade conditions as well as a blend of best international practices. The standing committees of the National Assembly and the Senate need to engage private professionals before firming up their opinion on the bill.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/can-proposed-vat-mode-deliver-930
Pickup in industrial growth ByMohiuddin Aazim
The growth in large-scale manufacturing which started inching up from the second quarter, has risen to 2.34 per cent during July-January.
In January alone, the LSM grew 7.5 per cent mainly because of a low base and a pick-up in international demand from the beginning of 2010. Officials anticipate full-year growth of at least 5-6 per cent against last year’s contraction of 8.2.
The industries whose outputs increased in seven months to January 2010 include cotton and cotton yarn, automobiles, fertilisers, chemicals, cooking oil, leather, soaps, detergents, pharmaceuticals, power looms and electric and electronic household items of daily use.
Revival of large-scale manufacturing, pickup in exports, decline in imports, overall growth in workers’ remittances, reasonably good cotton crop and increase in rice production have impacted positively on the economic performance so far this fiscal year.
But increasing fiscal deficit, continuing low tax- to-GDP ratio, cuts in development spending, growing power shortages and mounting foreign debts pose serious challenges.
Whereas industrial revival is in sight, it seems a resurge in agriculture is taking more time. Cotton output is up more than 12 per cent over the previous year but is still short of the target of 13.36 million bales. Officials of the ministry of food and agriculture say wheat output may be close to the target of 25 million tonnes. They say that winter rains in late January-early February have dispelled fears of initially estimated shortfall of two million tonnes.
Rice production for this year is estimated at 6.68 million tonnes, slightly below the production of the last year, but higher than the target of 6.4 million tonnes. Federal Food Minister Nazar Muhammad Gondal informed the parliament that sugarcane output has reached 47.03 million tonnes against the target of 56.527 million tonnes. This slippage in output, international prices and the government’s failure to eliminate unethical practices of sugar millers keep domestic sugar prices at record high levels. Livestock that had performed pretty well till FY08 is not growing fast due to water shortages and the army offensive in the NWFP and Northern areas. The agriculture sector looks unlikely to achieve the growth target of 3.8 per cent.
Banking sector is doing well. Its profitability is on the rise and it has also restarted lending to the private sector after containing growth of bad loans. This, coupled with renewed activity in transportation and retail sectors has brightened the scope for growth in the services sector. The central bank and the government expect to achieve GDP growth target of 3.3 per cent during this fiscal year. By the month-end, the State Bank would release its second quarterly report along with an outlook for the rest of the fiscal year making the picture clearer.
So far, borrowings from the IMF, rebound in exports after the easing of the Great Recession and increased remittances have contained the current account deficit and eased volatility in exchange rates. But a buildup in foreign debts and the consequent increase in foreign debt servicing in future would keep the economy under pressure. Clearly there is a need for faster domestic resource mobilisation.
The government is desperately looking for ways to accelerate the current tax-to-GDP ratio of nine per cent. From the next fiscal year, it plans to introduce value-added tax, enhance excise duty on cigarettes and on various services including banking and insurance, increase withholding tax on imports and levy capital value tax on real estate and capital gains tax on stock exchanges.
In all likelihood, it may not be able to levy agricultural income tax fearing negative political fallouts. Even the introduction of VAT from the next fiscal year is not certain as the Senate’s standing committee on finance has recommended its deferment for a year.
The recently-appointed Advisor to Prime Minister Dr Hafeez Shaikh has listed his priorities. He says he would improve financial management, economic discipline, governance and microeconomic framework.
He has also promised to try to achieve economic growth in a manner that its benefits can reach all citizens. But as for now, the government has reduced this year’s development to make up for the increased current expenses including for expensive war against militants. Actual release of development funds so far has seen a sharp decline, affecting uplift projects in such vital areas as education, health, water, power and poverty reduction.
Inflation still remains in double digits though the pace of its increase this year has been lower than in the last year. Given the fact that a huge increase in fuel oil prices in February is yet to show its impact on inflation from this month onwards, the annual inflation target of 9.5 per cent is likely to be met. As such, further easing of interest rates by the central bank looks unlikely.
Key office-bearers of The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) gathered at the Federation House Karachi last week to discuss the problems arising out of the increasing gap in demand and supply of electricity. They pointed out that the industry is suffering financial loss of Rs220 billion a year due to power shortages and so far 400,000 workers have lost their jobs. They urged the government to work out a long-term solution to this problem instead of resorting to unwise short-cuts, perhaps referring to planned rental power plants.
Currently, the country is facing power deficit of about 4500 megawatt that is bound to increase as the summer days get hotter in coming months. But so far, the industrial estates of Karachi have not reported major power outages as Karachi Electric Supply Company (KESC) is meeting their requirements at the cost of household consumers. In other parts of the country, however, industries suffer from power outages.
The continuing critical shortage of power is a source of worry for the manufacturing sector.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/pickup-in-industrial-growth-930
In January alone, the LSM grew 7.5 per cent mainly because of a low base and a pick-up in international demand from the beginning of 2010. Officials anticipate full-year growth of at least 5-6 per cent against last year’s contraction of 8.2.
The industries whose outputs increased in seven months to January 2010 include cotton and cotton yarn, automobiles, fertilisers, chemicals, cooking oil, leather, soaps, detergents, pharmaceuticals, power looms and electric and electronic household items of daily use.
Revival of large-scale manufacturing, pickup in exports, decline in imports, overall growth in workers’ remittances, reasonably good cotton crop and increase in rice production have impacted positively on the economic performance so far this fiscal year.
But increasing fiscal deficit, continuing low tax- to-GDP ratio, cuts in development spending, growing power shortages and mounting foreign debts pose serious challenges.
Whereas industrial revival is in sight, it seems a resurge in agriculture is taking more time. Cotton output is up more than 12 per cent over the previous year but is still short of the target of 13.36 million bales. Officials of the ministry of food and agriculture say wheat output may be close to the target of 25 million tonnes. They say that winter rains in late January-early February have dispelled fears of initially estimated shortfall of two million tonnes.
Rice production for this year is estimated at 6.68 million tonnes, slightly below the production of the last year, but higher than the target of 6.4 million tonnes. Federal Food Minister Nazar Muhammad Gondal informed the parliament that sugarcane output has reached 47.03 million tonnes against the target of 56.527 million tonnes. This slippage in output, international prices and the government’s failure to eliminate unethical practices of sugar millers keep domestic sugar prices at record high levels. Livestock that had performed pretty well till FY08 is not growing fast due to water shortages and the army offensive in the NWFP and Northern areas. The agriculture sector looks unlikely to achieve the growth target of 3.8 per cent.
Banking sector is doing well. Its profitability is on the rise and it has also restarted lending to the private sector after containing growth of bad loans. This, coupled with renewed activity in transportation and retail sectors has brightened the scope for growth in the services sector. The central bank and the government expect to achieve GDP growth target of 3.3 per cent during this fiscal year. By the month-end, the State Bank would release its second quarterly report along with an outlook for the rest of the fiscal year making the picture clearer.
So far, borrowings from the IMF, rebound in exports after the easing of the Great Recession and increased remittances have contained the current account deficit and eased volatility in exchange rates. But a buildup in foreign debts and the consequent increase in foreign debt servicing in future would keep the economy under pressure. Clearly there is a need for faster domestic resource mobilisation.
The government is desperately looking for ways to accelerate the current tax-to-GDP ratio of nine per cent. From the next fiscal year, it plans to introduce value-added tax, enhance excise duty on cigarettes and on various services including banking and insurance, increase withholding tax on imports and levy capital value tax on real estate and capital gains tax on stock exchanges.
In all likelihood, it may not be able to levy agricultural income tax fearing negative political fallouts. Even the introduction of VAT from the next fiscal year is not certain as the Senate’s standing committee on finance has recommended its deferment for a year.
The recently-appointed Advisor to Prime Minister Dr Hafeez Shaikh has listed his priorities. He says he would improve financial management, economic discipline, governance and microeconomic framework.
He has also promised to try to achieve economic growth in a manner that its benefits can reach all citizens. But as for now, the government has reduced this year’s development to make up for the increased current expenses including for expensive war against militants. Actual release of development funds so far has seen a sharp decline, affecting uplift projects in such vital areas as education, health, water, power and poverty reduction.
Inflation still remains in double digits though the pace of its increase this year has been lower than in the last year. Given the fact that a huge increase in fuel oil prices in February is yet to show its impact on inflation from this month onwards, the annual inflation target of 9.5 per cent is likely to be met. As such, further easing of interest rates by the central bank looks unlikely.
Key office-bearers of The Federation of Pakistan Chambers of Commerce & Industry (FPCCI) gathered at the Federation House Karachi last week to discuss the problems arising out of the increasing gap in demand and supply of electricity. They pointed out that the industry is suffering financial loss of Rs220 billion a year due to power shortages and so far 400,000 workers have lost their jobs. They urged the government to work out a long-term solution to this problem instead of resorting to unwise short-cuts, perhaps referring to planned rental power plants.
Currently, the country is facing power deficit of about 4500 megawatt that is bound to increase as the summer days get hotter in coming months. But so far, the industrial estates of Karachi have not reported major power outages as Karachi Electric Supply Company (KESC) is meeting their requirements at the cost of household consumers. In other parts of the country, however, industries suffer from power outages.
The continuing critical shortage of power is a source of worry for the manufacturing sector.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/pickup-in-industrial-growth-930
State of economy
ARTICLE (March 30 2010): Agriculture sector: Growth prospects for agriculture sector remain weak in contrast to the strong growth seen last year. Negative contribution by the two major crops of FY10 kharif (rice and sugarcane) and expected decline in wheat harvest are mainly responsible for this gloomy outlook.
The major contributory factors for lower area under cultivation and relatively weak performance by these crops were: (a) water shortages; and (b) realisation of lower prices in the preceding season for rice and sugarcane. An overall decline in area under major crops, conservative lending by domestic private banks (DPBs) and weakness in demand for credit by the non-farm sector led to slowdown in agri-credit disbursement during July-January FY10.
On the positive side, relatively lower prices of fertiliser and higher farm incomes in FY09 encouraged farmers to use fertilisers aggressively. Fertiliser off-take also increased due to government support in terms of maintaining a higher support price for FY10 wheat crop despite a substantial decline in international prices of the grain.
Large Scale Manufacturing: The pace of recovery in LSM subsector increased in Q2-FY10 largely in response to rising domestic demand. Most of the recovery emanated from the consumer durable industries as demand for automobiles & allied industries increased sharply despite the QoQ increase in prices.
Furthermore, revival in construction activities in both public and private sector resulted in a sharp increase in demand for cement and steel during the quarter. Cement sector benefited also from recovery in external demand as exports to North African countries showed a steep rise. Resource based industries, however, presented a mixed picture.
Where the low- value-added textile sector benefited from a good cotton crop and a simultaneous shortage of cotton globally, the local sugar industry suffered from lower sugarcane production. Nonetheless, it will be extremely challenging to sustain the growth seen in July-January FY10 period given the prevalent energy shortages in the country.
In addition to energy insufficiency, local manufacturers are also confronting the rising cost pressures, since electricity and gas tariffs have increased from January 2010. Furthermore, the rise in global commodity prices from Q2-FY10 has also put significant pressures on production costs. If manufacturers tend to shift the cost burdens on the consumers, demand may tumble as consumers' purchasing power has already been hit by rising food prices.
Prices: Inflationary pressures strengthened in the economy in recent months. Resurgence in inflation during recent months is mainly attributed to: (a) rise in the administered prices of energy and key fuels by the government, (b) depreciation of rupee, and (c) a temporary supply shock due to bad weather (fog) in Punjab. Moreover, relatively higher international commodity prices of sugar, rice and crude oil also fuelled inflationary pressures in the economy.
Specifically, headline CPI inflation fell to 13.0 percent YoY in February 2010 after bottomed out at 8.9 percent in October 2009. The surge in CPI inflation in recent months is principally contributed by rise in the prices of food items and administered prices of key fuels and electricity tariffs.
This is also evident in a lower core inflation measured by excluding food and energy items (NFNE) from the CPI basket relative to core inflation measured by 20% trimmed mean. While NFNE inflation registered at 10.1 percent, 20% trimmed mean inflation recorded at 12.4 percent in February 2010.
Relatively higher core inflation measured by trimmed mean also indicates that inflationary pressures are substantially broad based within food and energy sub-groups. This also points towards rigidity in inflationary pressures in the economy. More importantly, since inflationary pressures concentrated in food and energy sub-groups, this indicates possibility of strong second-round effects on the prices of other goods and services due to rising costs of production and increase in cost of living.
Money and Banking: SBP kept the policy rate unchanged at 12.5 percent in January 2010. This was because of rebounding inflationary pressures, lingering risks on external current account though reduced from last year level and persistent weakness in the fiscal account.
In terms of monetary aggregates, growth in Broad Money (M2) accelerated to 5.7 percent during July-February FY10 from 2.0 percent in the corresponding period of FY09. This improvement resulted entirely from an expansion in net domestic assets (NDA) of the banking system on the back of strong rise in private sector credit and increased recourse of government to finance its deficit from the banking system.
On the other hand, trend improvement in the external account visible since December 2008, has started to reverse from October 2009 onwards. Resultantly, NFA of the banking system recorded a depletion of Rs 46.6 billion in July-February FY10; though much lower compared to last year's contraction.
Deposit mobilisation by banks shows some recovery since deposits recorded a growth of 4.6 percent during July-February FY10 in sharp contrast to the previous year when the deposit base contracted by 0.6 percent. The trend decline in private sector credit, visible for twelve consecutive months, reversed from October 2009 as (1) the demand for seasonal finance (ie cotton, sugarcane and rice) picked-up, and (2) a mild recovery was seen in domestic demand. Consequently, cumulative credit to private sector grew by 4.7 percent during July-February FY10; slightly lower than the growth seen in the corresponding period a year earlier.
Fiscal Developments: Key fiscal indicators improved in Q2-FY10 over the previous quarter, bringing the cumulative fiscal deficit for H1-FY10 to 2.7 percent of annual estimated GDP. This figure is consistent with the SBP forecast of budget deficit for the year. The improvement in revenue growth during Q2-FY10 is largely due to increased direct tax collection.
This was to be expected given that the traditional first quarter receipts had been pushed into the second quarter following extension of the deadline for filing income tax returns. Moreover, tax collection was also helped by a revival in the economy and rise in rupee value of imports.
On the expenditure side, the government was able to contain growth in total outlays during Q2-FY10. However, given the rigidities in current expenditure on account of the need to address build-up of energy sector circular debt, security related expenditure etc, the government has little choice but to cut development spending if pledges by FoDP are not realized and lags in reimbursement of Coalition Support Fund continue.
Balance of Payments: Improvement in the overall external accounts recorded during Q1-FY10 could not be sustained in the ensuing months (October-February). Considerable YoY decline in financial inflows during the latter period and trend reversal with regard to the improvement in CA deficit witnessed earlier led to a noticeable deterioration in overall external account during this period. Nonetheless, overall external account recorded sizeable YoY improvement for the aggregate July-February FY10 period.
Deterioration in the current account deficit during October-February period was contributed by both an expansion in the trade deficit and a contraction in invisible account surplus. On the financing side, the decline was primarily due to fall in net foreign investment flows.
Significant fall in foreign direct investment along with payment of Sukuk bond worth US $600 million resulted in 61.2 percent decline in net foreign investment during the period under review. Furthermore, inflows from IFIs also remained subdued in the latter months of current fiscal year.
The pressures on the country's reserves during July-February FY10 were visibly lower owing to improvement in the overall external account balance during this period. As a result the country's overall reserves climbed to US $15.1 billion against US $10.6 billion in the same period last year. The foreign exchange market also exhibited relative stability, and the exchange rate depreciated by only 4.3 percent during July-February FY10 compared to 14.5 percent in the corresponding period last year.
Trade Account: Pakistan's trade deficit contracted by 19.5 percent YoY during July-February FY10 as compared to a fall of 6.2 percent during the same period last year. This contraction was largely on account of a fall in the import bill which was supported by a marginal rise in exports.
The compression in imports was entirely due to price impact which outpaced the rising import quantum. However, with price impact also turning positive from December 2009 onwards, import growth has started to rebound. As far as exports are concerned, the recovery was observed both in textile as well as non-textile sectors particularly in Q2-FY10.
Revival in external demand for textiles coupled with good production of cotton resulted in an increase in exports of low value added products. In non-textile sector, quantum growth for the fuel group in particular was remarkable during the period under review with major contribution coming from rice and fruits.
(Alongside the executive summary of Second Quarterly Report for the year 2009-2010 of the Central Board of State Bank of Pakistan.)
Source: http://www.brecorder.com/index.php?id=1037669&currPageNo=1&query=&search=&term=&supDate=
The major contributory factors for lower area under cultivation and relatively weak performance by these crops were: (a) water shortages; and (b) realisation of lower prices in the preceding season for rice and sugarcane. An overall decline in area under major crops, conservative lending by domestic private banks (DPBs) and weakness in demand for credit by the non-farm sector led to slowdown in agri-credit disbursement during July-January FY10.
On the positive side, relatively lower prices of fertiliser and higher farm incomes in FY09 encouraged farmers to use fertilisers aggressively. Fertiliser off-take also increased due to government support in terms of maintaining a higher support price for FY10 wheat crop despite a substantial decline in international prices of the grain.
Large Scale Manufacturing: The pace of recovery in LSM subsector increased in Q2-FY10 largely in response to rising domestic demand. Most of the recovery emanated from the consumer durable industries as demand for automobiles & allied industries increased sharply despite the QoQ increase in prices.
Furthermore, revival in construction activities in both public and private sector resulted in a sharp increase in demand for cement and steel during the quarter. Cement sector benefited also from recovery in external demand as exports to North African countries showed a steep rise. Resource based industries, however, presented a mixed picture.
Where the low- value-added textile sector benefited from a good cotton crop and a simultaneous shortage of cotton globally, the local sugar industry suffered from lower sugarcane production. Nonetheless, it will be extremely challenging to sustain the growth seen in July-January FY10 period given the prevalent energy shortages in the country.
In addition to energy insufficiency, local manufacturers are also confronting the rising cost pressures, since electricity and gas tariffs have increased from January 2010. Furthermore, the rise in global commodity prices from Q2-FY10 has also put significant pressures on production costs. If manufacturers tend to shift the cost burdens on the consumers, demand may tumble as consumers' purchasing power has already been hit by rising food prices.
Prices: Inflationary pressures strengthened in the economy in recent months. Resurgence in inflation during recent months is mainly attributed to: (a) rise in the administered prices of energy and key fuels by the government, (b) depreciation of rupee, and (c) a temporary supply shock due to bad weather (fog) in Punjab. Moreover, relatively higher international commodity prices of sugar, rice and crude oil also fuelled inflationary pressures in the economy.
Specifically, headline CPI inflation fell to 13.0 percent YoY in February 2010 after bottomed out at 8.9 percent in October 2009. The surge in CPI inflation in recent months is principally contributed by rise in the prices of food items and administered prices of key fuels and electricity tariffs.
This is also evident in a lower core inflation measured by excluding food and energy items (NFNE) from the CPI basket relative to core inflation measured by 20% trimmed mean. While NFNE inflation registered at 10.1 percent, 20% trimmed mean inflation recorded at 12.4 percent in February 2010.
Relatively higher core inflation measured by trimmed mean also indicates that inflationary pressures are substantially broad based within food and energy sub-groups. This also points towards rigidity in inflationary pressures in the economy. More importantly, since inflationary pressures concentrated in food and energy sub-groups, this indicates possibility of strong second-round effects on the prices of other goods and services due to rising costs of production and increase in cost of living.
Money and Banking: SBP kept the policy rate unchanged at 12.5 percent in January 2010. This was because of rebounding inflationary pressures, lingering risks on external current account though reduced from last year level and persistent weakness in the fiscal account.
In terms of monetary aggregates, growth in Broad Money (M2) accelerated to 5.7 percent during July-February FY10 from 2.0 percent in the corresponding period of FY09. This improvement resulted entirely from an expansion in net domestic assets (NDA) of the banking system on the back of strong rise in private sector credit and increased recourse of government to finance its deficit from the banking system.
On the other hand, trend improvement in the external account visible since December 2008, has started to reverse from October 2009 onwards. Resultantly, NFA of the banking system recorded a depletion of Rs 46.6 billion in July-February FY10; though much lower compared to last year's contraction.
Deposit mobilisation by banks shows some recovery since deposits recorded a growth of 4.6 percent during July-February FY10 in sharp contrast to the previous year when the deposit base contracted by 0.6 percent. The trend decline in private sector credit, visible for twelve consecutive months, reversed from October 2009 as (1) the demand for seasonal finance (ie cotton, sugarcane and rice) picked-up, and (2) a mild recovery was seen in domestic demand. Consequently, cumulative credit to private sector grew by 4.7 percent during July-February FY10; slightly lower than the growth seen in the corresponding period a year earlier.
Fiscal Developments: Key fiscal indicators improved in Q2-FY10 over the previous quarter, bringing the cumulative fiscal deficit for H1-FY10 to 2.7 percent of annual estimated GDP. This figure is consistent with the SBP forecast of budget deficit for the year. The improvement in revenue growth during Q2-FY10 is largely due to increased direct tax collection.
This was to be expected given that the traditional first quarter receipts had been pushed into the second quarter following extension of the deadline for filing income tax returns. Moreover, tax collection was also helped by a revival in the economy and rise in rupee value of imports.
On the expenditure side, the government was able to contain growth in total outlays during Q2-FY10. However, given the rigidities in current expenditure on account of the need to address build-up of energy sector circular debt, security related expenditure etc, the government has little choice but to cut development spending if pledges by FoDP are not realized and lags in reimbursement of Coalition Support Fund continue.
Balance of Payments: Improvement in the overall external accounts recorded during Q1-FY10 could not be sustained in the ensuing months (October-February). Considerable YoY decline in financial inflows during the latter period and trend reversal with regard to the improvement in CA deficit witnessed earlier led to a noticeable deterioration in overall external account during this period. Nonetheless, overall external account recorded sizeable YoY improvement for the aggregate July-February FY10 period.
Deterioration in the current account deficit during October-February period was contributed by both an expansion in the trade deficit and a contraction in invisible account surplus. On the financing side, the decline was primarily due to fall in net foreign investment flows.
Significant fall in foreign direct investment along with payment of Sukuk bond worth US $600 million resulted in 61.2 percent decline in net foreign investment during the period under review. Furthermore, inflows from IFIs also remained subdued in the latter months of current fiscal year.
The pressures on the country's reserves during July-February FY10 were visibly lower owing to improvement in the overall external account balance during this period. As a result the country's overall reserves climbed to US $15.1 billion against US $10.6 billion in the same period last year. The foreign exchange market also exhibited relative stability, and the exchange rate depreciated by only 4.3 percent during July-February FY10 compared to 14.5 percent in the corresponding period last year.
Trade Account: Pakistan's trade deficit contracted by 19.5 percent YoY during July-February FY10 as compared to a fall of 6.2 percent during the same period last year. This contraction was largely on account of a fall in the import bill which was supported by a marginal rise in exports.
The compression in imports was entirely due to price impact which outpaced the rising import quantum. However, with price impact also turning positive from December 2009 onwards, import growth has started to rebound. As far as exports are concerned, the recovery was observed both in textile as well as non-textile sectors particularly in Q2-FY10.
Revival in external demand for textiles coupled with good production of cotton resulted in an increase in exports of low value added products. In non-textile sector, quantum growth for the fuel group in particular was remarkable during the period under review with major contribution coming from rice and fruits.
(Alongside the executive summary of Second Quarterly Report for the year 2009-2010 of the Central Board of State Bank of Pakistan.)
Source: http://www.brecorder.com/index.php?id=1037669&currPageNo=1&query=&search=&term=&supDate=
Niche targeting as microfinance evolves By SYED MOHSIN AHMED AND SYEDA SHEHRBANO KAZIM
ARTICLE (March 28 2010): Microfinance plays a vital role in offering access to financial services to those segments of the society that are typically excluded from the formal financial sector. As such microfinance is far more than microcredit as offering 'micro' loans is actually one part of the spectrum of services microfinance offers to society.
Microfinance services include loans to poor people certainly but also offer access to deposits, money transfers, insurance policies and so on to a large part of the 'unbanked' population. People living in poverty have as much, if not more, of a need for diverse financial services as do those with higher incomes. For the poor, a day's lost wages can mean no food for the household while for the well-off, a few days of unemployment have little effect on basic consumption.
Just as the range of services offered by microfinance providers is huge so is the distinction between various segments of the market that each type of service caters to. Microfinance clients are for the most part categorised according to their poverty level and appropriate services are offered to each niche of the market. In Pakistan, as is the case globally, we describe the niches in the market beginning with the bankable non-poor and ending with the destitute extremely poor.
The pyramid contains between those two extremes, four segments - transitory non-poor, transitory vulnerable, transitory poor and the chronic poor. As the microfinance sector evolves, each segment of the market is treated as a niche that is a subset of the entire market towards which specific products with distinctive features need to be focused.
Within the wider demographic audience each of the six segments can be catered to by some category of microfinance providers once the products and services are modified to serve the needs of that segment. Targeting the right segment with the correct product and service mix is the key to efficacious delivery.
Usually, people who use microfinance are poor, belonging to the poor stratum of the economy. Clients might even be unemployed, trying their hand for the first time at entrepreneurship. Microfinance providers (MFPs) cater to the needs of clients, who are excluded from the main stream of financial services as commercial banks do not find it viable to operate in the poorer, more isolated, parts of the country.
As is the case globally, in Pakistan also microcredit clients predominantly fall in the segments that are just above and below the poverty line. Over the past decade, the MFPs have seen an opportunity to increase their client base by diversifying. They have started developing a range of products to meet the needs of other clients, like pensioners and salaried workers.
Although the exact number of potential clients of microfinance is not known, estimates suggest that it ranges between 10-60M individuals (above the age of 18 and below 65) and they require a range of financial services as are required by the wealthier segments (don't you think like us they require annuity plans to meet their education and marriage requirements, what about the need to be able to access deposit services whenever there is a need of cash to meet a particular emergency or to deposit excess cash when it is available after wheat or cotton harvest).
Logic dictates that the extremely poor are not the 'real' clients of microfinance, which is after all the provision of financial services to those, who are economically or at least potentially economically active. The extremely poor are that segment of the population that lacks assets, has no (or minimal) saleable skills and in short, has the least developed natural capabilities to be productive.
The extremely poor are then the niche for safety net programmes, such as the Zakat fund or the Bait-ul-Maal or more recently the Benazir Income Support Programme and the Sasti Roti schemes, which effectively subsidise their lives without any compulsion for economic participation or responsibility.
In complex models or graduated programmes, the extremely poor can become recipients of grants and trainings such that they are eventual clients for microfinance providers. This segment, however, cannot be catered to without the support and involvement of the government and is not at present able to take advantage of the extensive and complex services that are the repertoire of microfinance.
Microfinance providers now use poverty assessment tools to determine where their 'investment' in people will do the greatest good. Serving the extremely poor requires ongoing subsidisation and government involvement to ensure food security, shelter and healthcare.
Similarly, the chronic poor require greater flexibility in the sort of services offered to them. At the upper end of this spectrum, microfinance providers are offering services that include savings, money transfer and micro insurance. It is the considered opinion of the MF sector that microcredit to the bottom two bands is counterproductive as lending to the very poor can lead to a debt trap.
Traditionally, the main target clientele for the microfinance industry are those segments of the population that straddle the poverty line - the transitory poor and the transitory vulnerable. These are the segments of society who are economically active - they work for themselves or for others, have some marketable skill and have earning potential, realised or unrealised.
These are the people who can start their own businesses or expand it once they are given access to capital - microcredit. These are people who given the opportunity would prefer to save in a formal institution as opposed to buying non-earning assets. These are the potential entrepreneurs that microfinance targets.
The transitory poor and the transitory vulnerable are, also, the most likely to traverse segments as their economic status is the most volatile and unstable. Price hikes of any staple good can cause either to move to the segment below, while unemployment, illness or death in family can cause the same.
Microfinance does substantially more than offer this population credit - it offers them security. Savings, remittances, insurance (health and life) and working capital facilities smooth out consumption patterns and give them a relatively stable income to focus on raising their standards of living.
The transitory non-poor and the non-poor, of course, can, if they so choose, utilise the savings facilities offered by Microfinance Banks, but they are not the target clientele of traditional microfinance.
It would, however, certainly be socially responsible of those not beset with poverty to place their funds where they will be utilised for microfinance services. It is, however, an important segment that is known as the "missing middle" and needs capital of a larger amount to set up or expand business.
A lot of research is now being carried out to find out opportunities available and the risk associated with this segment. There is no doubt, however, that this is the segment that could result in the setting up of small to medium enterprises, hence creating jobs for the larger population.
The wide range of microfinance providers (MFPs) present in the market, is symptomatic of the variations in the type of services they offer and who they target as their clientele. The MFPs range from small non-government organisations (NGOs) to microfinance banks, from community organisations to telecommunications services for remittances. These providers have over the years evolved clear structures and policies for catering to the needs of their particular niche in the market.
As the industry evolves further, we are likely to see more specialised product development and more targeted delivery of those products. While microfinance began with credit provision for productive purposes, it already has multiple loan and insurance products like health insurance, loans for children's education, emergency covers, money transfers through mobile banking and saving services that cater to the need of different segments. The microfinance industry by its very nature is evolving to provide market segments with those financial services that best serve society and target populations.
Niche marketing and co-operation with external stakeholders is the next step to expand the provision of financial services to poorest and transitory non-poor segments.
Source: http://www.brecorder.com/index.php?id=1036602&currPageNo=1&query=&search=&term=&supDate=
Microfinance services include loans to poor people certainly but also offer access to deposits, money transfers, insurance policies and so on to a large part of the 'unbanked' population. People living in poverty have as much, if not more, of a need for diverse financial services as do those with higher incomes. For the poor, a day's lost wages can mean no food for the household while for the well-off, a few days of unemployment have little effect on basic consumption.
Just as the range of services offered by microfinance providers is huge so is the distinction between various segments of the market that each type of service caters to. Microfinance clients are for the most part categorised according to their poverty level and appropriate services are offered to each niche of the market. In Pakistan, as is the case globally, we describe the niches in the market beginning with the bankable non-poor and ending with the destitute extremely poor.
The pyramid contains between those two extremes, four segments - transitory non-poor, transitory vulnerable, transitory poor and the chronic poor. As the microfinance sector evolves, each segment of the market is treated as a niche that is a subset of the entire market towards which specific products with distinctive features need to be focused.
Within the wider demographic audience each of the six segments can be catered to by some category of microfinance providers once the products and services are modified to serve the needs of that segment. Targeting the right segment with the correct product and service mix is the key to efficacious delivery.
Usually, people who use microfinance are poor, belonging to the poor stratum of the economy. Clients might even be unemployed, trying their hand for the first time at entrepreneurship. Microfinance providers (MFPs) cater to the needs of clients, who are excluded from the main stream of financial services as commercial banks do not find it viable to operate in the poorer, more isolated, parts of the country.
As is the case globally, in Pakistan also microcredit clients predominantly fall in the segments that are just above and below the poverty line. Over the past decade, the MFPs have seen an opportunity to increase their client base by diversifying. They have started developing a range of products to meet the needs of other clients, like pensioners and salaried workers.
Although the exact number of potential clients of microfinance is not known, estimates suggest that it ranges between 10-60M individuals (above the age of 18 and below 65) and they require a range of financial services as are required by the wealthier segments (don't you think like us they require annuity plans to meet their education and marriage requirements, what about the need to be able to access deposit services whenever there is a need of cash to meet a particular emergency or to deposit excess cash when it is available after wheat or cotton harvest).
Logic dictates that the extremely poor are not the 'real' clients of microfinance, which is after all the provision of financial services to those, who are economically or at least potentially economically active. The extremely poor are that segment of the population that lacks assets, has no (or minimal) saleable skills and in short, has the least developed natural capabilities to be productive.
The extremely poor are then the niche for safety net programmes, such as the Zakat fund or the Bait-ul-Maal or more recently the Benazir Income Support Programme and the Sasti Roti schemes, which effectively subsidise their lives without any compulsion for economic participation or responsibility.
In complex models or graduated programmes, the extremely poor can become recipients of grants and trainings such that they are eventual clients for microfinance providers. This segment, however, cannot be catered to without the support and involvement of the government and is not at present able to take advantage of the extensive and complex services that are the repertoire of microfinance.
Microfinance providers now use poverty assessment tools to determine where their 'investment' in people will do the greatest good. Serving the extremely poor requires ongoing subsidisation and government involvement to ensure food security, shelter and healthcare.
Similarly, the chronic poor require greater flexibility in the sort of services offered to them. At the upper end of this spectrum, microfinance providers are offering services that include savings, money transfer and micro insurance. It is the considered opinion of the MF sector that microcredit to the bottom two bands is counterproductive as lending to the very poor can lead to a debt trap.
Traditionally, the main target clientele for the microfinance industry are those segments of the population that straddle the poverty line - the transitory poor and the transitory vulnerable. These are the segments of society who are economically active - they work for themselves or for others, have some marketable skill and have earning potential, realised or unrealised.
These are the people who can start their own businesses or expand it once they are given access to capital - microcredit. These are people who given the opportunity would prefer to save in a formal institution as opposed to buying non-earning assets. These are the potential entrepreneurs that microfinance targets.
The transitory poor and the transitory vulnerable are, also, the most likely to traverse segments as their economic status is the most volatile and unstable. Price hikes of any staple good can cause either to move to the segment below, while unemployment, illness or death in family can cause the same.
Microfinance does substantially more than offer this population credit - it offers them security. Savings, remittances, insurance (health and life) and working capital facilities smooth out consumption patterns and give them a relatively stable income to focus on raising their standards of living.
The transitory non-poor and the non-poor, of course, can, if they so choose, utilise the savings facilities offered by Microfinance Banks, but they are not the target clientele of traditional microfinance.
It would, however, certainly be socially responsible of those not beset with poverty to place their funds where they will be utilised for microfinance services. It is, however, an important segment that is known as the "missing middle" and needs capital of a larger amount to set up or expand business.
A lot of research is now being carried out to find out opportunities available and the risk associated with this segment. There is no doubt, however, that this is the segment that could result in the setting up of small to medium enterprises, hence creating jobs for the larger population.
The wide range of microfinance providers (MFPs) present in the market, is symptomatic of the variations in the type of services they offer and who they target as their clientele. The MFPs range from small non-government organisations (NGOs) to microfinance banks, from community organisations to telecommunications services for remittances. These providers have over the years evolved clear structures and policies for catering to the needs of their particular niche in the market.
As the industry evolves further, we are likely to see more specialised product development and more targeted delivery of those products. While microfinance began with credit provision for productive purposes, it already has multiple loan and insurance products like health insurance, loans for children's education, emergency covers, money transfers through mobile banking and saving services that cater to the need of different segments. The microfinance industry by its very nature is evolving to provide market segments with those financial services that best serve society and target populations.
Niche marketing and co-operation with external stakeholders is the next step to expand the provision of financial services to poorest and transitory non-poor segments.
Source: http://www.brecorder.com/index.php?id=1036602&currPageNo=1&query=&search=&term=&supDate=
Monetary policy decision
ARTICLE (March 28 2010): The State Bank of Pakistan has decided to keep its Policy Rate unchanged at 12.5 Percent. This decision was taken at a meeting of the Central Board of directors of the State Bank of Pakistan held under the Chairmanship of SBP Deputy Governor, Yaseen Anwar in Lahore on Saturday.
THE FOLLOWING IS THE COMPLETE TEXT OF MONETARY POLICY DECISION: Building on initial gains in macroeconomic stability the economy is looking to further its traction for sustainable recovery. Inflationary pressures have dampened but continue to persist, mainly due to alignment of energy sector prices with market factors.
Large Scale Manufacturing (LSM) has consistently grown since October 2009 after contraction for almost 20 months but remains fragile. Reduction in the external current account deficit has allowed SBP to rebuild foreign exchange reserves, despite shortfalls in external financial flows. However, uncertainty has increased in some areas, particularly the fiscal sector, with implications for the rest of the economy, including monetary policy.
Although CPI inflation (YoY) has come down to 13.0 percent in February 2010, it is high and exhibits persistence. After a low of 8.9 percent in October 2009, inflation slipped back largely due to increases in electricity tariffs, adjustments in the prices of domestic petroleum products, and administered prices of commodities like wheat.
To which extent these factors will influence other prices in the economy and expectations of inflation in the coming months remain difficult to assess. Nonetheless, SBP expects the average CPI inflation for FY10 to remain close to 12 percent.
Despite presence of high inflation, crippling electricity shortages, and challenging security conditions, domestic economic activity has picked up in recent months. A cumulative growth of 2.4 percent during the first seven months of FY10 in the Large Scale Manufacturing (LSM) is encouraging.
Sustainability of this trend in LSM and overall economic growth would depend on improvements in the availability of electricity and security situation. In addition, this would need supportive growth in private sector credit, which in turn depends on a reduction in the scale of government and public sector's reliance on bank borrowings.
The balance of payments position has improved considerably. The external current account deficit has come down to $2.6 billion during July - February, FY10 compared to $8 billion in the same period last year. This has allowed SBP to accumulate foreign exchange reserves, $11.1 billion as on 26th March 2010, and has facilitated stability in the foreign exchange market.
However, other developments in the external sector, such as Foreign Direct Investments (FDI) and workers' remittances, need to be monitored closely, especially when prospects of foreign official flows remain unclear.
The key source of uncertainty, however, lies in the weak fiscal position. Burdened by significant security related expenditures and shortfalls in revenues, keeping the fiscal deficit for FY10 within target would be challenging.
Partial phasing out of subsidies and reduction in development expenditures have helped in containing expenditures but has led to a surge in domestic prices and is hurting crucial public sector investment. Similarly, increased Petroleum Development Levy (PDL) receipts, due to higher oil imports, have cushioned the lower tax revenues to some extent but have contributed towards inertia in domestic inflation.
During the remaining months of FY10, uncertainty regarding non-tax revenues on account of foreign reimbursements and extent of remaining power sector subsidies adds to fiscal complications. The financing mix of the fiscal deficit also seems uncertain. The external financing for budget, especially the part pledged by the Friends of Democratic Pakistan (FoDP), has mostly been elusive.
Of the Rs 110 billion net external budget financing received during H1-FY10, Rs 93 billion were provided by the IMF. With an understanding that this part of IMF money, provided in lieu of FoDP flows, is for short term, the importance of the timing of external budgetary flows cannot be overemphasised.
Not surprisingly, therefore, government borrowing from the SBP has been substantial in Q3-FY10. According to provisional figures the outstanding stock of government borrowing from SBP (on cash basis), as on 25th March 2010, stands at Rs 1240 billion, which is Rs 110 billion higher than the quarterly ceiling limit.
With less than expected retirement of credit availed by the government for commodity operations and commencement of the 2010 wheat procurement season, pressure will build on the banking system resources. Continued borrowings by the Public Sector Enterprises (PSEs), partly because of the lingering energy sector circular debt, are also straining systemic liquidity.
Further, the high infection ratio of credit to Small and Medium Enterprises (SMEs) at 22 percent and Agriculture at 17 percent may lead banks to show reluctance to extend credit to the private sector even when the pace of growth of incremental Non-performing Loans (NPLs) has slowed considerably in the last quarter of 2009.
In this environment, with resources tied up in both commodity and circular debt and risk averse behaviour, banks will tend to negotiate higher rates on risk-free or government guaranteed debt. For instance, the first issuance of the Term Finance Certificate (TFC) in March 2009 was priced at KIBOR plus 1.75 percent, while the second issuance in September 2009 was at KIBOR plus 2 percent.
Similarly, the rates for financing commodity operations were around KIBOR plus 2.5 to 2.75 percent. This reflects that banks are building in the cost of ongoing rollover, instead of repayment, of outstanding credit. Thus, the attractively priced government borrowing may lead to stagnation in private sector credit growth.
Government will have to revisit its commodity intervention strategy, sooner than later, so that commodity operation requirements may go back to normal levels. Similarly, a complete resolution of the circular debt would be essential. Apart from releasing banking system resources and easing pressure on market rates, it will alleviate some constraints impeding production of electricity in the country thus paving way for sustainable economic recovery.
Given the uncertainties pertaining to the fiscal and quasi-fiscal sectors, present stance of monetary policy is striking a difficult balance between reducing inflation, ensuring financial stability, and supporting economic recovery. An upward adjustment in SBP's policy rate, at this juncture, runs the risk of impeding the still nascent recovery, while a downward adjustment runs the risk of fuelling an already high inflation. Hence, SBP has decided to keep the policy rate unchanged at 12.5 percent.
Source: http://www.brecorder.com/index.php?id=1036600&currPageNo=1&query=&search=&term=&supDate=
THE FOLLOWING IS THE COMPLETE TEXT OF MONETARY POLICY DECISION: Building on initial gains in macroeconomic stability the economy is looking to further its traction for sustainable recovery. Inflationary pressures have dampened but continue to persist, mainly due to alignment of energy sector prices with market factors.
Large Scale Manufacturing (LSM) has consistently grown since October 2009 after contraction for almost 20 months but remains fragile. Reduction in the external current account deficit has allowed SBP to rebuild foreign exchange reserves, despite shortfalls in external financial flows. However, uncertainty has increased in some areas, particularly the fiscal sector, with implications for the rest of the economy, including monetary policy.
Although CPI inflation (YoY) has come down to 13.0 percent in February 2010, it is high and exhibits persistence. After a low of 8.9 percent in October 2009, inflation slipped back largely due to increases in electricity tariffs, adjustments in the prices of domestic petroleum products, and administered prices of commodities like wheat.
To which extent these factors will influence other prices in the economy and expectations of inflation in the coming months remain difficult to assess. Nonetheless, SBP expects the average CPI inflation for FY10 to remain close to 12 percent.
Despite presence of high inflation, crippling electricity shortages, and challenging security conditions, domestic economic activity has picked up in recent months. A cumulative growth of 2.4 percent during the first seven months of FY10 in the Large Scale Manufacturing (LSM) is encouraging.
Sustainability of this trend in LSM and overall economic growth would depend on improvements in the availability of electricity and security situation. In addition, this would need supportive growth in private sector credit, which in turn depends on a reduction in the scale of government and public sector's reliance on bank borrowings.
The balance of payments position has improved considerably. The external current account deficit has come down to $2.6 billion during July - February, FY10 compared to $8 billion in the same period last year. This has allowed SBP to accumulate foreign exchange reserves, $11.1 billion as on 26th March 2010, and has facilitated stability in the foreign exchange market.
However, other developments in the external sector, such as Foreign Direct Investments (FDI) and workers' remittances, need to be monitored closely, especially when prospects of foreign official flows remain unclear.
The key source of uncertainty, however, lies in the weak fiscal position. Burdened by significant security related expenditures and shortfalls in revenues, keeping the fiscal deficit for FY10 within target would be challenging.
Partial phasing out of subsidies and reduction in development expenditures have helped in containing expenditures but has led to a surge in domestic prices and is hurting crucial public sector investment. Similarly, increased Petroleum Development Levy (PDL) receipts, due to higher oil imports, have cushioned the lower tax revenues to some extent but have contributed towards inertia in domestic inflation.
During the remaining months of FY10, uncertainty regarding non-tax revenues on account of foreign reimbursements and extent of remaining power sector subsidies adds to fiscal complications. The financing mix of the fiscal deficit also seems uncertain. The external financing for budget, especially the part pledged by the Friends of Democratic Pakistan (FoDP), has mostly been elusive.
Of the Rs 110 billion net external budget financing received during H1-FY10, Rs 93 billion were provided by the IMF. With an understanding that this part of IMF money, provided in lieu of FoDP flows, is for short term, the importance of the timing of external budgetary flows cannot be overemphasised.
Not surprisingly, therefore, government borrowing from the SBP has been substantial in Q3-FY10. According to provisional figures the outstanding stock of government borrowing from SBP (on cash basis), as on 25th March 2010, stands at Rs 1240 billion, which is Rs 110 billion higher than the quarterly ceiling limit.
With less than expected retirement of credit availed by the government for commodity operations and commencement of the 2010 wheat procurement season, pressure will build on the banking system resources. Continued borrowings by the Public Sector Enterprises (PSEs), partly because of the lingering energy sector circular debt, are also straining systemic liquidity.
Further, the high infection ratio of credit to Small and Medium Enterprises (SMEs) at 22 percent and Agriculture at 17 percent may lead banks to show reluctance to extend credit to the private sector even when the pace of growth of incremental Non-performing Loans (NPLs) has slowed considerably in the last quarter of 2009.
In this environment, with resources tied up in both commodity and circular debt and risk averse behaviour, banks will tend to negotiate higher rates on risk-free or government guaranteed debt. For instance, the first issuance of the Term Finance Certificate (TFC) in March 2009 was priced at KIBOR plus 1.75 percent, while the second issuance in September 2009 was at KIBOR plus 2 percent.
Similarly, the rates for financing commodity operations were around KIBOR plus 2.5 to 2.75 percent. This reflects that banks are building in the cost of ongoing rollover, instead of repayment, of outstanding credit. Thus, the attractively priced government borrowing may lead to stagnation in private sector credit growth.
Government will have to revisit its commodity intervention strategy, sooner than later, so that commodity operation requirements may go back to normal levels. Similarly, a complete resolution of the circular debt would be essential. Apart from releasing banking system resources and easing pressure on market rates, it will alleviate some constraints impeding production of electricity in the country thus paving way for sustainable economic recovery.
Given the uncertainties pertaining to the fiscal and quasi-fiscal sectors, present stance of monetary policy is striking a difficult balance between reducing inflation, ensuring financial stability, and supporting economic recovery. An upward adjustment in SBP's policy rate, at this juncture, runs the risk of impeding the still nascent recovery, while a downward adjustment runs the risk of fuelling an already high inflation. Hence, SBP has decided to keep the policy rate unchanged at 12.5 percent.
Source: http://www.brecorder.com/index.php?id=1036600&currPageNo=1&query=&search=&term=&supDate=
Comparative analysis of exemptions in bill on VAT By SHAFQAT MEHMUD AND DR SUMMAIRA RIAZ
ARTICLE (March 28 2010): The government of Pakistan has full intentions to implement the Value Added Tax (VAT) system with effect from July 1, 2010 as part of its commitment with the IMF. Currently, this bill is in the Parliament for discussion. The VAT bill has far reaching implications, both for the government as well as the common man.
It will impact the growth and development of industry, agriculture as well as socio-economic setup of the country. Although the whole bill warrants deeper analysis, however, what kind of goods are being under its net is a matter of common interact. This is essential as it shall directly affect the daily life and shall test the capacity of the FBR so far as collection is examined.
We can learn from the experiences of others and be wise to not make mistakes at the cost of our economy that is already dwindling. The FBR claims that the proposed VAT bill is in accordance with best international practices. If that is the case, then there is no harm in comparing different aspects of the bill to other economies.
In this report, we would like to examine the exemptions from VAT as specified in the bill and the exemptions that are currently available in most developed economies as well as specified in India, our neighbouring country. The purpose of this article is to put hold the issue in proper perspective for the benefit of the Parliament as well as general public.
In the bill's first schedule, the exemptions inter-alia are: (1) unprocessed peas, wheat and wheat flour (2) ice and water excluding those for sale under brand name (3) table salt, excluding salt sold under brand name (4) books, excluding advertisement material (5) dextrose and insulin infusions only and (6) precious metals other than a first supply of precious metal.
In the second schedule, the zero-rated supplies include such basic pharmaceutical and medical supplies as are specified by the Board. To begin with, it may be made clear that the VAT is not perfect neither perfectible. It is further added that no classical act of VAT exists in the world. It operates on the principle that no single size fits all (NSZFA).
The European Union (EU) where all member countries have VAT operates under the provisions of EU-sixth directive. It would be interesting to know what kind of the goods are exempt from the VAT or can be exempted from the VAT. The purpose of exemption is both for reducing the administrative cost as well as not taxing the poor man.
Here it may be added that in the EU countries, a poor man is a person whose annual income is less than US $30,000, whereas the person having this income in Pakistan attracts highest slab of income tax. Consequently, it implies that the exemption scope needs to be much broader than what is specified in the EU, based on the per capita income of common man in Pakistan. The relevant portions, containing the list of exemptions in the EU is reproduced as under.
EXEMPTIONS WITHOUT THE RIGHT TO DEDUCT
For socio-economic reasons, the following are exempted:
-- Certain activities of general interest (such as hospital and medical care, goods and services linked to welfare and social security work, school and university education and certain cultural services or the provision of foodstuffs).
-- Certain transactions, including insurance, the granting of credit, certain banking services, supplies of postage stamps, lotteries and gambling and certain supplies of immovable property.
EXEMPTIONS WITH THE RIGHT TO DEDUCT To take account of the place where goods and services are deem to have been consumed and hence taxed, the following transactions are exempt:
-- Intra-community supplies of goods, including new means of transport and products subject to excise duty dispatched from one member state to another. As we note from above, that supply of food items and medical and educational services and materials are exempt from VAT in EU. They have not specified items but have given blanket exemptions on all such food and health and educational services and material.
Consequently, it means that all activities relating to day-to-day life needed goods and those that are required for the socio-economic development of the society are exempt from VAT. It is interesting to note that items, which are excisable are not only exempt, but are entitled to input credit adjustment. We may add here that in all these countries tax-to-GDP ratio is higher than 20%.
The VAT successfully operates in United Kingdom for last thirty years and it is showing robust growth in Australia in forms of Goods and Services Tax (GST). It would be relevant to see what kinds of exemptions and in what manner are available in the UK and Australia.
In UK, as per the VAT Act 1994, schedule 8, group 1 specifies food of a kind used for human consumption is zero-rated. A product is 'food of a kind used for human consumption' if: the average person, knowing what it is and how it is used, would consider it to be food or drink; and it is fit for human consumption.
The term includes (a) products eaten as part of a meal, or as a snack; and (b) products like flour, which, although not eaten by itself, are generally recognised food ingredients. The above makes it clear that food for human consumption is not only exempts but is entitled to input tax credits.
The purpose again here is to tax primarily such goods, which are not essential for the daily life. And again the underline philosophy is to discourage the consumption of the non-essential items and this partially answers the criticism on VAT on being regressive tax.
Again the same sections says: "You can zero-rate all supplies of unprocessed foodstuffs such as raw meat and fish; vegetables and fruit; cereals, nuts and pulses and culinary herbs." The zero-rating as stated above clarifies that almost all the agricultural products are exempt from VAT and are entitled for tax paid on any goods and services used in their production.
The exemptions available to farm products is world over are just to attract investment in this core activity of life. However, it is amazing to note that in the proposed VAT bill by government, no such exemptions have been provided. Now let's compare the tax system in Australia. Earlier, we stated that the GST in Australia is proving a very smooth growth engine for the economy. There agriculture sector is booming. Again we may see what kinds of exemptions are available there.
THINGS THAT ARE GST-FREE:
-- Basic food, education courses, course materials and related excursions or field trips, medical, health and care services, medical aids and appliances, medicines, exports childcare, religious services and charitable activities, supplies of accommodation and meals to residents of retirement villages by certain operators, cars for disabled people to use, as long as certain requirements are met, water, sewerage and drainage, the sale of a business as a going concern, international transport and related matters, precious metals, supplies through inward duty free shops, grants of land by government, farmland, international mail.
"A farmer grows potatoes and sells them at the produce markets. The potatoes are basic food so the farmer doesn't include GST in their price. But the farmer can claim GST credits for the GST included in the price of purchases relating to potato growing, such as fertiliser, fuel and freight."
(Source Website of Australia Taxation Officer)
Australia does not only exempt agricultural products, food items and socio-economic services, but refunds or allows input credit adjustment to the supplier. This, in return keeps their cost free of any taxes hidden or otherwise. Even in one decade, since the GST was introduced in Australia, it has already become a success story and is referred to by independent analysts, Professor Bird as VAT of fourth generation.
No analysis becomes complete unless, we see the relevant system in the best democratic state (USA) and the biggest democratic state (India). As we know, there is no VAT in the US. However, in its federating units, there is un-adjustable GST. It would be relevant to see what goods are exempt from the GST in the US in its largest state (California). In grocery stores, unprepared food items are not taxed.
All other food items, including fruits and vegetables, are exempt from sales tax. Also excluded are food animals (livestock), food plants and seeds, fertiliser used to grow food, prescription drugs and certain medical supplies, energy utilities, certain alternative energy devices and supplies, art for display by public agencies, and veterans' pins.
There are many specific exemptions for various veterans', non-profit, educational, religious, and youth organisations. Sale of items to certain out-of-state or national entities (mostly transportation companies) is exempt, as are some goods sold while in transit through California to a foreign destination.
We may note that in the US, states exclusively rely upon GST, as internal revenue is with the federal government. It is for this reason that states are continuing with non-adjustable GST instead of adopting VAT. Despite such heavy reliance on GST, the list of exemption is no different from the EU, UK and Australia.
Almost all food items medicines; supplies to federal government, educational institutions are exempt from the GST. The list of exemptions in the US may be very relevant to our government as we have very strong strategic partnership with that country.
In India, the study for adoption of VAT started in early 90s when the present prime minister was its finance minister. Del Gupta published a scholarly paper on taxation system in India and advised for cautious approach towards adoption of VAT.
Subsequent to different studies, and especially constituted commission report, India is poised to introduce VAT in its all states during the current financial year, whereas in few states, it is already operative. We may add that in India, the federation has the power to tax services where as federating units are entitled to tax goods.
This bifurcation is to make federation responsible for socio-economic services. Our government is proposing exact opposite. In India, as per there VAT act following are exempt.
-- Agricultural implements operated manually or driven by animals, aids and implements used by handicapped persons, books, periodicals, and journals, electric energy, fresh milk, pasteurised milk, butter milk, and curd, fresh plants, samplings, and fresh flowers, fresh vegetables and fruits, meat, fish, prawn, and other aquatic products when not cured, or frozen, eggs, and livestock, paddy, rice, wheat, pulses, salt, and flour, sugar, textile.
India is very relevant to us as we share common economic conditions. It is much more essential for India to have higher tax-to-GDP ratio to sustain its socio-economic development. Despite these constraints, the Indian exemption list as stated above is very exhaustive. It has even exempted the supply of electrical energy and textile as well as sugar sector. None of their agricultural products are subject to VAT.
If we look into the list of exemptions in above stated countries, we will observe that food items, including vegetables, socio-economic sectors, healthcare, medical profession is either exempt or is zero-rated in developed countries. However, in the proposed VAT bill, we have restricted our exemptions to bare minimum.
The third schedule, however, provides that pharmaceutical and medical supplies as specified by the board shall be zero-rated. Here very interesting point to consider is, as per section 13, no such power is available to the Board, as it has been invested in the parliament. This is by itself an anomalous situation that needs careful study by the parliament.
Once the VAT becomes operational, almost every commodity other than peas, wheat and wheat flour shall be chargeable to the VAT. Does the FBR have the capacity to implement the collection of taxes from sales made on donkey carts? What would happen to common person in a country where 40% of its population lives below the poverty line?
Another interesting thing is that any person making sale less than Rs 21,000 per day is exempt from registration. Now question arises, how an unregistered person can recover the tax from sale of the VAT-able commodities. We may further add that Australia took more than six year to convince the parliament for the enforcement of the GST. It also did a lot of capacity building of the potential taxpayers.
In India, they constituted a commission that came out with exhaustive report as to how and in what manner the VAT needs to be levied. On the contrary, FBR has not published any material on the viability of the proposed bill except for few seminars subsequent to moving of the bill in the parliament. Since this bill shall be having far reaching repercussions, the print and the electronic media also needs to sensitise on this core economic issue.
The standing committee of the parliament where the bill has been referred should conduct public hearings as is being done routinely on every bill in the US. The country needs VAT, but its design needs to be tailored around to meet the local economic conditions. Otherwise this will be a failed attempt and will mar the current administration with their policy of taking one step forward and two steps back.
Source: http://www.brecorder.com/index.php?id=1036598&currPageNo=1&query=&search=&term=&supDate=
It will impact the growth and development of industry, agriculture as well as socio-economic setup of the country. Although the whole bill warrants deeper analysis, however, what kind of goods are being under its net is a matter of common interact. This is essential as it shall directly affect the daily life and shall test the capacity of the FBR so far as collection is examined.
We can learn from the experiences of others and be wise to not make mistakes at the cost of our economy that is already dwindling. The FBR claims that the proposed VAT bill is in accordance with best international practices. If that is the case, then there is no harm in comparing different aspects of the bill to other economies.
In this report, we would like to examine the exemptions from VAT as specified in the bill and the exemptions that are currently available in most developed economies as well as specified in India, our neighbouring country. The purpose of this article is to put hold the issue in proper perspective for the benefit of the Parliament as well as general public.
In the bill's first schedule, the exemptions inter-alia are: (1) unprocessed peas, wheat and wheat flour (2) ice and water excluding those for sale under brand name (3) table salt, excluding salt sold under brand name (4) books, excluding advertisement material (5) dextrose and insulin infusions only and (6) precious metals other than a first supply of precious metal.
In the second schedule, the zero-rated supplies include such basic pharmaceutical and medical supplies as are specified by the Board. To begin with, it may be made clear that the VAT is not perfect neither perfectible. It is further added that no classical act of VAT exists in the world. It operates on the principle that no single size fits all (NSZFA).
The European Union (EU) where all member countries have VAT operates under the provisions of EU-sixth directive. It would be interesting to know what kind of the goods are exempt from the VAT or can be exempted from the VAT. The purpose of exemption is both for reducing the administrative cost as well as not taxing the poor man.
Here it may be added that in the EU countries, a poor man is a person whose annual income is less than US $30,000, whereas the person having this income in Pakistan attracts highest slab of income tax. Consequently, it implies that the exemption scope needs to be much broader than what is specified in the EU, based on the per capita income of common man in Pakistan. The relevant portions, containing the list of exemptions in the EU is reproduced as under.
EXEMPTIONS WITHOUT THE RIGHT TO DEDUCT
For socio-economic reasons, the following are exempted:
-- Certain activities of general interest (such as hospital and medical care, goods and services linked to welfare and social security work, school and university education and certain cultural services or the provision of foodstuffs).
-- Certain transactions, including insurance, the granting of credit, certain banking services, supplies of postage stamps, lotteries and gambling and certain supplies of immovable property.
EXEMPTIONS WITH THE RIGHT TO DEDUCT To take account of the place where goods and services are deem to have been consumed and hence taxed, the following transactions are exempt:
-- Intra-community supplies of goods, including new means of transport and products subject to excise duty dispatched from one member state to another. As we note from above, that supply of food items and medical and educational services and materials are exempt from VAT in EU. They have not specified items but have given blanket exemptions on all such food and health and educational services and material.
Consequently, it means that all activities relating to day-to-day life needed goods and those that are required for the socio-economic development of the society are exempt from VAT. It is interesting to note that items, which are excisable are not only exempt, but are entitled to input credit adjustment. We may add here that in all these countries tax-to-GDP ratio is higher than 20%.
The VAT successfully operates in United Kingdom for last thirty years and it is showing robust growth in Australia in forms of Goods and Services Tax (GST). It would be relevant to see what kinds of exemptions and in what manner are available in the UK and Australia.
In UK, as per the VAT Act 1994, schedule 8, group 1 specifies food of a kind used for human consumption is zero-rated. A product is 'food of a kind used for human consumption' if: the average person, knowing what it is and how it is used, would consider it to be food or drink; and it is fit for human consumption.
The term includes (a) products eaten as part of a meal, or as a snack; and (b) products like flour, which, although not eaten by itself, are generally recognised food ingredients. The above makes it clear that food for human consumption is not only exempts but is entitled to input tax credits.
The purpose again here is to tax primarily such goods, which are not essential for the daily life. And again the underline philosophy is to discourage the consumption of the non-essential items and this partially answers the criticism on VAT on being regressive tax.
Again the same sections says: "You can zero-rate all supplies of unprocessed foodstuffs such as raw meat and fish; vegetables and fruit; cereals, nuts and pulses and culinary herbs." The zero-rating as stated above clarifies that almost all the agricultural products are exempt from VAT and are entitled for tax paid on any goods and services used in their production.
The exemptions available to farm products is world over are just to attract investment in this core activity of life. However, it is amazing to note that in the proposed VAT bill by government, no such exemptions have been provided. Now let's compare the tax system in Australia. Earlier, we stated that the GST in Australia is proving a very smooth growth engine for the economy. There agriculture sector is booming. Again we may see what kinds of exemptions are available there.
THINGS THAT ARE GST-FREE:
-- Basic food, education courses, course materials and related excursions or field trips, medical, health and care services, medical aids and appliances, medicines, exports childcare, religious services and charitable activities, supplies of accommodation and meals to residents of retirement villages by certain operators, cars for disabled people to use, as long as certain requirements are met, water, sewerage and drainage, the sale of a business as a going concern, international transport and related matters, precious metals, supplies through inward duty free shops, grants of land by government, farmland, international mail.
"A farmer grows potatoes and sells them at the produce markets. The potatoes are basic food so the farmer doesn't include GST in their price. But the farmer can claim GST credits for the GST included in the price of purchases relating to potato growing, such as fertiliser, fuel and freight."
(Source Website of Australia Taxation Officer)
Australia does not only exempt agricultural products, food items and socio-economic services, but refunds or allows input credit adjustment to the supplier. This, in return keeps their cost free of any taxes hidden or otherwise. Even in one decade, since the GST was introduced in Australia, it has already become a success story and is referred to by independent analysts, Professor Bird as VAT of fourth generation.
No analysis becomes complete unless, we see the relevant system in the best democratic state (USA) and the biggest democratic state (India). As we know, there is no VAT in the US. However, in its federating units, there is un-adjustable GST. It would be relevant to see what goods are exempt from the GST in the US in its largest state (California). In grocery stores, unprepared food items are not taxed.
All other food items, including fruits and vegetables, are exempt from sales tax. Also excluded are food animals (livestock), food plants and seeds, fertiliser used to grow food, prescription drugs and certain medical supplies, energy utilities, certain alternative energy devices and supplies, art for display by public agencies, and veterans' pins.
There are many specific exemptions for various veterans', non-profit, educational, religious, and youth organisations. Sale of items to certain out-of-state or national entities (mostly transportation companies) is exempt, as are some goods sold while in transit through California to a foreign destination.
We may note that in the US, states exclusively rely upon GST, as internal revenue is with the federal government. It is for this reason that states are continuing with non-adjustable GST instead of adopting VAT. Despite such heavy reliance on GST, the list of exemption is no different from the EU, UK and Australia.
Almost all food items medicines; supplies to federal government, educational institutions are exempt from the GST. The list of exemptions in the US may be very relevant to our government as we have very strong strategic partnership with that country.
In India, the study for adoption of VAT started in early 90s when the present prime minister was its finance minister. Del Gupta published a scholarly paper on taxation system in India and advised for cautious approach towards adoption of VAT.
Subsequent to different studies, and especially constituted commission report, India is poised to introduce VAT in its all states during the current financial year, whereas in few states, it is already operative. We may add that in India, the federation has the power to tax services where as federating units are entitled to tax goods.
This bifurcation is to make federation responsible for socio-economic services. Our government is proposing exact opposite. In India, as per there VAT act following are exempt.
-- Agricultural implements operated manually or driven by animals, aids and implements used by handicapped persons, books, periodicals, and journals, electric energy, fresh milk, pasteurised milk, butter milk, and curd, fresh plants, samplings, and fresh flowers, fresh vegetables and fruits, meat, fish, prawn, and other aquatic products when not cured, or frozen, eggs, and livestock, paddy, rice, wheat, pulses, salt, and flour, sugar, textile.
India is very relevant to us as we share common economic conditions. It is much more essential for India to have higher tax-to-GDP ratio to sustain its socio-economic development. Despite these constraints, the Indian exemption list as stated above is very exhaustive. It has even exempted the supply of electrical energy and textile as well as sugar sector. None of their agricultural products are subject to VAT.
If we look into the list of exemptions in above stated countries, we will observe that food items, including vegetables, socio-economic sectors, healthcare, medical profession is either exempt or is zero-rated in developed countries. However, in the proposed VAT bill, we have restricted our exemptions to bare minimum.
The third schedule, however, provides that pharmaceutical and medical supplies as specified by the board shall be zero-rated. Here very interesting point to consider is, as per section 13, no such power is available to the Board, as it has been invested in the parliament. This is by itself an anomalous situation that needs careful study by the parliament.
Once the VAT becomes operational, almost every commodity other than peas, wheat and wheat flour shall be chargeable to the VAT. Does the FBR have the capacity to implement the collection of taxes from sales made on donkey carts? What would happen to common person in a country where 40% of its population lives below the poverty line?
Another interesting thing is that any person making sale less than Rs 21,000 per day is exempt from registration. Now question arises, how an unregistered person can recover the tax from sale of the VAT-able commodities. We may further add that Australia took more than six year to convince the parliament for the enforcement of the GST. It also did a lot of capacity building of the potential taxpayers.
In India, they constituted a commission that came out with exhaustive report as to how and in what manner the VAT needs to be levied. On the contrary, FBR has not published any material on the viability of the proposed bill except for few seminars subsequent to moving of the bill in the parliament. Since this bill shall be having far reaching repercussions, the print and the electronic media also needs to sensitise on this core economic issue.
The standing committee of the parliament where the bill has been referred should conduct public hearings as is being done routinely on every bill in the US. The country needs VAT, but its design needs to be tailored around to meet the local economic conditions. Otherwise this will be a failed attempt and will mar the current administration with their policy of taking one step forward and two steps back.
Source: http://www.brecorder.com/index.php?id=1036598&currPageNo=1&query=&search=&term=&supDate=
Debate on VAT: tanners' standpoint By AGHA SAIDDAIN
ARTICLE (March 26 2010): Foreign powers, who are busy to spin a spider's web around nuclear Islamic state, which already is caught in a deadly debt trap and has lost its independence in formulating policies to get rid of this monstrous external debt. Total external debt of Pakistan, including foreign exchange liabilities were US $10 billion in 1980 and US $20 billion in 1990.
In May 1998 just before freezing of foreign currency accounts, the external debt was recorded US $42 billion. The burden of debt services, which was 18% in 1980, jumped to 60% in 1998. As of June 2001, Pakistan's total external debt and liabilities stood at US $37.8 billion and on June 30, 2009 our external debts and liabilities have further increased to US $47.26 billion.
According to the estimates of the IMF, Pakistan's debt will increase to US $57.10 billion by the end of current fiscal year and 64 billion by the end of 2011-12. The main reason for this heavy burden of debt has been a result of large and persistent fiscal and current account balance of payments deficits imprudent used of borrowed resources, such as wasteful government spending resort to borrowing for covering non-development needs, undertaking of low economic priority development projects, and poor implementation of foreign aided projects, weakening of debt carrying capacity in term of stagnation or decline in real government revenues and exports and the rising cost of government borrowings both domestic and foreign.
We have wasted the breathing space and have not utilised this time wisely and judiciously to restructure our economy on sound footings and as a result, we had to beg again in front of the IMF with all its conditionalities. Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank.
In these circumstances, we are near the economic collapse and on the dictates of the IMF, we are levying various kinds of taxes and making lives of our citizens difficult and miserable. The Federal Value Added Tax Act 2010 is one of the conditions mentioned in letter of intent signed by the Finance Minister on November 27, 2008 in which it was clearly mentioned that the government would initiate a process to implement a full VAT with minimum exemptions.
Beggars have no choice and authorities have drafted the VAT ACT 2010 under the dictates of the IMF. Under the act zero rating on five export industries, leather, textile, carpets, sports goods and surgical goods will be removed and brought into VAT scheme.
Most of these industries are in crises due to impact of war on terror and persistent loadshedding. The exports of the leather sector have recorded 42% decline in the last 20 months and the industry is at the brink of its collapse and if the zero rating is withdrawn and VAT levied, the industry will totally collapse.
How can a sick industry sustain the pressure of new levy of VAT must be better known to our competent economic managers who drafted the VAT Act in air-conditioned offices without knowing the ground reality. These authorities have not even bothered to discuss this issue with the stakeholders before it was finally drafted.
The FBR authorities are of the view that they cannot resist powerful groups, who with connivance of these authorities, obtained exemptions through SROs and the VAT Act will restrain powerful groups from obtaining exemptions and only Parliament is having powers to issue such exemptions meaning that the authorities have been involved in malpractices in the past and SRO's were not issued on merits and in the interest of the country.
Former Commerce Minister Razaq Dawood had advised the then CBR (FBR) to provide draft SRO to the concerned associations of that particulars industry before it was finally issued. After getting suggestions with the industry, final draft of SRO was approved. It was a prudent policy but withdrawn by the FBR.
The trust deficit between trade and government is chronic and deep-rooted. For economic uplift of any country, there must be mutual trust between trade and government authorities. There are inherent flaws in the VAT Act and it has been drafted with a Machiavellian mindset to treat business class like a dacoits or thieves. Some of the provisions of VAT ACT are too harsh and need to be deleted. The definition of "ASSOCIATED PERSON" under sections-3 of VAT Act is objectionable and need to be changed. The present definition is quoted as under:
-- "ASSOCIATED PERSON - (1) for the purpose of the Act, two persons are "associated persons." If the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of other, or both can reasonably be expected to act in accordance with the intentions of third person.
1) The following are presumed to be associated person.
a) An individual and a relative of the individual; and
b) The member's of the association of persons.
Unless the Board is satisfied that neither person can reasonably to act in accordance with the intentions of other. The above definition is against the Constitution and Pakistan Penal Code in which no other individual is held responsible for an act of other person, who may be son, brother or any other relative of the person who is proved to be culprit.
Section 3(4) of VAT Act further defines term "relative" as under: Relative in relation to an individual means; (a) an ancestor, a descendent, of any grandparents, or an adopted, or an adopted child, of the individual; (b) an ancestor, a descendent of any of the grandparents, or an adopted child of a spouse of the individual, or (c) a spouse of the individual or any of the persons specified in Sub-Paragraph (a) or (b).
Under Section 5(a), any activity whether or not activity is undertaken for profit will be called economic activity. Open Market Price as described under section 6 of VAT Act is also debatable. It says: "one supply is similar to another if it is the same as, or closely resembles, the supply in character, quality, quantity, functionality, material, and reputation".
What about two similar mobile phones with similar functions, one produced in China and another in Europe, and the price of Chinese set in Rs 6000 and similar set costs Rs 40,000 if produced by a company of international repute. The present definition suits to tax officials for malpractices and bribing. The most alarming section is Section 12 relating to "Zero-rated supplies" which reads as under:
"A supply or import is a zero-rated supply or import if"
(a) it is specified a zero-rated supply or import in the SECOND SCHEDULE of this Act or it is supply of a right or option to receive a supply that will be zero-rated supply; or
(b) it is specified as a zero-rated supply under a provincial VAT Law.
The Second Schedule of VAT Act is silent on zero rating of five export sectors meaning that zero-rating of five export sectors has been withdrawn. This is an act, which can has serious repercussion on the future of our economy. The policy of the government to export taxes will further result decline in our exports.
The authorities are ready to take any dictation from the borrowing agencies but not facilitate their own citizen, to earn foreign exchange for the country. The VAT Act is contrary to the strategic Trade Policy Framework 2009-12 announced by the Commerce Minister on July 27, 2009.
Secondly, it will encourage culture of flying invoices and other malpractices for which zero rating regime for five sectors was introduced. Due to these flying invoices and malpractices the government was receiving less and paying more in the shape of refund. Finally, it was found that refunds are more because of flying invoices and a few cases of malpractices are still pending in various courts.
The refund procedure in Pakistan has been sluggish and not export-friendly. Exports needed to be encouraged to pay back our debts, otherwise the country will face bankruptcy in future years. We must follow policies of China, India, Bangladesh, Turkey and other similar countries. Export are to earn foreign exchange and not for revenue collection.
The present government must sit with the business leaders of leading export industries and find ways as how to increase our exports. Comparative study of policies to boost exports by various countries must by conducted and Pakistan needs to follow similar policies. Setback to exports means setback to economy, which can be a big setback to present political government.
The present government may not close its eyes on such legislation, which is detrimental to the country in general and to export industry in particular. For good governance, it is imperative to boost exports and the government needs to focus its attention to this important sector of economy.
No economy can be sustainable on more borrowings and without exports. This is the area where immediate government attention is required, otherwise laws like VAT Act can prove last nail in our economy. The first step is to discuss VAT Act with the stakeholders, ie exporters, importers, chamber of commerce, trade association and other concerned trade bodies.
As suggested by the Senate Standing Committee, the bill may be deferred for one year till discussion with the stakeholders is completed and the bill is thoroughly debated before its implementation. The present VAT ACT is not in accordance with the fundamental rights of a citizens of Islamic Republic of Pakistan laid down in our Constitution for example Section 87 of VAT Act reads as under:
-- "87 BAR OF SUITS, PROSECUTION - and other legal proceedings (1) No suit shall be brought in any court including high court in its civil jurisdiction to set aside or modify any order passed, any assessment made, any tax levied, any penalty imposed or collection of any tax made, audit, enquire, investigation conducted under this act or rules made there under or against any action taken by an officer of inland revenue in connection with such matters."
Under this, section officer of Inland Revenue is a supreme authority even above of all superior courts, including high court. No normal person can draft such a legal provisions in which individual's right to seek redress has been snatched.
In case of dispute, who will interpret the law and who will decide that officer concerned has committed mistake. This section is based on presumption that the officer of Inland Revenue in infallible and always correct. This provision has given unlimited discretionary powers to the officer and has paved the way for malpractices and blackmailing.
Under this provision, the legislator has been assigned the job of judiciary, which is too much. While drafting the law, these experts have not taken into consideration ground reality of our country. They have copied few provisions from VAT Law prevailing in Australia where the literacy rate is 100% and in our country literacy is the main issue in documentation of economy.
Under Section 48, it is mentioned that it shall be reasonable for a person to believe that another person is registered for VAT if that another person is on the list placed on the website of the Board. It has been presumed that whole nation is computer literate.
Under Section 69 of VAT Act, an officer may conduct audit, including forensic audit of any registered person. The term forensic audit has not been clarified or defined. If it is an audit through the court, then what about Section 87 which has put bar on legal proceedings.
The Section 70 is about "Special Audit" by an accountant appointed by the Board with unlimited powers. What is the difference between audit and special audit is not clear.
On the one hand, there is bar on suits and, on the other, Section 72 authorises an officer of assistant collector rank to arrest any person suspected or believed to have committed tax fraud. Where the person suspected or believed to have committed tax fraud is a company every director or officer of such company may be arrested.
The business community should open its eyes and stand against such harsh provisions of VAT Act. Such law will discourage investors and can cause serious setback to our industrial growth. At least all foreign investors will shun investment in the presence of such harsh provisions.
The provision along with Section 87 can be called conspiracy against the country to further retard its industrial growth and create unemployment in the country to push us in dark ages. How can a person be arrested just on suspicion having no right of bail before arrest, as VAT Act is a "Divine Law" and above the Constitution of Pakistan.
The government should offer this act for debate among the stakeholders and presentations may be made by the chambers and associations to all the 4 provincial assemblies of Pakistan and National Assembly including Senate. Some of the provisions of the VAT ACT are deceptive such as Section 23 about EXPORT OF GOODS.
To a lay man, it looks like as if exports are zero-rated, but for a person who can understand legal language, it says that on export of goods VAT would not be levied. Nowhere in the world, VAT is on exports even duty-free shops at all airports refund VAT once passenger is having boarding pass and passport.
Many other things like ancillary or incidental supplies need to be clarified. The authorities may avoid to try this adventure to impose VAT on zero-rating export sector. The first step is to defer this law for at least one year and remove all provision, which my open doors for corruption and malpractices. Lastly, the VAT will push inflation rate to sky-high and poor class will be further suppressed.
The rulers should avoid policies which may lead to bloody revolution and make our country unstable. The percentage of people, living below the poverty line, is increasing day by day and as a result, crime rate in the country is increasing to an alarming rate.
Instead of the VAT, it would be better to broaden our tax net to improve tax-to-GDP ratio. The present VAT ACT can also improve this ratio by reducing the GDP and increasing taxes, as will be result of present unthought draft.
(The writer is former Chairman of Pakistan Tanners Association)
Source: http://www.brecorder.com/index.php?id=1035826&currPageNo=1&query=&search=&term=&supDate=
In May 1998 just before freezing of foreign currency accounts, the external debt was recorded US $42 billion. The burden of debt services, which was 18% in 1980, jumped to 60% in 1998. As of June 2001, Pakistan's total external debt and liabilities stood at US $37.8 billion and on June 30, 2009 our external debts and liabilities have further increased to US $47.26 billion.
According to the estimates of the IMF, Pakistan's debt will increase to US $57.10 billion by the end of current fiscal year and 64 billion by the end of 2011-12. The main reason for this heavy burden of debt has been a result of large and persistent fiscal and current account balance of payments deficits imprudent used of borrowed resources, such as wasteful government spending resort to borrowing for covering non-development needs, undertaking of low economic priority development projects, and poor implementation of foreign aided projects, weakening of debt carrying capacity in term of stagnation or decline in real government revenues and exports and the rising cost of government borrowings both domestic and foreign.
We have wasted the breathing space and have not utilised this time wisely and judiciously to restructure our economy on sound footings and as a result, we had to beg again in front of the IMF with all its conditionalities. Pakistan was the only country in South Asia to be classified as a severely indebted country by the World Bank.
In these circumstances, we are near the economic collapse and on the dictates of the IMF, we are levying various kinds of taxes and making lives of our citizens difficult and miserable. The Federal Value Added Tax Act 2010 is one of the conditions mentioned in letter of intent signed by the Finance Minister on November 27, 2008 in which it was clearly mentioned that the government would initiate a process to implement a full VAT with minimum exemptions.
Beggars have no choice and authorities have drafted the VAT ACT 2010 under the dictates of the IMF. Under the act zero rating on five export industries, leather, textile, carpets, sports goods and surgical goods will be removed and brought into VAT scheme.
Most of these industries are in crises due to impact of war on terror and persistent loadshedding. The exports of the leather sector have recorded 42% decline in the last 20 months and the industry is at the brink of its collapse and if the zero rating is withdrawn and VAT levied, the industry will totally collapse.
How can a sick industry sustain the pressure of new levy of VAT must be better known to our competent economic managers who drafted the VAT Act in air-conditioned offices without knowing the ground reality. These authorities have not even bothered to discuss this issue with the stakeholders before it was finally drafted.
The FBR authorities are of the view that they cannot resist powerful groups, who with connivance of these authorities, obtained exemptions through SROs and the VAT Act will restrain powerful groups from obtaining exemptions and only Parliament is having powers to issue such exemptions meaning that the authorities have been involved in malpractices in the past and SRO's were not issued on merits and in the interest of the country.
Former Commerce Minister Razaq Dawood had advised the then CBR (FBR) to provide draft SRO to the concerned associations of that particulars industry before it was finally issued. After getting suggestions with the industry, final draft of SRO was approved. It was a prudent policy but withdrawn by the FBR.
The trust deficit between trade and government is chronic and deep-rooted. For economic uplift of any country, there must be mutual trust between trade and government authorities. There are inherent flaws in the VAT Act and it has been drafted with a Machiavellian mindset to treat business class like a dacoits or thieves. Some of the provisions of VAT ACT are too harsh and need to be deleted. The definition of "ASSOCIATED PERSON" under sections-3 of VAT Act is objectionable and need to be changed. The present definition is quoted as under:
-- "ASSOCIATED PERSON - (1) for the purpose of the Act, two persons are "associated persons." If the relationship between them is such that one can reasonably be expected to act in accordance with the intentions of other, or both can reasonably be expected to act in accordance with the intentions of third person.
1) The following are presumed to be associated person.
a) An individual and a relative of the individual; and
b) The member's of the association of persons.
Unless the Board is satisfied that neither person can reasonably to act in accordance with the intentions of other. The above definition is against the Constitution and Pakistan Penal Code in which no other individual is held responsible for an act of other person, who may be son, brother or any other relative of the person who is proved to be culprit.
Section 3(4) of VAT Act further defines term "relative" as under: Relative in relation to an individual means; (a) an ancestor, a descendent, of any grandparents, or an adopted, or an adopted child, of the individual; (b) an ancestor, a descendent of any of the grandparents, or an adopted child of a spouse of the individual, or (c) a spouse of the individual or any of the persons specified in Sub-Paragraph (a) or (b).
Under Section 5(a), any activity whether or not activity is undertaken for profit will be called economic activity. Open Market Price as described under section 6 of VAT Act is also debatable. It says: "one supply is similar to another if it is the same as, or closely resembles, the supply in character, quality, quantity, functionality, material, and reputation".
What about two similar mobile phones with similar functions, one produced in China and another in Europe, and the price of Chinese set in Rs 6000 and similar set costs Rs 40,000 if produced by a company of international repute. The present definition suits to tax officials for malpractices and bribing. The most alarming section is Section 12 relating to "Zero-rated supplies" which reads as under:
"A supply or import is a zero-rated supply or import if"
(a) it is specified a zero-rated supply or import in the SECOND SCHEDULE of this Act or it is supply of a right or option to receive a supply that will be zero-rated supply; or
(b) it is specified as a zero-rated supply under a provincial VAT Law.
The Second Schedule of VAT Act is silent on zero rating of five export sectors meaning that zero-rating of five export sectors has been withdrawn. This is an act, which can has serious repercussion on the future of our economy. The policy of the government to export taxes will further result decline in our exports.
The authorities are ready to take any dictation from the borrowing agencies but not facilitate their own citizen, to earn foreign exchange for the country. The VAT Act is contrary to the strategic Trade Policy Framework 2009-12 announced by the Commerce Minister on July 27, 2009.
Secondly, it will encourage culture of flying invoices and other malpractices for which zero rating regime for five sectors was introduced. Due to these flying invoices and malpractices the government was receiving less and paying more in the shape of refund. Finally, it was found that refunds are more because of flying invoices and a few cases of malpractices are still pending in various courts.
The refund procedure in Pakistan has been sluggish and not export-friendly. Exports needed to be encouraged to pay back our debts, otherwise the country will face bankruptcy in future years. We must follow policies of China, India, Bangladesh, Turkey and other similar countries. Export are to earn foreign exchange and not for revenue collection.
The present government must sit with the business leaders of leading export industries and find ways as how to increase our exports. Comparative study of policies to boost exports by various countries must by conducted and Pakistan needs to follow similar policies. Setback to exports means setback to economy, which can be a big setback to present political government.
The present government may not close its eyes on such legislation, which is detrimental to the country in general and to export industry in particular. For good governance, it is imperative to boost exports and the government needs to focus its attention to this important sector of economy.
No economy can be sustainable on more borrowings and without exports. This is the area where immediate government attention is required, otherwise laws like VAT Act can prove last nail in our economy. The first step is to discuss VAT Act with the stakeholders, ie exporters, importers, chamber of commerce, trade association and other concerned trade bodies.
As suggested by the Senate Standing Committee, the bill may be deferred for one year till discussion with the stakeholders is completed and the bill is thoroughly debated before its implementation. The present VAT ACT is not in accordance with the fundamental rights of a citizens of Islamic Republic of Pakistan laid down in our Constitution for example Section 87 of VAT Act reads as under:
-- "87 BAR OF SUITS, PROSECUTION - and other legal proceedings (1) No suit shall be brought in any court including high court in its civil jurisdiction to set aside or modify any order passed, any assessment made, any tax levied, any penalty imposed or collection of any tax made, audit, enquire, investigation conducted under this act or rules made there under or against any action taken by an officer of inland revenue in connection with such matters."
Under this, section officer of Inland Revenue is a supreme authority even above of all superior courts, including high court. No normal person can draft such a legal provisions in which individual's right to seek redress has been snatched.
In case of dispute, who will interpret the law and who will decide that officer concerned has committed mistake. This section is based on presumption that the officer of Inland Revenue in infallible and always correct. This provision has given unlimited discretionary powers to the officer and has paved the way for malpractices and blackmailing.
Under this provision, the legislator has been assigned the job of judiciary, which is too much. While drafting the law, these experts have not taken into consideration ground reality of our country. They have copied few provisions from VAT Law prevailing in Australia where the literacy rate is 100% and in our country literacy is the main issue in documentation of economy.
Under Section 48, it is mentioned that it shall be reasonable for a person to believe that another person is registered for VAT if that another person is on the list placed on the website of the Board. It has been presumed that whole nation is computer literate.
Under Section 69 of VAT Act, an officer may conduct audit, including forensic audit of any registered person. The term forensic audit has not been clarified or defined. If it is an audit through the court, then what about Section 87 which has put bar on legal proceedings.
The Section 70 is about "Special Audit" by an accountant appointed by the Board with unlimited powers. What is the difference between audit and special audit is not clear.
On the one hand, there is bar on suits and, on the other, Section 72 authorises an officer of assistant collector rank to arrest any person suspected or believed to have committed tax fraud. Where the person suspected or believed to have committed tax fraud is a company every director or officer of such company may be arrested.
The business community should open its eyes and stand against such harsh provisions of VAT Act. Such law will discourage investors and can cause serious setback to our industrial growth. At least all foreign investors will shun investment in the presence of such harsh provisions.
The provision along with Section 87 can be called conspiracy against the country to further retard its industrial growth and create unemployment in the country to push us in dark ages. How can a person be arrested just on suspicion having no right of bail before arrest, as VAT Act is a "Divine Law" and above the Constitution of Pakistan.
The government should offer this act for debate among the stakeholders and presentations may be made by the chambers and associations to all the 4 provincial assemblies of Pakistan and National Assembly including Senate. Some of the provisions of the VAT ACT are deceptive such as Section 23 about EXPORT OF GOODS.
To a lay man, it looks like as if exports are zero-rated, but for a person who can understand legal language, it says that on export of goods VAT would not be levied. Nowhere in the world, VAT is on exports even duty-free shops at all airports refund VAT once passenger is having boarding pass and passport.
Many other things like ancillary or incidental supplies need to be clarified. The authorities may avoid to try this adventure to impose VAT on zero-rating export sector. The first step is to defer this law for at least one year and remove all provision, which my open doors for corruption and malpractices. Lastly, the VAT will push inflation rate to sky-high and poor class will be further suppressed.
The rulers should avoid policies which may lead to bloody revolution and make our country unstable. The percentage of people, living below the poverty line, is increasing day by day and as a result, crime rate in the country is increasing to an alarming rate.
Instead of the VAT, it would be better to broaden our tax net to improve tax-to-GDP ratio. The present VAT ACT can also improve this ratio by reducing the GDP and increasing taxes, as will be result of present unthought draft.
(The writer is former Chairman of Pakistan Tanners Association)
Source: http://www.brecorder.com/index.php?id=1035826&currPageNo=1&query=&search=&term=&supDate=
Debate on VAT By HUZAIMA BUKHARI AND DR IKRAMUL HAQ
ARTICLE (March 24 2010): The ongoing debate over introduction of Value Added Tax (VAT) from July 1, 2010 - at the command of IMF and World Bank - misses a vital point. The cause for concern is not its poor drafting by foreign experts (sic) or hurried imposition as a condition of IMF loan - as was the case with Income Tax Ordinance in 2001 - but it's devastating effects on our industrial and business houses as well as on the poor people.
The IMF and World Bank are also ignoring the fact that implementing the VAT in an undocumented economy - size of underground economy is monstrously high in Pakistan - will be disastrous unless accompanied by asset-seizure legislation as part of tax codes.
Our economic managers - in reality are now IMF and World Bank - have never considered using tax policy as a tool of economic development. Their sole stress on revenue targets has resulted into an economic quandary. Tragically, their single-minded approach has even failed to overcome the ever-bourgeoning fiscal deficit. An irrational tax policy has not only created fiscal imbalances but has led us towards socio-political disaster - a democratically elected government is facing destabilisation. No doubt our economic survival now lies in collecting taxes wherever due by abandoning the policy to appease the powerful and the rich.
However, the VAT is not an answer, being regressive tax it will push more people towards poverty. The rich will pass on the burden of this tax to the consumers. The real solution is taxing the rich and mighty by introducing asset-seizure legislation. If they fail to pay taxes on their un-taxed assets - kept in or outside Pakistan - these should be seized at once. This legislation will be true manifestation of democratic rule confirming an unshakeable determination, consistency and political will to curb the 65-year-old habit of defying tax laws, together with complete purge in the tax machinery.
The primary function of any tax policy and tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal of a development-oriented tax policy is to ensure that this function is discharged effectively and simultaneously reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some of the means for achieving these ends.
In Pakistan, an opposite approach has been adopted: there has been a gradual shift from equitable to highly inequitable taxes. The shift from progressive levies aimed at removing inequalities, to regressive taxes favouring the rich - presumptive and easily collectable taxes, burden of which is transferred to consumers - has destroyed the entire philosophy of taxes, especially direct taxes.
In this backdrop, the VAT will be another step in the wrong direction. With its introduction, the dismal share of direct taxes in overall collection of taxes at the Federal level will shrink further. The immediate cause for anxiety for all of us - the government, parliamentarians, media and civil society - should be correction in tax-base - presently, it favours the rich and cruelly taxes the poor. Bureaucrats, sitting in the Ministry of Finance and the Federal Board of Revenue (FBR) should not be allowed to introduce foreign-drafted laws in the Parliament, especially when these are against the interest of our people.
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor is increased by 38% whereas on the rich, it is reduced by 18%. The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line - their number is now 48 million according to official figures.
The FBR has in its reports admitted that in the first half of the current fiscal year 2009-10, the share of indirect taxes rose to 72% and that of direct taxes dipped to 28%. It confirms that the taxation system of Pakistan, contrary to the rest of the world, is highly regressive. If we take into account the portion of so-called income tax collection, which is in fact indirect in nature, the share of indirect tax would not be less than 82 percent in the total collection of FBR.
The central goal of Tax Administration Reforms Project (TARP), funded by the World Bank and Department for International Development (DFID), was to improve the direct taxation collection and minimise the indirect taxes to make the taxation system just and fair. However, at the end TARP's tenure, the result is exact the opposite. This is how we implement reform programmes - responsibility should also be shared by the IMF and World Bank for poor monitoring and relaxed controls.
The FBR Chairman, before the Senate Standing Committee on Finance, conceded that "increase in direct taxes is one of the major challenges before the Board". Due to wrong policies of the successive governments - civil and military alike - the poor have been burdened with more and more taxes.
What makes the situation more painful is the fact that taxes collected are wasted by the rulers on their personal comforts and luxuries and the masses get nothing back from what they pay to the state. The successive governments have miserably failed to discharge their basic obligation of protecting life and property of its people, what to talk of extending social services free of cost.
Taxes collected are consumed by debt serving, defence, for the security of the rulers and their foreign tours. Besides regressive taxation, the government resorts to borrowing money at a high cost, from wherever available, to run the day to day affairs.
Interest payments on domestic and foreign debts during the ongoing fiscal year 2009-10 are likely to cost the national exchequer Rs 664 billion (48% of revenue target fixed for the year) that is 17 billion more than what was estimated in the budget. If the defence spending - including cost of 'war against terror' - is added, the entire revenue collection of Rs 1380 billion will be engulfed just by two items, meaning by for all other outlays more borrowings, domestic and international, will be made. It is a never-ending vicious circle.
The burden of indirect taxes like VAT is always passed on to the end consumers. These kind of taxes take a very small portion of a rich man's enormous income and a very large slice of a poor man's meagre earnings. The rulers - controlling the state and its resources - are not ready to pay income tax on their collossal incomes from agriculture, which they earn as absentee landlords.
They are unwilling to cut non-development expenditure at least by 50%. They are not ready to live like a common man and surrender all the perks and privileges they are enjoying at the cost of taxpayers' money. On the contrary, they are burdening the masses with more and more indirect taxes and that too for debt servicing, defence and luxuries. Realisation of actual tax potential of Pakistan, which by a very conservative estimation is not less than Rs 4 trillion, is the real challenge.
It can be met by introducing the following measures:
-- Reintroduction of progressive taxes eg wealth tax, estate duty, gift tax, capital gain tax.
-- Taxation of "agricultural income" of big absentee landlords.
-- Taxation of capital gains at stock market with incentive of lower rate for small investors.
-- Bringing into tax net speculative transactions in real estate.
-- Taxation of abusive transfer pricing transactions.
-- Abolition of section 111(4) of the Income Tax Ordinance, 2001 that protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance after paying a nominal premium of 1 to 2 percent of the entire proceeds!
The existing ill-directed, illogical, inequitable and regressive tax policy coupled with oppressive-corrupt tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation - even under the garb of income taxation through presumptive tax regime on goods and services-without evaluating its impact on the economy and the life of poor masses is a lamentable policy.
In the name of higher growth in tax collection, measures like the VAT are proposed instead of progressive taxes mentioned above, and no seriousness is shown for better enforcement of tax laws - what is preventing the government to confiscate all un-taxed assets? This policy of taxing the poor for the benefit of the rich - employed by military rulers - is religiously being followed by Zardari-Gilani et al with the only difference that Shaukat Aziz stood replaced first with Shaukat Tareen and now with Abdul Hafeez Shaikh - all three nominees of the IMF and World Bank.
[The authors, tax lawyers, teach tax laws at Lahore University of Management Sciences (LUMS)].
Source: http://www.brecorder.com/index.php?id=1035109&currPageNo=1&query=&search=&term=&supDate=
The IMF and World Bank are also ignoring the fact that implementing the VAT in an undocumented economy - size of underground economy is monstrously high in Pakistan - will be disastrous unless accompanied by asset-seizure legislation as part of tax codes.
Our economic managers - in reality are now IMF and World Bank - have never considered using tax policy as a tool of economic development. Their sole stress on revenue targets has resulted into an economic quandary. Tragically, their single-minded approach has even failed to overcome the ever-bourgeoning fiscal deficit. An irrational tax policy has not only created fiscal imbalances but has led us towards socio-political disaster - a democratically elected government is facing destabilisation. No doubt our economic survival now lies in collecting taxes wherever due by abandoning the policy to appease the powerful and the rich.
However, the VAT is not an answer, being regressive tax it will push more people towards poverty. The rich will pass on the burden of this tax to the consumers. The real solution is taxing the rich and mighty by introducing asset-seizure legislation. If they fail to pay taxes on their un-taxed assets - kept in or outside Pakistan - these should be seized at once. This legislation will be true manifestation of democratic rule confirming an unshakeable determination, consistency and political will to curb the 65-year-old habit of defying tax laws, together with complete purge in the tax machinery.
The primary function of any tax policy and tax system is to raise revenue for the government for its public expenditure as well as for local authorities and similar public bodies. So the first goal of a development-oriented tax policy is to ensure that this function is discharged effectively and simultaneously reducing inequalities through a policy of redistribution of income and wealth. Higher rates of income taxes, capital transfer taxes and wealth taxes are some of the means for achieving these ends.
In Pakistan, an opposite approach has been adopted: there has been a gradual shift from equitable to highly inequitable taxes. The shift from progressive levies aimed at removing inequalities, to regressive taxes favouring the rich - presumptive and easily collectable taxes, burden of which is transferred to consumers - has destroyed the entire philosophy of taxes, especially direct taxes.
In this backdrop, the VAT will be another step in the wrong direction. With its introduction, the dismal share of direct taxes in overall collection of taxes at the Federal level will shrink further. The immediate cause for anxiety for all of us - the government, parliamentarians, media and civil society - should be correction in tax-base - presently, it favours the rich and cruelly taxes the poor. Bureaucrats, sitting in the Ministry of Finance and the Federal Board of Revenue (FBR) should not be allowed to introduce foreign-drafted laws in the Parliament, especially when these are against the interest of our people.
It is now well-established that there is a direct link between growing poverty in Pakistan and distortion in tax base since 1991, when a major shift was made by introducing presumptive taxes (indirect taxes in the garb of income tax) and VAT-type sales tax. Since 1991, the burden of taxes on the poor is increased by 38% whereas on the rich, it is reduced by 18%. The lack of judicious balance between direct and indirect taxes has pushed an overwhelming majority of Pakistanis towards the poverty line - their number is now 48 million according to official figures.
The FBR has in its reports admitted that in the first half of the current fiscal year 2009-10, the share of indirect taxes rose to 72% and that of direct taxes dipped to 28%. It confirms that the taxation system of Pakistan, contrary to the rest of the world, is highly regressive. If we take into account the portion of so-called income tax collection, which is in fact indirect in nature, the share of indirect tax would not be less than 82 percent in the total collection of FBR.
The central goal of Tax Administration Reforms Project (TARP), funded by the World Bank and Department for International Development (DFID), was to improve the direct taxation collection and minimise the indirect taxes to make the taxation system just and fair. However, at the end TARP's tenure, the result is exact the opposite. This is how we implement reform programmes - responsibility should also be shared by the IMF and World Bank for poor monitoring and relaxed controls.
The FBR Chairman, before the Senate Standing Committee on Finance, conceded that "increase in direct taxes is one of the major challenges before the Board". Due to wrong policies of the successive governments - civil and military alike - the poor have been burdened with more and more taxes.
What makes the situation more painful is the fact that taxes collected are wasted by the rulers on their personal comforts and luxuries and the masses get nothing back from what they pay to the state. The successive governments have miserably failed to discharge their basic obligation of protecting life and property of its people, what to talk of extending social services free of cost.
Taxes collected are consumed by debt serving, defence, for the security of the rulers and their foreign tours. Besides regressive taxation, the government resorts to borrowing money at a high cost, from wherever available, to run the day to day affairs.
Interest payments on domestic and foreign debts during the ongoing fiscal year 2009-10 are likely to cost the national exchequer Rs 664 billion (48% of revenue target fixed for the year) that is 17 billion more than what was estimated in the budget. If the defence spending - including cost of 'war against terror' - is added, the entire revenue collection of Rs 1380 billion will be engulfed just by two items, meaning by for all other outlays more borrowings, domestic and international, will be made. It is a never-ending vicious circle.
The burden of indirect taxes like VAT is always passed on to the end consumers. These kind of taxes take a very small portion of a rich man's enormous income and a very large slice of a poor man's meagre earnings. The rulers - controlling the state and its resources - are not ready to pay income tax on their collossal incomes from agriculture, which they earn as absentee landlords.
They are unwilling to cut non-development expenditure at least by 50%. They are not ready to live like a common man and surrender all the perks and privileges they are enjoying at the cost of taxpayers' money. On the contrary, they are burdening the masses with more and more indirect taxes and that too for debt servicing, defence and luxuries. Realisation of actual tax potential of Pakistan, which by a very conservative estimation is not less than Rs 4 trillion, is the real challenge.
It can be met by introducing the following measures:
-- Reintroduction of progressive taxes eg wealth tax, estate duty, gift tax, capital gain tax.
-- Taxation of "agricultural income" of big absentee landlords.
-- Taxation of capital gains at stock market with incentive of lower rate for small investors.
-- Bringing into tax net speculative transactions in real estate.
-- Taxation of abusive transfer pricing transactions.
-- Abolition of section 111(4) of the Income Tax Ordinance, 2001 that protects tax evaders as they can whiten untaxed income through an extremely simple and easily available procedure by going to a money exchanger and getting fictitious foreign remittance after paying a nominal premium of 1 to 2 percent of the entire proceeds!
The existing ill-directed, illogical, inequitable and regressive tax policy coupled with oppressive-corrupt tax system is widening the existing divide between the rich and the poor. The sole stress on indirect taxation - even under the garb of income taxation through presumptive tax regime on goods and services-without evaluating its impact on the economy and the life of poor masses is a lamentable policy.
In the name of higher growth in tax collection, measures like the VAT are proposed instead of progressive taxes mentioned above, and no seriousness is shown for better enforcement of tax laws - what is preventing the government to confiscate all un-taxed assets? This policy of taxing the poor for the benefit of the rich - employed by military rulers - is religiously being followed by Zardari-Gilani et al with the only difference that Shaukat Aziz stood replaced first with Shaukat Tareen and now with Abdul Hafeez Shaikh - all three nominees of the IMF and World Bank.
[The authors, tax lawyers, teach tax laws at Lahore University of Management Sciences (LUMS)].
Source: http://www.brecorder.com/index.php?id=1035109&currPageNo=1&query=&search=&term=&supDate=
Wednesday, March 24, 2010
Snags in enforcing value-added tax By Mohiuddin Aazim
THE government intends to introduce value-added tax from July 1, at a proposed flat rate of 15 per cent. The VAT will replace general sales tax in most cases and bring into the tax net some hitherto untaxed classes of retailers and suppliers.
The Federal Board of Revenue (FBR) has sent the draft of the Federal Value Added Tax Bill 2010 to the parliament. A Senate committee is currently examining it.
Meanwhile, businessmen are voicing their concerns over the manner in which the VAT is being introduced. A common complaint is that their input has not been sought. Business leaders also lament that the FBR has done nothing to create mass awareness about how VAT will be implemented. They fear that operational issues would crop up if VAT is imposed without taking them into confidence. That is why many business lobby groups have rejected it.
But the Federation of Pakistan Chambers of Commerce and Industry appears to be somewhat accommodative. “We have invited the FBR Chairman on 15th of this month at FPCCI in Karachi. He would listen to our views and respond to them. Amendments can be inserted into the proposed law and sent again to the parliament for approval,” said Mr Zakaria Usman, FPCCI vice-president.
“Before that, representatives of key business associations will hold a two-day brainstorming session at FPCCI to prepare a comprehensive presentation on VAT.”
Pakistan’s tax-to-GDP ratio is about nine per cent—the lowest in the region. As such any move to enhance tax revenue should not be normally opposed. And businessmen do realise this. “What we are complaining about is that we were not taken on board when FBR finalised draft legislation for VAT,” explained Mr S. M. Muneer, a former FPCCI president.
On March 8, Mr Asrar Raouf, FBR Member Policy (Direct Taxes) assured businessmen at a luncheon at Korangi Association of Trade and Industry that FBR was open to receive their inputs on how to go about introducing VAT.
He said even the proposed rate of 15 per cent VAT was open for discussion with business community. His boss, FBR Chairman Sohail Ahmed, is expected to say similar things when he visits FPCCI. “But VAT is to take effect from July 1.”
“How on earth our issues would be taken care of in such a short span of time?” questioned Mr Anis Majid, Chairman, Karachi Wholesale Grocers Group. “Whereas imposing VAT on retail businesses with a turnover of Rs7.5 million is not a big issue, the requirement for registration of such suppliers making supplies worth Rs75,000 or more (during the course of an economic activity) would definitely create problems for many.”
An ex-president of Karachi Chamber of Commerce Mr Anjum Nisar pointed out that as a matter of routine our bureaucracy is used to taking crucial decisions first and seeking stakeholders’ inputs later. This has delayed—and even failed many a good moves in the past. And I fear it can delay the imposition of VAT as well. Not only the businessmen required enough insight into operational issues of VAT, officials of FBR who would be involved in its collection also needed a certain level of training,” he added.
One of the issues, which businessmen fear they will have to face, is refund of taxes under VAT regime due to absence of effective electronic payment system. But FBR Member Policy Mr Asrar Raouf says that unlike General Sales Tax or GST regime, there will be a fully-automated refund system working under VAT.
He explained at a meeting with Karachi-based businessmen that refund system under VAT would operate on sale and purchase invoices and by the time next return is filed, a refund adjustment would already have taken place in the claimant’s bank account. Unlike in GST regime, no cheques would be issued against refunds. However complaints keep mounting against FBR over delays in refunds claimed under GST. Recently, Federal Tax Ombudsman Mr Shoaib Suddle revealed that 20 per cent of all disputes that his office received related to GST refunds.
Another VAT issue relates to determining the extent of value-addition in a product. Although FBR officials say all major agricultural crops would stay out of the VAT regime till processing stage, businessmen wonder how the tax authorities would determine the extent of value-addition in a crop that would make it liable for VAT. “We have been told that in case of pulses no value-add tax would be charged if the value-addition is less than five per cent,” said Mr Anis Majid. “We however, don’t know how exactly they would determine it.”
The draft of the proposed legislation for VAT finalised by FBR and posted on its website lists only a few food items as exempted from VAT. These include unprocessed peas; wheat and wheat flour; ice and waters except those for sale under brand names/trade marks; table salt including iodised salt but excluding salt sold in retail packing bearing brand names and trade marks.
This implies that all other edible items including fresh food items would be subject to value-added tax. Retailers fear that this might push up already high food inflation .“Besides, subjecting hundreds of food items to VAT would also increase the required paperwork,” feared an office-bearer of Karachi Retail Grocers Group who declined to be identified.
Generating more tax revenue from retail business is principally a good idea. It would help in bringing a large number of businesses and individuals in tax net and documenting the economy and would yield roughly Rs400 billion additional revenue per year. “But literacy rate in our country is too low. Expecting the retailers to know the nitty gritty of the new tax within a few months does not make sense.”
FBR had finalised the draft of the Federal Value-added Tax Bill 2010 on the last day of January and came up with its corrected version on February 27. “They should have done this at the start of this fiscal year giving all the stake holders a full year time to develop an understanding about VAT and debate its pros and cons at various forums,” said a trader based in Jodia Bazar.
Some businessmen say instead of introducing VAT at the export, import, retail and supplies stage in one go, the government should impose it on one particular area and gradually expand its scope to other areas. That is what many other countries have done. They say that replacing various tax slabs under GST regime for different class of businesses with unified VAT in one go may create confusion as these businesses and individuals have got used to GST over a period of time. They fear that a sudden replacement of GST regime by VAT would increase the frequency and volumes of tax litigation.
As VAT legislation is also to be vetted by provincial legislatures, it seems that no meaningful discussions can take place on this subject if the federal government is determined to impose it from July 1. Sindh Chief Minister Syed Qaim Ali Shah has said that provincial assemblies’ input should be given due weightage in the proposed VAT law. One has to see how quickly the provincial assemblies’ inputs and recommendations of the trade and industry can be incorporated into the proposed law for introducing VAT.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/snags-in-enforcing-valueadded-tax-530
The Federal Board of Revenue (FBR) has sent the draft of the Federal Value Added Tax Bill 2010 to the parliament. A Senate committee is currently examining it.
Meanwhile, businessmen are voicing their concerns over the manner in which the VAT is being introduced. A common complaint is that their input has not been sought. Business leaders also lament that the FBR has done nothing to create mass awareness about how VAT will be implemented. They fear that operational issues would crop up if VAT is imposed without taking them into confidence. That is why many business lobby groups have rejected it.
But the Federation of Pakistan Chambers of Commerce and Industry appears to be somewhat accommodative. “We have invited the FBR Chairman on 15th of this month at FPCCI in Karachi. He would listen to our views and respond to them. Amendments can be inserted into the proposed law and sent again to the parliament for approval,” said Mr Zakaria Usman, FPCCI vice-president.
“Before that, representatives of key business associations will hold a two-day brainstorming session at FPCCI to prepare a comprehensive presentation on VAT.”
Pakistan’s tax-to-GDP ratio is about nine per cent—the lowest in the region. As such any move to enhance tax revenue should not be normally opposed. And businessmen do realise this. “What we are complaining about is that we were not taken on board when FBR finalised draft legislation for VAT,” explained Mr S. M. Muneer, a former FPCCI president.
On March 8, Mr Asrar Raouf, FBR Member Policy (Direct Taxes) assured businessmen at a luncheon at Korangi Association of Trade and Industry that FBR was open to receive their inputs on how to go about introducing VAT.
He said even the proposed rate of 15 per cent VAT was open for discussion with business community. His boss, FBR Chairman Sohail Ahmed, is expected to say similar things when he visits FPCCI. “But VAT is to take effect from July 1.”
“How on earth our issues would be taken care of in such a short span of time?” questioned Mr Anis Majid, Chairman, Karachi Wholesale Grocers Group. “Whereas imposing VAT on retail businesses with a turnover of Rs7.5 million is not a big issue, the requirement for registration of such suppliers making supplies worth Rs75,000 or more (during the course of an economic activity) would definitely create problems for many.”
An ex-president of Karachi Chamber of Commerce Mr Anjum Nisar pointed out that as a matter of routine our bureaucracy is used to taking crucial decisions first and seeking stakeholders’ inputs later. This has delayed—and even failed many a good moves in the past. And I fear it can delay the imposition of VAT as well. Not only the businessmen required enough insight into operational issues of VAT, officials of FBR who would be involved in its collection also needed a certain level of training,” he added.
One of the issues, which businessmen fear they will have to face, is refund of taxes under VAT regime due to absence of effective electronic payment system. But FBR Member Policy Mr Asrar Raouf says that unlike General Sales Tax or GST regime, there will be a fully-automated refund system working under VAT.
He explained at a meeting with Karachi-based businessmen that refund system under VAT would operate on sale and purchase invoices and by the time next return is filed, a refund adjustment would already have taken place in the claimant’s bank account. Unlike in GST regime, no cheques would be issued against refunds. However complaints keep mounting against FBR over delays in refunds claimed under GST. Recently, Federal Tax Ombudsman Mr Shoaib Suddle revealed that 20 per cent of all disputes that his office received related to GST refunds.
Another VAT issue relates to determining the extent of value-addition in a product. Although FBR officials say all major agricultural crops would stay out of the VAT regime till processing stage, businessmen wonder how the tax authorities would determine the extent of value-addition in a crop that would make it liable for VAT. “We have been told that in case of pulses no value-add tax would be charged if the value-addition is less than five per cent,” said Mr Anis Majid. “We however, don’t know how exactly they would determine it.”
The draft of the proposed legislation for VAT finalised by FBR and posted on its website lists only a few food items as exempted from VAT. These include unprocessed peas; wheat and wheat flour; ice and waters except those for sale under brand names/trade marks; table salt including iodised salt but excluding salt sold in retail packing bearing brand names and trade marks.
This implies that all other edible items including fresh food items would be subject to value-added tax. Retailers fear that this might push up already high food inflation .“Besides, subjecting hundreds of food items to VAT would also increase the required paperwork,” feared an office-bearer of Karachi Retail Grocers Group who declined to be identified.
Generating more tax revenue from retail business is principally a good idea. It would help in bringing a large number of businesses and individuals in tax net and documenting the economy and would yield roughly Rs400 billion additional revenue per year. “But literacy rate in our country is too low. Expecting the retailers to know the nitty gritty of the new tax within a few months does not make sense.”
FBR had finalised the draft of the Federal Value-added Tax Bill 2010 on the last day of January and came up with its corrected version on February 27. “They should have done this at the start of this fiscal year giving all the stake holders a full year time to develop an understanding about VAT and debate its pros and cons at various forums,” said a trader based in Jodia Bazar.
Some businessmen say instead of introducing VAT at the export, import, retail and supplies stage in one go, the government should impose it on one particular area and gradually expand its scope to other areas. That is what many other countries have done. They say that replacing various tax slabs under GST regime for different class of businesses with unified VAT in one go may create confusion as these businesses and individuals have got used to GST over a period of time. They fear that a sudden replacement of GST regime by VAT would increase the frequency and volumes of tax litigation.
As VAT legislation is also to be vetted by provincial legislatures, it seems that no meaningful discussions can take place on this subject if the federal government is determined to impose it from July 1. Sindh Chief Minister Syed Qaim Ali Shah has said that provincial assemblies’ input should be given due weightage in the proposed VAT law. One has to see how quickly the provincial assemblies’ inputs and recommendations of the trade and industry can be incorporated into the proposed law for introducing VAT.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/snags-in-enforcing-valueadded-tax-530
Taxing farm produce By Ashfak Bokhari
A SEMINAR on pre-budget public consultation by the National Assembly committee on finance and revenue held on February 19 in Islamabad singled out income from agriculture as one of the areas that needed to be urgently brought into tax net to beef up the falling revenue.
Two ANP senators were quite vocal in making the demand. This is a recurring theme on such occasions every year and the strident calls often end up with a promise from the government to introduce it from next year.
A similar pledge was made last year in April by the then adviser on finance Shaukat Tarin who said he was determined to tax all ‘no go areas’ such as agriculture, real estate and capital markets. The traditional feudal structure, he said, has been a major hurdle in the economic development and the country has to get rid of these ‘sacred cows’ to make progress. However, no such tax was proposed nor imposed.
Even before resigning from his finance minister’s job a few weeks ago, Shaukat Tarin, an ardent advocate of taxing rich agriculturalists, had again committed himself on February 13 to introducing tax on agricultural income from next financial year. The aggravating financial difficulties seem to have compelled him to do so.
The fact remains that the successive governments have failed to effectively tax income from this sector and the yearly collection under the land-based levy has remained below one billion rupees for more than a decade. Compared to this, there are 1.8 million salaried taxpayers who pay Rs27.4 billion in income tax.
Before signing the $7.6 billion loan programme, the International Monetary Fund has reportedly pressed the government to introduce agriculture tax ‘if it is serious about increasing the revenue’. The tax on farm products, the IMF said, was now unavoidable. And Shaukat Tarin had fully agreed with the Fund and promised to introduce this tax. In the past too, Pakistan had made such promises to obtain loans from the IMF but later wriggled out of them.
However, the IMF did not press for tax on agricultural income after sensing resistance to such a tax in the parliament dominated by the feudal elite. On November 28, after approving the loan, the IMF said it did not ‘envisage’ Pakistan putting a new tax on agriculture.
Agricultural income is defined by the law to include direct and indirect income from land. Rental income for the use of cultivated land, rent for a building on or in the vicinity of the cultivated land if the building is occupied by the cultivator or by the receiver of rental income from cultivated land are some examples of indirect income. Agricultural income, according to the FBR, is taxed by the provincial governments. If an individual enjoys agricultural income exceeding Rs80,000 then his income greater than ‘zero’ from all sources taken together (excluding agricultural income) will be chargeable to tax under the Income Tax Ordinance 2001. This method is similar to the one applied in India.
The tax on agricultural income has been a recurring issue in political and economic discussion. The issue often comes back to the agenda of the government when the demand for its imposition gathers momentum. However, what is required is a transition from the current system by first expanding the base of agricultural taxation and then putting in place a system of rural income taxation which would tax agricultural income in the same way as other income.
The oldest tax on agriculture has been the land tax or land revenue as it is known. Despite frequent changes in the structure of the tax, its collection system had remained fairly stable. The system contains elements of both pre-colonial and colonial land systems and some additions since the partition. In 1947, the land revenue systems in the provinces of Punjab, NWFP and Sindh were different in terms of methods of assessment. However, the West Pakistan Land Revenue Act of 1967 introduced a uniform basis for land revenue in the four provinces.
The main problem with the taxation of agriculture is that the revenue from it is very low. Incomes from agricultural activities have mostly been outside the income tax net. Other direct taxes collected from agricultural income are also negligible. In 1996, the actual collection of the main taxes on agriculture (charges on land and Ushr) was less than Rs2 billion amounting to less than 0.5 per cent of agricultural GDP. In 1981-87, the figures with comparable countries were 2.2 per cent for Malaysia, 4.6 for Argentina, and 6.3 for Chile. Most developing countries rely on land taxes and/or presumptive income taxes. But most agricultural incomes tend to fall below the exemption limits.
The 1999 World Bank report on agricultural taxation in Pakistan had recommended a three-phase approach to reform the system. In the first phase, the existing provincial agricultural income taxes would continue with a much lower exemption (five acres) while the land revenue will be discontinued. In the second phase, the income tax would switch to an Annual Rental Value or similar basis. However, the provinces would be allowed to develop alternate measures of the income to land if this was thought necessary. In the final phase, the income tax system would switch to a general income tax on presumptive basis.
In 1977, a bold step was taken by the then government. The Finance Act of 1977 repealed that part of the Income Tax Act of 1922 which exempted agricultural income from taxation. This change was part of the agricultural reform package – including the Land Reform Act of 1977 – offered by the PPP government just before the national and provincial elections in March 1977. Under the new system presumed income from agriculture would be determined on the basis of the number of PIUs per hectare.
After the coup d’etat in July 1977, the military government of General Ziaul Haq suspended the Finance Act of 1977 and restored the tax exemption on agricultural income in the Income Tax Ordinance of 1979. The question of changes in the direct taxes on agriculture, including land revenue, ushr and income tax, was examined by at least three expert committees in the 1980s. The majority view was against introducing a tax on agricultural income.
At the end of 1990, the Islami Jamhuri Ittehad (IJI) government appointed a taxation committee, which was in favour of a tax on agricultural income, but in its view the federal government lacked the constitutional authority to introduce such a tax. In December 1996, at the initiative of the caretaker government, each provincial government introduced an “Agricultural Income Tax Ordinance”, which were later modified. These measures could at best be seen as a step towards establishing “presumed” income from land as the basis of taxation.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/taxing-farm-produce-230
Two ANP senators were quite vocal in making the demand. This is a recurring theme on such occasions every year and the strident calls often end up with a promise from the government to introduce it from next year.
A similar pledge was made last year in April by the then adviser on finance Shaukat Tarin who said he was determined to tax all ‘no go areas’ such as agriculture, real estate and capital markets. The traditional feudal structure, he said, has been a major hurdle in the economic development and the country has to get rid of these ‘sacred cows’ to make progress. However, no such tax was proposed nor imposed.
Even before resigning from his finance minister’s job a few weeks ago, Shaukat Tarin, an ardent advocate of taxing rich agriculturalists, had again committed himself on February 13 to introducing tax on agricultural income from next financial year. The aggravating financial difficulties seem to have compelled him to do so.
The fact remains that the successive governments have failed to effectively tax income from this sector and the yearly collection under the land-based levy has remained below one billion rupees for more than a decade. Compared to this, there are 1.8 million salaried taxpayers who pay Rs27.4 billion in income tax.
Before signing the $7.6 billion loan programme, the International Monetary Fund has reportedly pressed the government to introduce agriculture tax ‘if it is serious about increasing the revenue’. The tax on farm products, the IMF said, was now unavoidable. And Shaukat Tarin had fully agreed with the Fund and promised to introduce this tax. In the past too, Pakistan had made such promises to obtain loans from the IMF but later wriggled out of them.
However, the IMF did not press for tax on agricultural income after sensing resistance to such a tax in the parliament dominated by the feudal elite. On November 28, after approving the loan, the IMF said it did not ‘envisage’ Pakistan putting a new tax on agriculture.
Agricultural income is defined by the law to include direct and indirect income from land. Rental income for the use of cultivated land, rent for a building on or in the vicinity of the cultivated land if the building is occupied by the cultivator or by the receiver of rental income from cultivated land are some examples of indirect income. Agricultural income, according to the FBR, is taxed by the provincial governments. If an individual enjoys agricultural income exceeding Rs80,000 then his income greater than ‘zero’ from all sources taken together (excluding agricultural income) will be chargeable to tax under the Income Tax Ordinance 2001. This method is similar to the one applied in India.
The tax on agricultural income has been a recurring issue in political and economic discussion. The issue often comes back to the agenda of the government when the demand for its imposition gathers momentum. However, what is required is a transition from the current system by first expanding the base of agricultural taxation and then putting in place a system of rural income taxation which would tax agricultural income in the same way as other income.
The oldest tax on agriculture has been the land tax or land revenue as it is known. Despite frequent changes in the structure of the tax, its collection system had remained fairly stable. The system contains elements of both pre-colonial and colonial land systems and some additions since the partition. In 1947, the land revenue systems in the provinces of Punjab, NWFP and Sindh were different in terms of methods of assessment. However, the West Pakistan Land Revenue Act of 1967 introduced a uniform basis for land revenue in the four provinces.
The main problem with the taxation of agriculture is that the revenue from it is very low. Incomes from agricultural activities have mostly been outside the income tax net. Other direct taxes collected from agricultural income are also negligible. In 1996, the actual collection of the main taxes on agriculture (charges on land and Ushr) was less than Rs2 billion amounting to less than 0.5 per cent of agricultural GDP. In 1981-87, the figures with comparable countries were 2.2 per cent for Malaysia, 4.6 for Argentina, and 6.3 for Chile. Most developing countries rely on land taxes and/or presumptive income taxes. But most agricultural incomes tend to fall below the exemption limits.
The 1999 World Bank report on agricultural taxation in Pakistan had recommended a three-phase approach to reform the system. In the first phase, the existing provincial agricultural income taxes would continue with a much lower exemption (five acres) while the land revenue will be discontinued. In the second phase, the income tax would switch to an Annual Rental Value or similar basis. However, the provinces would be allowed to develop alternate measures of the income to land if this was thought necessary. In the final phase, the income tax system would switch to a general income tax on presumptive basis.
In 1977, a bold step was taken by the then government. The Finance Act of 1977 repealed that part of the Income Tax Act of 1922 which exempted agricultural income from taxation. This change was part of the agricultural reform package – including the Land Reform Act of 1977 – offered by the PPP government just before the national and provincial elections in March 1977. Under the new system presumed income from agriculture would be determined on the basis of the number of PIUs per hectare.
After the coup d’etat in July 1977, the military government of General Ziaul Haq suspended the Finance Act of 1977 and restored the tax exemption on agricultural income in the Income Tax Ordinance of 1979. The question of changes in the direct taxes on agriculture, including land revenue, ushr and income tax, was examined by at least three expert committees in the 1980s. The majority view was against introducing a tax on agricultural income.
At the end of 1990, the Islami Jamhuri Ittehad (IJI) government appointed a taxation committee, which was in favour of a tax on agricultural income, but in its view the federal government lacked the constitutional authority to introduce such a tax. In December 1996, at the initiative of the caretaker government, each provincial government introduced an “Agricultural Income Tax Ordinance”, which were later modified. These measures could at best be seen as a step towards establishing “presumed” income from land as the basis of taxation.
Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/taxing-farm-produce-230
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