5pc additional tax on manufacturing businesses: PBC voices its concern

KARACHI: Pakistan Business Council (PBC) note with concern from Friday’s press reports that the government is considering an additional tax of 5 percent on manufacturing businesses with a minimum turnover of Rs 50 million, which fail to export at least 10 percent of their turnover.

PBC chief executive Ehsan A Malik in a letter to the Federal Finance Minister Miftah Ismail said this move is purported to offset the loss of revenue from traders and appears to be positioned with the positive optics of encouraging exports to help manage the balance of trade.

You are aware that the manufacturing sector which represents 20 percent of GDP already contributes 56 percent of national tax revenues. Also, that over the last couple of decades the country has been deindustrializing. This has not only resulted in loss of jobs and share of world exports, in a consumption-oriented economy, our inability to make basic goods also resulted in increased reliance on imports, with negative consequences on the balance of trade and the current account.

Pakistan Business Council’s ‘Make-in-Pakistan’ thrust aims to address three objectives: create jobs, promote value-added exports and encourage sensible import substitution.

This cannot succeed in an unlevelled playing field in which traders and the informal sector enjoys an unfair competitive advantage.

Whilst the logic of providing incentives to exports is conceptually sound, it must be recognized that it is impossible for a business that has never exported to start exporting as much as 10% of its turnover, especially when these industries are denied energy at regionally competitive cost and when their current range of products are not designed for the export market. It should also be noted that the Fixed Tax Regime already provides exporters a tax incentive.

PBC recommends that any further stimulus for exports be phased over a 3–5 years period allowing those currently serving the domestic market to reconfigure their offerings in exchange for lower tax on profit from domestic sales.

Also, they should be provided energy at a cost comparable to the five core export sectors, at least for the proportion of items they will produce for exports. Likewise, they should be provided rebates and concessional credit to transform their units for the global market.

The current export rebates are not configured to expand the export basket as they are targeted at promoting traditional exports.

Most businesses serving the domestic market are unlikely to be engaged in manufacture traditional items for exports. PBC has for long supported export-oriented FDI.

Measures that we suggest above and a phased programme would encourage subsidiaries of MNCs operating in Pakistan to compete for a share of their global value chain.

PBC would also draw your attention to the experience several decades ago in India, when continued foreign ownership was linked to export performance of Indian subsidiaries. This resulted in foreign-owned FMCG companies operating in the food, beverages, home and personal care categories resorting to exports outside their core business. Items like carpets and thermometers were routed through their books in a bid to qualify.

There was hardly any net increase in aggregate exports as FMCG companies had no expertise or marketing networks abroad and acted merely as a front for existing exporters to qualify for continued foreign ownership.

Last, but not the least, resorting to tax the manufacturing sector at 34% to make up for shortfalls from retail and other sectors is unfair and unreasonable and will only encourage further informalization of the economy. If introduced abruptly, as is suggested by the media, exports will merely be an excuse to tax the already taxed.

PBC urge you to reconsider this proposal, especially as it comes after imposition of Super Tax and higher taxes on salaries. For those in the private sector, this represents a “perfect storm” and amounts to killing the goose that lays the golden egg.

Copyright Business Recorder, 2022