Budget proposals: KCCI demands out-of-box solutions to save nose-diving economy

KARACHI: High rate of inflation has pushed the prices of consumer goods and commodities to a level where these are beyond the reach of poor and lower middle class. As a consequence of these factors, demand for various goods has been suppressed and GDP growth has slowed, said the Karachi Chamber of Commerce and Industry (KCCI) in its budget proposals for the year 2024-25.

It said as a result of sharp decline in forex reserves, steep devaluation of Pak rupee against major currencies and restriction on opening of LCs, the trade and industry across the entire spectrum of economy are finding it extremely difficult to survive. Industries are running out of raw materials while many SMEs have already shut down their operations because they are dependent on commercial importers for supply of raw materials.

In view of the unprecedented economic challenges that Pakistan is currently facing, the KCCI has prepared its proposals for federal budget FY 202425 based on the recommendations and suggestions from its members and trade associations to deal with the major issues and rescue the country from present economic crisis.

KCCI believes that out-of-box solutions are needed to avoid further downslide of economy. It is important for the decision makers in the government to have a better perception of ground realities of Pakistan's economic landscape and business dynamics.

KCCI believes that the ministries of Finance, Commerce and FBR will have to look beyond the traditional approach to deal with present situation and come up with novel solutions to put the economy back on track.

The KCCI noted that industrial packaging units in Pakistan enjoy exemptions on bulk imports of black tea intended for retail packaging and sales. However, a significant portion of the tea imported in bulk is sold in the open market without any value addition, leading to misuse of the exemption.

The quantity considered as bulk, typically 10kg to 20kg, is sold to wholesalers and tea stalls/ restaurants in the same bulk packaging in wooden boxes or bags, making the exemption unnecessary.

This misuse of exemption adversely affects commercial importers of tea, gradually squeezing them out of the trade and resulting in substantial revenue losses for Pakistan. Ending these exemptions will create a level playing field for legal importers and contribute to increased revenue.

In its budget proposals, the KCCI requested to withdraw exemptions on bulk imports of tea, as the tea itself is a finished commodity ready for use. Exemption is claimed solely for the act of packing, which does not constitute value addition.

Despite a domestic consumption of 340,000 metric tons of black tea in Pakistan, legal imports only amount to 120,000 metric tons due to excessively high tariffs and taxes, leading to reliance on smuggling and exemptions, particularly in Ex PATA/ FATA, and Azad Kashmir, which supply 70% of legal imports. In 2023 alone, 40 million kgs of tea were imported under these exempted areas, marking a staggering 650% increase from 2022, driven by population quotas.

The distorted tax regime has driven legitimate importers out of the market, resulting in significant revenue losses for the government. Given black tea’s essential status and widespread use, the tariff structure should be rationalized to discourage misuse of concessions and smuggling. Withdrawal of these exemptions will curb their misuse and substantially boost revenue by Rs. 70 to Rs. 80 billion.

KCCI proposed that exemptions to Ex PATA/ FATA, and Azad Kashmir be withdrawn and not extended beyond FY2024 as these exemptions are sources of revenue leakages.

It requested to rectify the anomaly regarding the classification of back tea. It should be categorised as a raw material rather than a finished product, considering that the imported tea undergoes further processing.

The Pakistan Custom Tariff (PCT) currently utilises eight-digit codes, whereas many countries globally, such as Malaysia, China, the US, and Turkiye, have expanded their Harmonised System (HS) codes to 10, 13, 10, and 12 digits respectively. It is imperative that Pakistan follows suit and extends its PCT headings to 12 digits.

This extension is necessary to rectify inconsistencies in the tariff system, facilitating a more precise assessment of tariffs. By accommodating non-manufactured raw materials, intermediatory products, and finished goods not locally produced, this move aims to promote fairer trade practices and enhance industrial competitiveness

KCCI proposed to extend Pakistan Custom Tariff (PCT) headings to 12 digits to align with global standards and accommodate non-manufactured raw materials, intermediatory products, and finished goods not locally manufactured, aiming to reduce tariff anomalies and rates.

The current GST exemption limit set at Rs. 10 million creates significant hurdles for various industries within Pakistan. These industries face a dual challenge: maintaining competitiveness in the global market and managing high production costs.

Production expenses in Pakistan are over 35% higher compared to those key competing nations such as China, Bangladesh, and India. This disparity undermines the competitiveness of Pakistani industries on an international scale.

Moreover, the prevailing tax structure adds to the financial strain by limiting export capabilities and deterring investments aimed at enhancing production and export activities.

It proposed to mitigate these challenges and foster growth across industrial sectors; it is proposed to elevate the GST exemption limit from Rs. 10 million to Rs. 30 million. A higher exemption threshold would incentivize smaller enterprises to formalize their operations, thereby integrating more businesses into the formal economy and enhancing regulatory compliance.

The misuse of tax exemptions in Ex Federally Administered Tribal Areas (FATA)/Provincially Administered Tribal Areas (PATA) regions have led to significant revenue losses and adverse effects on businesses, particularly in the black tea and large steel import sectors.

The exemptions, originally intended to spur regional development, are being exploited, resulting in imported goods being sold in open markets across Pakistan instead of being utilized locally.

This diversion not only undermines the purpose of the exemptions but also creates unfair competition and disadvantages legitimate importers, ultimately affecting revenue collection for the Federal Board of Revenue (FBR). Reports indicate that the Federal Board of Revenue (FBR) has cited figures ranging around PKR 100 billion in lost tax revenue due to these exemptions annually.

To address the misuse of tax exemptions and restore fairness in the import sector, KCCI recommended discontinuing the tax exemptions granted to Ex FATA/ PATA regions by the end of the current fiscal year, with no further extensions beyond June 2024. This action will help level the playing field for all players, allowing them to compete more effectively in local markets.

Additionally, it is essential to ensure consistent tax regimes for all importers, eliminating discriminatory practices and anomalies that disadvantage legitimate businesses.

By implementing these measures, the government can mitigate revenue losses, promote fair competition, and uphold the integrity of the taxation system.

Copyright Business Recorder, 2024