Tax breaks and the economy

The Finance Ministry in a written response to the National Assembly this week past stated that Chinese investors under the China Pakistan Economic Corridor (CPEC) are exempted from taxes and concessions, amounting to 156 billion rupees in lost revenue, but that this would not have any negative impact on domestic investors and industries.
The Finance Ministry has notified tax exemptions and concessions to Chinese companies through statutory regulatory orders (SROs) so stated the written response, which is the prerogative of the Federal Board of Revenue (FBR) that is under the administrative control of the Ministry of Finance and does not require parliamentary approval. In this context, it is relevant to note that in the Letter of Intent dated 5 December 2013, under the 6.64 billion loan approved by the International Monetary Fund (IMF) in September 2013, the government committed to the following: We remain committed to our plan to broaden the tax net through the elimination of most tax exemptions and loopholes granted through Statutory Regulatory Orders (SROs). Since the start of the programme, we have issued a few SROs to address some implementation issues of already budgeted measures and address some legal concerns. The budgetary implications of these SROs are negligible and we are covering the cost through administrative measures. We have issued no new SROs granting so-called special exemptions, compared to some 43 in the previous fiscal year. We reaffirm our commitment to refrain from issuing any new tax concessions or exemptions (including customs tariffs) through SROs, and will approve a legislation by end-December 2015 to permanently prohibit the practice. We are on track to finalize by end-December 2013 a comprehensive plan analyzing all existing SROs granting tax exemptions or concessions and containing a calendar to eliminate the vast majority of them and convert the remainder into regular legislation. The ultimate objective of this plan would be to achieve an increase in revenues of some 1-11/2 percent of GDP, with all designated SROs eliminated in no more than three years. By end-June 2014, we will issue the necessary orders to eliminate the first batch of SROs which will be identified in our plan consistent with our overall fiscal goals (new structural benchmark).
Pakistan Business Council (PBC) and the Overseas Investors Chambers of Commerce and Industry (OICCI) noted in their pre-budget proposals for 2014-15 supported the IMF condition and noted that FBR's power to issue SROs and its indiscriminate use of this power for individual gain or due to political pressure distorts and severely impacts on FBR's revenue collections. The suggestion of PBC was to allow SROs above a certain threshold to be approved and vetted by the Economic Coordination Committee (ECC), headed by Finance Minister Ishaq Dar, as well as from parliament.
FBR officials maintain that most of the SROs it issues are either approved and/or initiated by the Finance Minister himself. There is a general perception confirmed by senior Ministry officials on condition of anonymity that Ishaq Dar is extremely controlling, and hence decisions relating to SROs are either approved if not initiated by him. And parliament with an overwhelming PML-N majority would simply rubber stamp the ECC's decisions in this regard.
OICCI suggested that specific SROs, specific to promoting business and/or Foreign Direct Investment be retained by the FBR. This suggestion appears to be untenable for the simple reason that FBR's over-riding objective is to meet the over ambitious revenue targets stipulated in the budget and is not concerned with attracting investors, local or foreign.
However, by the twelfth and final review by the IMF staff dated 13th September 2016 under the EFF there was unfortunately no mention of the condition pertaining to the SROs even though implementation of the CPEC had begun and no doubt tax concessions had been notified through the issuance of SROs mentioned by the Ministry of Finance in its response to the National Assembly. Perhaps the Fund staff, in an attempt to insulate themselves from criticism in terms of the EFF design as well as its 'shoddy' monitoring noted that fiscal policy should remain prudent and debt management should be strengthened to keep the long-term public debt path sustainable. It is little wonder that there is intense criticism of the Fund staff's handling of the EFF where key programme conditions remained unmet and yet the tranche was released; and the Sharif administration's failure to meet its commitments under the EFF.
The much delayed 180 billion rupee export package for one and a half years was announced by Prime Minister Nawaz Sharif amidst much fanfare on 9 January 2017, a mere three months after the end of the IMF programme, and the notification issued through SRO 39(I)/2017 to exempt customs duty on import of different categories of cotton and staple fiber for the period from January 16, 2017 to June 30, 2018. The Revenue Division has also accorded benefit of concessionary SRO No.1125 (1)/2011 to machinery, not manufactured locally, if imported by textile industrial units registered with Ministry of Textile Industry.
Exports have been declining since 2014 from 25 billion dollars in 2014 to 21.9 billion dollars in 2016 and the decline continues a little over three months after the effectivity of the export package clearly indicating that the subsidy and exemptions/concessions granted through SROs were not appropriate policies. The government would have been better advised to allow an overvalued rupee to reach its market value, regarded as critical given that there has been a significant depreciation of currencies of competing countries to make their exports more competitive in the international market.
To conclude, the SROs continue and reflect a set of measures that may be defined as a double whammy: they favour those with influence in the corridors of power while lacking sound macroeconomic rationale. This is reflected by the export package where the SROs have reduced tax collections and have not raised or arrested the decline in exports.