Cement industry's contribution to GDP under-reported

31 Mar, 2008

The overall contribution of manufacturing sector particularly cement industry to Gross Domestic Product (GDP) is under-reported due to non-availability of basic/vital statistics of cement units, regarding, production and capacity utilisation.
First study of its kind on cement sector conducted by FBR Fiscal Research and Statistics Wing headed by Dr Ather Maqsood Ahmed, revealed that cement industry haw been enjoying all kinds of tax incentives during the last few years, but no increase in revenue collection was noticed with the manifold hike in production.
The average annual growth in production from 1990-91 to 2001-02 was 2.3 percent, it increased to 16 percent between 2002-03 and 2006-07. The contribution of 10 units was 80 percent of total quantity produced in 2006-07. This share has increased from 64 percent in 2004-05 to 80 percent in 2006-07. The industry's capacity has increased by 37.2 percent whereas the production has increased by 12.3 percent during last three years.
According to FBR analysis, cement manufacturers have increased prices by forming cartel. Average price of cement per bag has varied between Rs 213 and Rs 250 since January 2007. In places like Multan and Hyderabad, the average price was much lower than the national average during most of 2007 while it was generally higher at Quetta and Rawalpindi/Islamabad. The wholesale price index of cement has recorded a declining trend in recent months compared with a steady surge during last five years.
Similarly, the retail price has also declined from over Rs 270 to Rs 250 per bag clearly indicating that price-hike had more to do with the existence of a cartel-like situation rather than the interplay of market forces. The FBR study also confirmed that cement industry has deposited meager amount of duties/taxes despite significant expansion of plant's capacity.
On the basis of available information, the FBR has found that the most disturbing aspect is the tax compliance of distributors, wholesale and retail traders of cement. Despite a regular increase in the number of registered persons within these three categories, the tax compliance has not improved.
Concentrating on tax paid by the industry over the years, it is evident that tax contribution in total tax collection has hovered around 2.5 percent only during the last three years. While indirect taxes were about Rs 20 billion in 2006-07 against Rs 12.6 billion in 2000-01, direct tax contribution has been quite low. It also appears quite inconsistent with expansion in the industry.
On the whole, notwithstanding the expansion in production capacity and boost in economic activity, the contribution of cement industry in total sales tax collection has declined over the time. The declining trend has continued in 2007-08 as well.
The unit-wise analysis reveals that out of 28 manufacturing units, the contribution of top 10 units has varied between 58 percent and 77 percent during last three years. Among the major contributors are the DG Khan Cement with 13.5 percent share in collection, followed by Lucky (12 percent) and Attock (10.4 percent).
The report highlighted that the high input claims by the manufacturers have raised valid concerns in the light of the fact that all plants, machinery and equipment are mostly zero-rated. There is, therefore, a suspicion that the facility of input adjustment is being misused, thereby causing revenue losses to the national exchequer. However, to verify this claim there is a need to undertake comprehensive audit of the industry.
The study pointed out that a comprehensive market analysis of cement industry has not been possible due to non-availability of relevant statistics and gross inconsistencies in information available from different sources like Board of Investment (BoI) sector paper, Cement Wing of Ministry of Industry, and Pakistan Economic Survey.
The anomalies are of peculiar nature. The robustness of data on domestic demand is also not quite sound. Absence of transparency has also been observed as far as the role of All Pakistan Cement Manufacturers Association (APCMA) is concerned.
The analysis uncovered multifaceted issues concerned with the cement industry. There are various question marks, but the situation warrants their solutions. Undoubtedly, the industry witnessed significant expansion in terms of its capacity but its contribution to the national exchequer in the form of tax revenues remained unsatisfactory. In fact, the situation has worsened steadily since 2006-07.
This assertion holds true when viewed within the context of wide array of incentives awarded by the government to the industry from time to time. The reduction in duty and tax rates has been the most visible concession. The simple rationale behind this move was that the revenue loss due to reduced rates would be compensated by expansion in production. However, this anticipated benefit has not taken place.
Instead, the input claims by the industry have risen exponentially over the years thereby jeopardising the collection of tax revenues as per the requirements of the government for its infrastructure development needs. Prima facie, this has not worked well partly due to deficient and inadequate system of audit and penalties to deter tax evasion.
Unfortunately, despite the huge significance attached to this sector some very basic and vital statistics are not available with the government. There is serious discrepancy between available information within various government departments. If it is not for inaccuracy of data, then the natural question is why additional investment, in the expansion of existing plants and new plants is taking place when the existing capacity is not being fully exploited.
One possible reason could be a deliberate attempt of under-reporting of production by the industry. But if this claim turns out to be correct, then it literally means under-reporting of value addition by the industry.
In turn, under-reported value added by one of the leading manufacturing sectors implies that the overall contribution of the manufacturing sector in GDP is under-reported and finally the GDP figures do not remain robust.
This is a serious conclusion with far-reaching implications. Thus, the onus falls on the Federal Bureau of Statistics and the Ministry of Industries to work together for exact statistics of the industrial sector, particularly the cement industry.
Unfortunately, without basic statistics, it is impossible to have proper planning of the economy. As a consequence, the resource mobilisation by FBR would also remain sub-optimal as appears to be the case today, the report added.

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