Shahzad Saleem founded Nishat Chunian Limited (NCL) in 1990 after graduating from the Lahore University of Management Sciences (LUMS). From a single spinning unit, NCL is now amongst the top five textile companies in Pakistan in terms of sales. The company has since diversified into weaving, home textiles and retail.
Shahzad Saleem has also served as Director on the board of MCB Bank Limited for twenty-three years and Adamjee Insurance Company Limited for five years. He founded and chaired LUMS Alumni Association for multiple tenures and initiated the ‘Pride of LUMS Award’. He stayed as a member of the Board of Trustees of LUMS for eight years.
Shahzad Saleem is also a philanthropist chairing Saleem Memorial Trust Hospital; which is the largest, not-for-profit hospital in Lahore and provides services from radiation oncology to cardiac surgery under one roof. The hospital is running on a cross-subsidy mechanism providing subsidized medical services to the underprivileged segments of society.
Following are the edited excerpts of a recent conversation BR Research had with him regarding the latest Budget and the country’s economic environment:
BR Research: How do you view the recent budget, and how do you see things moving forward in FY25?
Shahzad Saleem: The focus of this year’s budget has been the Public Sector Development Program (PSDP), as the government believes that the change and growth, they envision can come from government spending. However, in my humble opinion, this is not the right time for such an approach.
The largest sector within manufacturing is the textile sector, which faces multi-layer taxation. Some taxes go directly to the government, while others proliferate. For example, the export development surcharge, which is 0.25 percent of revenue, amounts to a significant sum. This fund, managed by the commerce ministry, often remains unutilized but we still continue to impose this tax.
Moreover, the way taxes are calculated in Pakistan presents a major issue. The super tax is an anomaly. Unlike the flat tax rates seen across the globe, Pakistan imposes layered taxation. Here, profits exceeding a certain limit result in a super tax, irrespective of the company’s capital, which is punitive for higher returns. Even when a company is making a loss, it can still end up paying super tax as it is computed on the basis of turnover tax. These are the irritants that no government is willing to remove, despite many stay orders against them.
Additionally, the normal tax rate for export-oriented sectors like textiles provides no real incentive for exports. Instead of encouraging the sector, the government penalizes it with a minimum tax disguised as a normal tax. The latest budget exacerbates this issue by introducing an advance tax. Essentially, there is a one percent minimum tax on revenue and a one percent advance tax. Considering the various levies, such as a seven percent pre-tax profit levy for labor, a 0.25 percent EDS tax, and a turnover tax, the effective tax rate can reach up to 200 percent when a company has a profit margin of only one percent. For companies with a five percent margin, the effective tax rate is around 58 percent, which includes EDS, super tax, income tax, worker welfare fund, and worker welfare participation fund. Do you think businesses can flourish under such restrictive measures anywhere in the world?
Moreover, the state continues to increase the minimum wage without considering the realities of competition with Bangladesh, Sri Lanka, or India. In Pakistan, the minimum wage is determined and revised periodically by the government through official gazettes. These gazettes are legal documents that announce the updated minimum wage rates for workers across various sectors and regions. The minimum wage varies by province and sector, with separate announcements made by the federal and provincial governments. Instead, there should be a single national minimum wage—easier to enforce and comply with—and let the market forces determine the rest based on skills, competencies, and experience. No one is willing to discuss this despite its significance in export competitiveness.
I believe there is so much opportunity for us, as many businesses, especially in the textile sector, are relocating from China amid the US-China trade war. Where are they relocating? Certainly not Pakistan, when they have options like Bangladesh, Vietnam, and India. These countries have special zones to welcome businesses from China. Forget long-term, we cannot be sure of our energy pricing, taxation structure, or regulatory environment for next month. Why can’t we sit with NEPRA and OGRA and decide a yearly tariff, and there will be less headline news also?
BRR: Why do you say PSDP is not the right approach?
SS: The simple argument is that you can defer the construction of a road or a bridge for some time. Bangladesh, for example, had broken roads, yet its economy continued to grow. The key point is that we need to increase the size of the economy first, which will then facilitate the undertaking of public sector development projects. Increasing pensions and salaries and PSDP is not ideal when the country is lagging in economic growth and development. We need to set priorities and adopt a modern mindset. By focusing on economic growth first, we can create a stronger foundation for future infrastructure projects.
BRR: How do you see the textile sector responding to the new taxes and levies?
SS: I would say that the textile sector has been hit by two atomic bombs. The first is the various taxations that I mentioned earlier. The second is the interest rate bomb. The government should ideally focus all subsidized loans on new investments, not on maintaining existing operations. However, with a 20 percent interest rate, Pakistan stands no chance against its competitors. Moreover, the currency rate is pegged to the USD while the USD has a 5% base rate vs. ours of 20%, how the industry can compete. At the current manufacturing cost, production is shutting down in Pakistan. Forget about exports—we are heading towards increased unemployment.
BRR: What is your take on the energy cost?
SS: The problem of energy cost is multifaceted with various factors contributing to it. Our energy mix is lopsided. I have been emphasizing for a long time that there needs to be proper planning for incorporating renewable energy into the system. A prime example of this lack of planning is solar power net metering. There was no strategic thought process behind it, which is evident from the recent issues we’ve faced.
Furthermore, the government needs to understand that to generate demand; it needs to bring down the electricity rates. Lowering the cost of electricity could dramatically increase its consumption and demand. For instance, if the government reduces the cost of electricity during winter, it could significantly boost usage. The government should calculate the cost of electricity at a higher utilization rate, such as 24,000 MW, and then work backwards to reduce the price. This approach would help in optimizing the energy mix and making electricity more affordable for consumers.
BRR: So how optimistic / or pessimistic are you about the Pakistan’s growth and development?
SS: The crux of the problem is that people in Pakistan often work opportunistically rather than strategically. We need to sit down and plan for the long term; we cannot survive on ad-hoc measures. Our approach to development is flawed. Take Sri Lanka, for example. Their collapse was worse than ours, but they are now gradually recovering because they have a plan. Public sector spending alone cannot lead to economic development. The private sector needs to prosper for the country to grow. However, with a 200 percent effective tax rate on the private sector, you can well imagine the stifling impact on growth.
We need a team with a unified mindset to address the challenges faced by the country. If the GoP believes in a free market, private sector growth, and low taxation, then they need a team that aligns with these ideas. Unfortunately, this is not the case in Pakistan, where priorities and values vary across departments and organizations. At the risk of being repetitive, I would say there is a need for a pragmatic shift in mindset, starting from the top—those who hold power: the judiciary, the establishment, and politicians. The business community is currently irrelevant because it will follow the signals sent by those in power.