This Saturday, BR Research met the President KCCI to get the chamber's immediate reaction on the federal fiscal budget FY19, as well as its views on PML-N's economic performance in the last five years. Below are the edited transcripts of the interview where the conversation mostly revolved around tax reforms, including VAT, FBR reforms, the recently announced amnesty scheme, and the overall ease of doing business.

 BR Research (BRR): How would you compare last five budgets with the one this year? 

 Muffasar Atta Malik (MAK): In our view, the last five budgets presented by the PML-N had been very hard on the business community.

Right at the outset, the former Finance Minister Ishaq Dar had announced that they have a long list of hundreds of thousands of individuals who have very rich lifestyles but are not even a part of the tax net. But five years down the lane, that list has neither been shared nor targeted by the government's revenue department. They have nearly doubled revenue generation in the last five years mainly by taxing the existing tax base instead of broadening the tax base.

BRR: And your initial thoughts on the budget FY19?

MAK: We were hoping the government would present the budget for a period of six months at the most and would allow the next government to present the budget according to its policies.

But given the election this year, the government had no option but to present a full year populist budget. They had to pass on benefits and reliefs in various forms across a range of stakeholders from salaried class to government employees and also the business community. However, in doing so they have made matters very difficult for the next government, because they can see they might not be able get in power this time around.

The question is for how long will these relief measures last. Whether they will be rolled back by the next government. That being said, it's good to see that some procedural and administrative reliefs have been provided.

 BRR: Can you shed more light on these procedural and administrative relief?

 MAK: One of the key complaints of the business community was about the discretionary powers of FBR's field level officers, and that it should be taken away. Those discretionary powers have been withdrawn in this budget. Another demand by the business community was that audit powers of the FBR should be reviewed, and that has also been done in this budget. Now it has been decided that corporate audit will be done once in three years and that too on composite basis.

Overall now they are trying to trust the business community. The golden years of FBR were in the Musharraf era when all their revenue targets were met. The business community was also very happy; the tax department also did not harass back then.

The overall direction of the budget has changed for the better. For instance, they have raised the minimum tax limit but to ensure that people remain in the tax net, the government has also demanded the filing of returns for minimum tax of nominal amounts (Rs1000 for example) as per various ranges of annual income below the minimum taxable income threshold.  Similarly, we all know that Dar had held the dollar at unrealistic levels. But the new finance managers have changed the policy.

BRR: But that presumptive tax regime is partially responsible for the mess that we see today. It left a documentation gap and led to misdeclaration, which along with other reasons led to a fall in average tax-to-GDP ratio in 2000s from the average ratios in 80s and 90s?

MAK: We are against misdeclaration. But dealing with the complications of Pakistani tax system is very cumbersome, and that's a reality. For instance, the FBR has made corporate tax filers an extended arm of the government by virtue of making us withholding tax collecting agents.

The government should in fact pay us the cost of collection as WHT agent; the government should at least reimburse to the tune of 5-10 percent of the WHT collection, depending on business sector or the size of company. For instance, a company whose revenues are Rs250-500 million may be collecting Rs100,000-Rs150,000 as WHT agent; it will have to pay at least Rs15,000-20,000 to the extra staff hired to deal with the extra work load.

BRR: Do you think the government will really be able to raise the petroleum levy as per the budget proposal? 

 MAK: Increasing the petroleum levy will be difficult for the government both politically and economically, because it will increase the cost of production. However, the likely fiscal gap that may emerge from the government's failure to increase petroleum levy will be offset by higher import taxes as the cost of imports have gone up since the currency depreciation.

BRR: Is the KCCI generally satisfied with the budget?

 MAK: Yes, provided there is no mini-budget after the new government. We are very fearful because the reliefs proposed in this budget are unprecedented in the history of PML-N. And we believe that whichever government comes after the general elections 2018, and even if the same set up comes back, you will see budgetary changes. It's a good change of direction, provided the direction is here to stay.

BRR: How much declarations do you see materialising from the amnesty scheme?

MAK: The PML-N is mistaken to believe that amnesty scheme will yield huge lot of foreign assets of up to $6-8 billion. While we are expected to see some declarations, looking at Pakistan's history we don't expect a lot of declarations streaming in, because the government doesn't even have tools to tap or nab undeclared foreign assets.

Nevertheless, in our view it's a good time to come clean because the rates at which this amnesty scheme is being offered is very lucrative.  We think even if the government manages to recover $2-3 billion under this scheme, we can call it a success. My own sense is that we should be able to recover around $2-3 billion.

BRR: What makes you convinced that even this much would be brought in?

MAK: The global environment has become very difficult. It's not easy to use informal channels any more. Governments in the US, the UK and other European countries don't just ask how you transferred the money in their jurisdictions, but they also inquire how you earned the money and whether you are a taxpayer or not.

Then there are fears that if for instance Dubai government announces overnight that those who have untaxed or undisclosed or 'benami' accounts, their property will be seized, then where will people go; they won't have any court to go to. This is why we think that this is a very good scheme that those with undeclared assets should make use of.

BRR: Are you content with the fact that GST remains at 17 percent?

MAK: No! That is a major source of corruption. There are still pending refunds of roughly up to Rs120 billion. The higher the GST rate, the higher the chances of corruption. The GST needs to be brought down to single digits, so the industry is not caught in the cumbersome procedure of refunds, filing and so forth, and thereby reduce the risks of corruption.

BRR: What is KCCI's official position on VAT mode taxation?

MAK: It's problematic. Our economy is not documented, which means VAT mode taxation will only add more pressure on the existing tax payers.

BRR: Imagine you have two choices: (a) reform FBR and roll out VAT mode taxation to ensure that everyone pays taxes with adjustments, audit; (b) keep FBR as it is, apply 6 percent flat GST, and flat taxation on income from everyone with a no-questions-asked policy. Which one would you prefer?

MAK: In the long run I will go for FBR's overhaul.

BRR: The long run will begin from the immediate run, which means you should support VAT today. 

 MAK: Ideally, the FBR should be reformed. But it is not going to happen, and surely not that easily. If it were to happen, we could have seen some improvements in the last five years.

BRR: Do you have any other concerns over the budget aside from the fear of rolling back of reliefs? 

MAK: Yes. For one, a new door of corruption has been opened courtesy the section 143(b). Previously, the tax that commercial importer used to pay at import stage used to be full and final, now it has been made into a minimum tax. This will open new opportunities for corruption.  Secondly, the decision to lower the tax on bank transaction for non-filers is wrong, because the idea is to force people to become filers.

BRR: But don't you think that policy is already keeping money out of the banking system?

MAK: The government needs to be sure whether it wants to increase the number of filers or bring money into the banking system. Do they really think that people would become filers because of this reduction to 0.4 percent?

BRR: On the whole, how would rate PML-N's economic performance in the last five years: very good, good, average, bad, or very bad?

MAK: Average

BRR: What makes you say that?

MAK: We have talked already about tax reforms. I think we can summarise it by saying that there haven't been any tax reforms. Arm twisting surely; but no economic reforms.

The single good work they have done is addition of power into the system. But the cost of energy is very high, and even in this budget they haven't proposed anything to make that power affordable for industries.

Aside from high cost of energy, there is still a crisis of exports. Although exports have picked up marginally off late, the currency depreciation has increased the cost of imported inputs for exports, which is why growth in exports will be checked by the fact that we are not competitive relative to our peers. What most people don't understand is that the region gets to dictate how much our energy costs should be because we don't live an isolated world and have to compete with peers in international markets.   

BRR: What is your assessment of the overall ease of doing business between 2013 and 2018?

MAK:  It has worsened. The biggest reason behind that is corruption, which has worsened in the last five years. Second, the registration process, licensing and other matters related to taxation and non-taxation bureaucracy have become more cumbersome. The third reason is the legal structure in so far as enforcing contracts is concerned.

BRR: This was the second year when the KCCI didn't give budget proposals. Why, and would you give proposals the next time around?

 MAK: We didn't do that because Dar simply wasn't listening to our concerns and demands. When he visited us after the first budget, we raised our concerns to him to which he said they didn't have the time to prepare the budget properly and that they basically presented whatever was made by the bureaucrats. "Next year would be better," he had said.  But next year it was the same. And when we raised our concerns, Dar never visited us again.

After Dar left the scene, the chairman FBR only recently visited us for the first time in 2-3 years. It is only now our communication channel with the finance ministry and tax authorities has been re-established. This year we had prepared budget proposals, but we didn't send it because they never listened to our needs. But it so happens that a lot of our demands shared through informal communication, which was re-established after Dar's departure from the scene, were met.

Next time we might give the proposals, if the direction remains the same. Because while we have praised the budget, we remain fearful that much of it may be reversed. If it eventually emerges as a three or five-month budget, then it is nothing but a lollipop.