Federal Government’s 2-Years Performance Report

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Federal Government’s 2-Years Performance Report

Introduction

Upon completion of PTI’s two years in the federal government, PRIME is issuing a short report on its assessment of the government’s performance in the domains of Trade Performance, Tax Policy & Administration, and Business Regulations.

Trade

In its first two years in power at the federal level, PTI-led government has laid the ground for its tariff policy. The policy entails simplifying tariff slabs on the principle of cascading; reducing additional customs and regulatory duties; providing time bound protection to nascent industries; gradually reducing tariffs on raw materials, intermediate and capital goods; and eliminating difference in rates for commercial importers and industrial users to end misuse. The now finalized, National Tariff Policy is to be implemented over a five year period starting from Federal Budget 2020-21, so its performance remains yet to be seen.

To facilitate international trade, SBP maintained its Export Financing Scheme rate at 3%, and Long-Term Financing Facility at 6%. Phase-II of China-Pakistan Free Trade Agreement saw its implementation during the same period. On the legislative side, treasury bench tabled the Geographical Indicators (Registration and Protection) Bill, 2019, which has now been signed into an Act. Ministry of Commerce’ ‘Look Africa Policy’ has borne fruit in the form of a 10% increase in exports to Africa during Jul 2019 – Feb 2020. These exports now stand at $1.03 B. However, there is no visible change in the overall exports destination.

The most significant measure by the government which has impacted Pakistan’s international trade has been its policy of going for a market determined exchange rate. Over the two years, Pakistani Rupee has been let to devalue by around 34.5%. While it helped the government in reducing its import bill, it did not help in increasing exports.

Budget 2020-21 has been forthcoming in reducing the incidence of duties on imports to the extent that the customs duty proceeds for FY 2021 are forecasted to be 36% less than the previous fiscal year. However looking at the trade statistics for 2018-2020, goods imports have seen a large contraction from $55.6 B in FY 18 to $42.4 B in FY 20. Similarly, albeit to a lesser extent, goods exports dropped from $24.8 B in FY 18 to $22.5 B in FY 20. All things  considered,  during  PTI’s  two  years  in  government,  both  imports  and  exports  have  faced  a  substantial downward slide.

For the former, a principal factor was Pakistan’s decision to approach the IMF. Initially, in order to get a better deal from the IMF, the then Finance team of the PM tried its best to increase its forex reserves by:

  •  Securing foreign currency deposits, loans, grants and deferred payment facilities from friendly countries such as Malaysia, Saudi Arabia, UAE, and China.
  •  By cutting down on its imports bill

Later on, once Pakistan entered into an IMF program under the Extended Fund Facility, it agreed to maintain a market based exchange rate and to improve its tax collection; factors which lead to further imports reduction. To meet its revenue targets, the government increased electricity tariffs, gas prices, and taxes on petroleum, which contributed to the slide in exports.

While the customs duties, regulatory duties, and import tariffs are being lowered in each successive fiscal year, there is no mentionable work on improving value-addition in exports, diversifying the exports basket or exploring new export destinations.

Tax Policy and Administration

Ever since assuming reigns of the federal government in August 2018, PTI has replaced four chairpersons of the FBR, in a period of two years. Each chairperson only got, on average, five and half months in office — a period too short to implement any meaningful reforms at FBR. Similarly, the top slot at Revenue Division has also changed hands thrice in two years.

To pursue its agenda of reforming tax policy, administration, and enforcement mechanism, PTI sold Shabbar Zaidi as the right man for the job. All the hope that there ever was about PTI being able to reform the tax system of the country, it relied upon Shabbar Zaidi to perform as an outsider to the bureaucracy, who wouldn’t face peer pressure in taking some much needed unpopular decisions that would face resistance from within the FBR. Nine months into the role, he took an indefinite leave from the job, citing health reasons, before he was officially replaced by a career civil servant again.

PTI’s boldest move in the domain of increasing the tax base was the move to bring the vast majority of non-tax paying retailers under the ambit of tax net. These retailers contribute around 18% to the national income but their tax contributions account for less than 1% of total FBR revenue.

The government imposed the condition of production of copy of CNIC for purchases over Rs. 50,000 and floated the idea of income tax calculated as a fixed percentage of annual turnover. Various trader unions organized shutter down strikes all across Pakistan and the pressure tactic seemed to have its desired effect as the government kept on extending the deadline for implementation of these measures so as to maintain status quo. While this resulted in resumption of market activity, it laid bare the weak writ of the state with respect to its ability to collect its dues.

At the same time number of tax filers has reached an all-time high of 2.7 million, credit for which goes to active enforcement measures by the FBR, and the amnesty scheme announced in May 2019. Overall, PTI government has announced two tax amnesty schemes in its tenure – one for the public in general, and one specifically for investments
in the construction industry. Bottom line – revised estimates for FBR taxes in 2017-18 stood at Rs. 3.94 billion; in 2019-20, the revised figure was recorded at Rs. 3.91 billion. Tax to GDP ratio is still in the single digit range, which has slipped to 9.5% from 9.9% last year.

Business Regulations

Pakistan’s Doing Business ranking has significantly improved from 136th to 108th in a year. This has been the result of successful implementation of a large number of initiatives across numerous departments, all of which cannot be mentioned here, for want of space. Few notable measures include elimination of requirement of physical inspection by FBR at the time of registration; time for obtaining building permit reduced from 30 days to 15 days; and number days required for obtaining electricity connection reduced from 73 days to 49 days in Lahore, and from 134 days to 73 days in Karachi. 

Government of Pakistan has established Pakistan Single Window (PSW), which will go live in 2022. The PSW is being developed at a cost of $67 million, borrowed from World Bank. The PSW programme includes phased establishment of an ICT-based platform involving simplification, harmonisation, and automation of regulatory process related to cross-border trade. It also includes implementation of a port community system to facilitate related logistics.

In the domain of promoting E-Commerce, in October 2019, Government of Pakistan introduced the country’s first ever E-Commerce policy. This is a step in the right direction however strong commitment by the government is required to make these reforms see the light of the day. Presently, Pakistan ranks 114th out of 152 countries on UNCTAD’s B2C E-Commerce Index. She lags her Asian competitors such as Malaysia, Thailand, India and Bangladesh that rank at 34th, 48th, 73rd and  103rd place, respectively. In 2020, SBP announced five-fold increase in the remittance limit for freelancers, from $5,000 to $25,000 per individual per month. Such meaningful measures for the industry can enable proliferation of E-Commerce transactions in Pakistan.

Post the onset of Covid-19 in Pakistan, PM Imran Khan has brought forth the construction incentives package as his revival plan for the economy. The PM is chairing weekly meetings to review progress and resolve any issues faced by the industry. PM’s construction incentives package has offered builders and developers with a tax amnesty scheme; given the status of industry to construction sector; it has introduced a fixed tax regime for the industry; withholding Tax has been exempted on all construction-related goods andservices except steel and cement; only 10% of fixed tax to be payable for those constructing houses under Naya Pakistan Housing Program; and State Bank of Pakistan and all other banks directed to set aside 5 percent of their portfolios for house financing.

In the domain of tourism promotion, the PM appears keen to deliver. PTI has made several contributions to both the tangibles and the intangible affecting the industry. The government has set up several camping sites for tourists in Khyber Pakhtunkhwa. E-Visa facility has been introduced along with relaxation in NOC requirements for foreign visitors. The government has transferred ownership of government rest-houses to Tourism Corporation Khyber Pakhtunkhwa. These positive steps notwithstanding, existence of multiple and overlapping task forces
for coordination and promotion of tourism indicates lack of clear policy. This is further complicated by the fact that in June 2020, Pakistan Tourism Development Corporation shut down 30 of its managed tourist facilities and terminated 450 employees due to financial losses.

Conclusion 

In an effort to curtail the trade and current account deficits, the government has ended up reducing the total trade volume of the country in such a manner that total imports and total exports both have fallen down. As 18% of FBR revenue comes from customs duties, and 38% from Sales tax (of which approximately 55% is contributed by imports), naturally FBR revenues were bound to take a hit, which explains the lackluster revenue performance of the government. These issues notwithstanding, the government has achieved a noteworthy improvement of jumping up 28 spots in the World Bank Ease of Doing Business Index in a year – a feat which could not have been achieved without support from the provincial governments, most notably the Government of Sindh and the Government of Punjab. An increase in the tax registry to 2.7 million is a significant achievement however tax policy and administration still needs revamping. We once again call for considering a low-rate, flatter and broad-based income and sales tax regime with better enforcement which can encourage more people to file tax returns and can yield a predictable tax base.

Click here to download the report:

Federal Government’s 2-Years Performance Report

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Policy Research Institute of Market Economy

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