The Karachi Chamber of Commerce and Industry (KCCI) has emphasized the need for out-of-the-box solutions to prevent a further downslide in Pakistan’s economy.
The decision-makers, according to the KCCI, must have a better understanding of the ground realities of Pakistan’s economic landscape and business dynamics.
In its Federal Budget Proposals for 2023-24, the KCCI highlighted the importance of looking beyond traditional approaches in the Ministries of Finance, Commerce, and the Federal Board of Revenue (FBR) to address the current economic situation and revive the economy.
The KCCI identified several key economic issues that require special attention. These include depleting foreign exchange reserves, restrictions on imports of raw materials and essential goods, limitations on opening Letters of Credit (LCs) for industrial raw materials, declining foreign exchange inflows, reduced revenue collection due to decreased imports, declining exports due to high energy costs, input prices, and raw material shortages, an inefficient tax collection system with a narrow tax base, tax evasion and avoidance by affluent individuals, low productivity in the agricultural sector, and stagnation in the real estate market, leading to a severe liquidity crisis.
According to the KCCI’s proposals, the sharp decline in foreign exchange reserves, the devaluation of the Pakistani Rupee against major currencies, and restrictions on opening LCs have made it extremely challenging for businesses across all sectors of the economy to survive. Industries are facing a shortage of raw materials, and many small and medium enterprises (SMEs) have already closed down due to reliance on commercial importers for their supply chains. The high rate of inflation has also pushed consumer goods and commodities beyond the reach of the poor and lower middle class, resulting in suppressed demand and an economic slowdown.
To address the unavailability of foreign exchange and declining inflows, the KCCI suggested that importers be allowed to arrange payment and remittance of foreign exchange through their own sources outside of Pakistan. They should also be able to directly receive their import documents from suppliers without involving domestic commercial banks. The KCCI expressed concerns about the role of commercial banks, as varying exchange rates and high profit margins have been observed, with preferential treatment given to clients with high trade volumes while neglecting SMEs.
To meet the International Monetary Fund’s conditionalities, the KCCI proposed exploring other avenues to enhance revenues, such as withdrawing exemptions from certain regions and reducing the government’s administrative expenditure, the size of the cabinet, perks, retirement benefits of officers in grade 17 to 22, and the size of the Public Sector Development Program (PSDP).
The KCCI also recommended streamlining the audit process by consolidating all audit functions under one provision of the Income Tax Ordinance with clear and well-defined parameters. Transparency and openness to taxpayers should be ensured, and the powers of tax officials should be curtailed to restore taxpayers’ trust and encourage a broadening of the tax base.
In addition, the KCCI proposed treating the CNIC (Computerized National Identity Card) number of unregistered buyers provided by registered sellers/suppliers at par with the Sales Tax Registration Number (STRN). It suggested that a 3 percent further tax on supplies to unregistered buyers should not be charged if the CNIC number is provided by the registered seller in the Sales Tax Return. For unregistered buyers of raw materials who do not provide a CNIC number, a 1.7 percent VAT (Value Added Tax) may be charged on the sales of raw materials.
In terms of withholding tax (WHT) on essential food items, the KCCI suggested revising the WHT rate to 2 percent on imports, applicable to all importers without distinguishing between commercial and industrial importers. This would ensure fairness and equal treatment for all stakeholders.
Regarding raw materials, the KCCI proposed treating withholding income tax at the import stage as advance tax, which would be adjustable against the actual tax liability. The concept of minimum WHT on the import of raw materials should be phased out and incorporated into the normal tax regime. Furthermore, a distinction should be made between importers of finished goods and importers of raw materials, as the latter primarily cater to the industrial sector and possess comprehensive documentation.
The KCCI highlighted the issue of high taxation on reactive dyes, an essential raw material for the textile industry, which is an export-oriented sector. It recommended rationalizing the customs duty on reactive dyes to a maximum of 3 percent and considering the abolishment of additional customs duties. This adjustment would acknowledge the importance of reactive dyes as a basic raw material and recognize that they cannot be used as finished end products.
Additionally, the KCCI proposed reducing the rates of customs duty to 2 percent, sales tax to 12 percent, and withholding tax to 1 percent for both industrial and commercial importers of polymers. To create a level playing field, it suggested waiving the 3 percent value-added sales tax on commercial importers. Since commercial importers do not add value to raw materials and sell them to small industries in their original form, the imposition of a 3 percent VAT is deemed unjustified by the KCCI.