PBC opposes 5 percent additional tax proposal on manufacturers unable to export

KARACHI: Pakistan Business Council (PBC) on Thursday urged the government to abandon plans for an additional 5 percent tax on manufacturing businesses, which fail to export at least 10 percent of their turnover of Rs50 million.

“We urge you to reconsider this proposal, especially as it comes after imposition of Super Tax and higher taxes on salaries,” PBC said in a letter to the Finance Minister Miftah Ismail. “For those in the private sector, this represents a perfect storm and amounts to killing the goose that lays the golden egg.”

“Resorting to tax the manufacturing sector at 34 percent to make up for shortfalls from retail and other sectors is unfair and unreasonable and will only encourage further informalization of the economy,” the council said.

The government move is purported to offset the loss of revenue from traders and appears to be positioned with the positive optics of encouraging exports to help manage the balance of trade.

“... it must be recognized that it is impossible for a business that has never exported to start exporting as much as 10 percent of its turnover, especially when these industries are denied energy at regionally competitive cost and when their current range of products are not designed for the export market,” the PBC said.

“This cannot succeed in an unlevel playing field in which traders and the informal sector enjoys an unfair competitive advantage.

PBC said the manufacturing sector represents 20 percent of GDP and already contributes 56 percent of national tax revenues.

“Also, that over the last couple of decades the country has been deindustrializing. This has not only resulted in loss of jobs and share of world exports, in a consumption-oriented economy, our inability to make basic goods also resulted in increased reliance on imports, with negative consequences on the balance of trade and the current account,” it said.

The council said any further stimulus for exports be phased over a 3–5-year period allowing those currently serving the domestic market to reconfigure their offerings in exchange for lower tax on profit from domestic sales.

Also, they should be provided energy at a cost comparable to the five core export sectors, at least for the proportion of items they will produce for exports. Likewise, they should be provided rebates and concessional credit to transform their units for the global market.

The current export rebates are not configured to expand the export basket as they are targeted at promoting traditional exports. Most businesses serving the domestic market are unlikely to be engaged in manufacture traditional items for exports.

PBC has for long supported export-oriented FDI. Measures that we suggest above and a phased programme would encourage subsidiaries of MNCs operating in Pakistan to compete for a share of their global value chain.