POLICY PAPER

TAX AND HEADACHES

Summary

The imposition of fiscal policies of International Monetary Fund on the local Trade and

Commerce industry in Pakistan is minimizing the base of the local businesses. Small business

groups are unable to cope with the situation of increasing sales tax rates which led to the

decrease in Purchasing Power Parity, affecting the wages of the labors. The IMF policy of fiscal

austerity is the mirror image of tax policy. The government although is keeping the taxes same

but is decreasing its spending. Its effect is same as tax increment, but through a slightly different

channel.

The issue

These policies have affected the cyclic process through which businesses run. Even slight

increase in sales tax has resulted in the increase of the prices of the commodities, which directly

affected the consumers. Furthermore, when the prices of the local commodity increase, it creates

a competition between a local and imported product. People instead of buying the local product

are buying the imported products at the same price. The cottage industries in terms of quality of a

commodity cannot compete with the imported product. As a result, the cottage industries that

have the potential of generating a considerable amount of GDP growth are unable to compete in

such situation. Whatever policy for promotion of cottage industry or the small and medium

enterprises is there, it is also not being implemented. When government decrease its spending
and increase the taxes, firms are downsizing their labor force, thus the amount of unemployment

is also increasing affecting the overall economic activities of the country. The small and medium

enterprises are unable to generate the revenue for the government in-return. There are very few

cottage industries in Pakistan. the fiscal crises deeply affect these industries. More the number of

established industries, more revenue will be generated by them thus the expenditure of the

government would be fulfilled.

Moreover, the IMF is not aware of the domestic economic culture of the Pakistani society. The

elite class is very small in number, whereas the large base of the poor class cannot afford the

expensive high taxed products, they are only dependent on government spending. So, the line of

purchasing power is very small, when the consumption is less then our firms automatically

cannot generate enough revenue for the government.

International comparison

Cutting public spending without any monetary stimulus leads to lower economic growth and

higher unemployment. For instance, Latvia has witnessed a long period of economic decline and

higher unemployment since seeking to create a situation where there was much pressure to cut

government spending and pursue fiscal austerity. The decline in Latvia GDP is a near record fall

of 25%. Similarly, in case of Estonia, it has seen 20 % fall in its GDP, but it rebound. GDP is

still 10% below since 2007. Unemployment has been in double figures for the past 4 years now.

Stakeholders

The strategic trade policy framework need to be formulated by the Ministry of

Commerce through an extensive consultative process. All stakeholders in the public and private

sector including Federation of Pakistan Chambers of Commerce and Industry, district Chambers,
trade associations, private businesses, academia, think tanks, trade missions, Ministries/Divisions

and other government agencies recommendations should be considered by the ministry.

Policy recommendations

 Increasing ease of doing business by removal of bottlenecks, simplifying procedures and

improving institutional efficiencies;

 Technological assistance to cottage industries that can save the production time as well as

improve the quality of the product, that will lead to increase in production/consumption

and ultimately in revenue generation through which the government spending would not

be affected.

 Local industry should be given electricity on subsidize rates. Due to the economic

conditions the industries are shifted to china and Bangladesh. This is further reducing the

number of industries, thus the government in order to meet its own expenses is increasing

the sales tax.

 Easy loans with low interest rate will eventually promote the base of cottage industries.

 Attractive business offers will increase the private business base that will ultimately

generate the revenue for the government, providing relief to government.

 To set up an institute that would help the people to establish their businesses along with

regular assistance.

 Promotion of FMCGs. The trading ministry to help FMCGs to rewrite their channel

strategies and their channel-management approaches, including how they assort, price,

promote, and merchandise their products, not just in these marketplaces but elsewhere.
 Raw and semi-processed products being currently exported can get higher values if

exported as processed products.

 Extensive information dissemination opportunities should be available under market

access secured by Pakistan, and other export promotional activities like exhibitions and

delegations, can play an integral part of the strategy for sustainability and enhancement of

share in the existing markets.