Pakistan’s Solvency At Risk Due to Commodity Headwinds, Supply Issues, Politics: OICCI

The primary challenge faced by most organizations is the threat to business continuity. There needs to be an active forum for the government and the private sector to interact and collectively drive actionable reforms.

Political and economic crises are not unusual in Pakistan’s history. According to the Overseas Investors Chamber of Commerce and Industry (OICC), the economy’s solvency and sovereignty are at risk due to a combination of commodity headwinds and supply chain disruptions, exacerbated by the Ukraine crises, catastrophic floods, and significant political uncertainty.

The OICCI leadership urges an active forum for the government and the private sector to interact, build trust and collectively drive actionable reforms before serious damage is done to the economic well-being of the country.

The concern is the lack of ownership of furthering foreign direct investments (FDIs) in the country and reducing issues of foreign investors. However, key stakeholders remain divided on economics which impacts the daily life of every citizen and more sharply those at the bottom of the pyramid.

According to the OICCI, external intervention can help if everyone doesn’t resolve to address flaws in the economy. “We essentially need to work towards one collective vision of the country – i.e., To make Pakistan beneficial for all – bring in the people of the country together to drive this cause – fueled by the right economic reforms/policies in place”.

Reprofiling debt to longer-term tenures seems inevitable, contends the OICCI.

Remittances

All multinational companies are faced with serious FX remittance issues. The OICCI says it realizes the constraints on the government but it must also take investors into confidence, whose dividends are shrinking day by day.

The major concern remains on the remittance of dividends pending for the past year, besides other remittances for services including Directors’ fees. Foreign investors are also struggling to sustain operations, with two glaring examples being Pharma and Oil Marketing Companies, with the GoP still avoiding a decision on pharma pricing or OMC-related cost reimbursement.

The OICCI has expressed concern that no one in the corridors of power is focusing on protecting the existing FDI, much less attracting further investment into the country. If this situation persists, Pakistan will fade away from the world’s attention as a country of high investment potential.

Options Proposed by OICCI to Governor SBP
  1. 10% of pending dividends be remitted within the next 2 months and the rest in quarterly installments over two years
  2. All pending dividends be hedged at the current exchange rate and be remitted in the next 2 years.
  3. Pending dividends be allowed to be invested into a profit-generating bank account to be notified by SBP. The profit and the principal dividend be repatriatable.
  4. Pending dividends be allowed to be re-invested in the expansion of the local subsidiary and be treated as additional FDI from the parent company.
Taxation

The entire economy is coping with Rupee depreciation at over 50 percent since July 2022, Inflation running at over 25 percent, the uncertain operating environment, and damage to agriculture and infrastructure due to floods. “As a result, many of our members have, like other businesses in Pakistan, decided to shut down their operations, some partially. This will have an impact on their earnings for the current fiscal year”.

“We may see a serious downfall in revenue collection from organized businesses. We, therefore, have recommended that GOP should simplify the tax regime, broaden the tax base, and remove the one-time burden of Super Tax from the organized sector”.

The OICCI recommends that all sectors including agriculture (with appropriate legislation) should contribute tax according to their share of the GDP. The GOP should seriously broaden the tax base without succumbing to political pressure and tax the rich and save the vulnerable.

It also recommends increasing the tax-free income to Rs. 1.2 million from the current Rs. 0.6 million annually. Other major recommendations are to remove/reduce minimum tax rates, substantially reduce the withholding tax regime from the current 200 rates to only a few, and many other measures to make tax compliance business-friendly.

Finally, the approach is to make Pakistan an FDI-friendly country with a predictable, consistent, and transparent policy framework.

State of the Economy

The FDI for the first eight months of the 2022-23 fiscal at $784 million is dismal and 40 percent less than last year. For a developing country like Pakistan, FDI is expected to be over 3 percent of the GDP against the current level of less than half a percent. This is a bad outcome and is no comparison to FDI inflow in other countries in the region, according to the OICCI.

The chamber claims to have suggested workable options to SBP to gradually reduce the buildup of pending dividend remittance including the option to allow pending dividends to be invested in the expansion of the local subsidiary and be treated as additional foreign investment.

Considering the recent World Bank forecast of 0.4 percent GDP growth during the current fiscal year, OICCI estimates that most of the businesses in Pakistan, including foreign investors, will be affected and will show subdued fiscal results and thereby lower tax contributions.

The chamber in its taxation proposals for 2023-24 to be submitted to the government soon is proposing a massive push to broaden the tax base including collecting tax from all segments of the economy, especially the trade and agriculture sector, as per their share in the GDP.

OICCI recommends arresting the large revenue not paid segment of the economy comprising of undervaluation at imports, excise duty not paid in key sectors like tobacco (Rs. 80 billion), and abuse of the Afghan Transit Trade facility affecting the economy.

The chamber has recommended increasing the tax-free income from Rs. 0.6 million to Rs. 1.2 million and eliminating or substantially reducing minimum tax, especially for listed companies. The chamber has also recommended substantial reduction and reform, from the current 200 rates of the Withholding Tax regime and many other measures to make tax compliance business friendly.

Follow ProPakistani on Google News & scroll through your favourite content faster!

Support independent journalism

If you want to join us in our mission to share independent, global journalism to the world, we’d love to have you on our side. If you can, please support us on a monthly basis. It takes less than a minute to set up, and you can rest assured that you’re making a big impact every single month in support of open, independent journalism. Thank you.



Get Alerts

Follow ProPakistani to get latest news and updates.


ProPakistani Community

Join the groups below to get latest news and updates.



>