All indications suggest that the next few years offer a precious opening to Pakistan to develop its capabilities for self-sustaining growth. Pakistan may not have support of foreign loans, credits and home remittances beyond that; hence, there is a need for radical change in attitude, approach and effort for self reliance. This need for change is particularly great in the engineering sector with particular reference to the automobile industry. Bold, courageous decision making can help build up this “mother industry”, ensuring overall industrial development, and emergence of a balanced, modern economy. This will help Pakistan avoid facing the plight of the textile industry, which is producing yarn and other textiles, while continuing to import large amounts of machinery, equipment, and parts for this industry - continuous avoidable imports of high value- added goods against exports of relatively low value content.
Finance stretegy: Import duties make implementation of projects not easy due to debt / equity requirements and demands on cash resources. Import duty on Engineering machinery and raw materials, not produced in Pakistan, thus deserves to be streamlined. Such a move will give strong impetus to growth of Pakistan’s Engineering Industry.
Similarly, import of plants provides additional credit sources, which may be made use of as far as possible. Duty and other charges may be assessed and collected only on the value of the machinery and not on the components of the usance amount. Interest component of plants and machinery cost imported under usance arrangements may thus be treated as normal business expense. This would then be similar to interest paid when capital is raised locally and only actual value of plant and equipment may be capitalised.
Tax credit: No Income Tax should be collected in this respect if the assesse is liable to pay Advance Tax during the financial year in which the goods are imported. Presently, Income Tax at an inappropriate rate is being collected on all imports irrespective of the fact, whether finally tax is due or not. This amounts to changing definition of the tax on income. The inequity is further increased as, in practice, the Government’s policy on issuing refund is excessively cumbersome.
Closely connected with this measure is the desirability of initial depreciation on investment on Balancing - Modernisation and Replacement (BMR) to be increased. This would give boost to BMR investments which are usually more cost effective than investment on completely fresh units. It follows also that tax credit should be allowed on the cost of plants and machinery as well as on the installation costs associated with such acquisition. This will enable industrialisation, promote employment and develop know-how rather than achieve a “limited objective” of tax collection, which is already too high.
Similarly, sales tax on locally produced automotive parts is an excessive burden as there exists no standardisation in this industry. Production is in small volumes and in small batches. This additional burden is a major handicap in its growth trajectory, which only leads to rampant smuggling and under-invoicing.
Revenue rewards: Significant revenue can be generated if customs officials wholeheartedly curb smuggling. Smuggling is increasing unabated and is inclusive of spare parts of all types and sizes, automotive vehicles, consumer goods and narcotics. Such a system has an adverse impact on those who abide by the laws and ironically they are the ones who are burdened even further with misconstrued assessments when revenue shortfall builds.
Following the example of Customs and Excise Departments, Income tax department also started rewarding officials including those holding high positions for their competency and honesty - an absurdity when officials are surely expected to be at least honest if not competent as well already!
More objectionable is the system of deduction of tax – custom duty from all imports and receipts irrespective of the fact whether in the final analysis such transactions lead to income or loss.
In case of no income or loss, the officials have to issue refunds which has resulted into a widespread disease of withholding them, as long as they can.
Equally undesirable is the practice of interpreting the law in favour of the revenue instead of in favour of the assesse. This tendency has grown sharply more recently and has led to harassment of the tax payer more than the dishonest one.
Industrial bank: An Engineering Bank of Pakistan in this connection may be created by nominating one of the banks like, National Bank of Pakistan - NBP or any commercial bank on the same pattern as adopted in promoting agriculture, through Zarai Taraqiati Bank - ZTBL. This will create a specialised institution with the understanding of the specialised demands of the Engineering sector which is bound to adopt a more flexible approach to the industry in general and specially towards those with proven record of performance and repayments. For larger projects of promoters with sound experience and record even 80 to 90% credit finance may be provided as in Japan, Korea, Philippines, Thailand, Indonesia, etc. to expedite formulation and implementation of capital intensive industries.
A major objective in the engineering industry during the next few years should be the production of an automobile engine in particular.
Now that the first few phases of the deletion program for automotive vehicles have been implemented to a large degree, a realistic but challenging deletion program may be approved for engine manufacture particularly for the industry. In view of the heavy financial outlay and more so due to necessity of induction of new technologies, a programme for engine manufacture must be approved, aimed at achieving deletion.
An obvious but neglected area may finally receive attention, i.e. improper and unnecessary imports of full CKD kits when local components are available. In order to utilise available capacity as well as to implement the spirit of CKD imports, assembly kits for cars, trucks, tractors, buses, vans, etc., may be allowed as long as they are not locally available in sufficient quantities and in good quality, like, radiators, batteries, etc. as is done in most other countries.
CKD vs CBU prices: Unfortunately, an impression has been created that the import of parts in knocked down/semi knocked down condition for local assembly and progressive local manufacture must be cheaper than the fully built up units. Pakistan’s own experience for a number of years has been the other way around, and particularly of imported knocked down parts from Japan. Since the knocked down parts and those particularly from Japan come from automated plants, their cost of packaging of diverse parts and freight becomes higher than fully built up units which come out more economically.
Japan is a classic example in this regard which has the largest number of robots – even more than United States. ‘Custom valuation’, being ignorant of technological developments and changes stick to the traditional path treating everybody and imports from any units in the same manner - obviously for uniformity’s sake, this amounts to putting horse and donkey together in the same stable. This necessitates the change of attitudes, laws and regulations and their ability to appreciate the varying circumstances and situations more so desirable flexibility expected of an elite service.
Needless to emphasise that no two units are alike: treating every importer assembler or manufacturer alike is, therefore, wrong. However some general principles may be fairly and clearly defined and applied consistently. There should be some clear proof or factual basis for valuation not the conceptual beliefs of an assessor.
The experience quoted in other countries mentioned above shows numerous facilities for local manufacture including banning and restricting the import of fully built up units in order to encourage the manufacture of indigenous products. The recent case of substantially enhancing the customs duties on the import of Japanese high powered motorcycles into USA to protect the Harley Davidson is a classic example in this respect. There is a case of banning fully built up units wherever there is substantial local manufacture of such vehicles or restricting their imports through fixing categories. There must be a distinction on duty on autos used by higher strata of income and autos used by the lower middle class.
Import facilities: Cutting tools are a basic requirement for engineering industry. In order to encourage precision and quality, import of these tools may be at nominal duty. Also in order to facilitate investment, balancing and modernisation, free list of import of machine tools should be extended to include tools, steel, jigs, fixtures, dies and molds. A list of such items whose free import will not affect local industry and are critical for the use of engineering goods industry.
Bureaucratic organisation: Whenever there are unusual events, there is heavy responsibility on the bureaucracy to make such laws, rules and regulations, particularly, in achievement of the socio-economic objectives of the state. In the past, bureaucracy has given some continuity in this respect, but in “changed circumstances”, much more than ever before, is expected. A radical departure from past practices is the need of the hour and hence need for a braver and bolder policy than that which has been seen in the past:
(If accepted, this may help to change
fortunes and self-respect)
