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Research Publication On: A Joint Study
Research Publication On: A Joint Study
RESEARCH PUBLICATION ON
A JOINT STUDY
OF
AND
It gives me immense pleasure to present the Research Study on Input Cost and Corporate Tax structure
– An analysis of trends in the SAARC Region which has been prepared jointly by the Federation of
Pakistan Chambers of Commerce and Industry (FPCCI) and the Institute of Cost and Management
Accountants of Pakistan (ICMAP).
The Federation which is the apex organisation of trade and industry of the country, attaches highest
priority to research and development activities. It has published in the past a number of useful
publications and research reports on trade and other issues. FPCCI in collaboration with the ICMAP
conducted this research study with a view to ascertain the regional trends of input costs of industrial
production and tax structure of selected industries in Pakistan and other countries in SAARC region.
FPCCI has been demanding since long to bring down the input costs of industrial sector, which are
comparatively higher than other countries in the region. The high cost of domestic production has
rendered our exports incompetitive in the international markets. The Study concludes that effective cost
control measures should be adopted by all industries in Pakistan in order to focus on the economic
competitiveness and to balance the factors of production in manufacturing sector and to safeguard
against economic exploitation with the global economic policies pursued under WTO.
The Study further concludes that in the last five years, cost of industrial production has increased due to
major factors such as increase in input costs such as fuel and energy, under-utilization of capacity,
increase in taxes, inconsistent government policies and high interest rates. The Research shows that
Pakistan is a relatively high tax country with poor tax administration. The taxation laws therefore
requires suitable revision and structural changes.
I congratulate the entire team of the FPCCI and the ICMAP for undertaking this research study which
will provide a useful input to the Government to formulate economic policies. I want to particularly pay
tributes to Syed Jamil Ahmed Rizvi, Director Research ICMAP and his team and Mr. Anwarul Haque,
Secretary General FPCCI and his team for bringing out such a useful document.
EXECUTIVE SUMMARY
World Trade Organization: WTO’s objective to liberalize the tariff on foreign goods is a serious
threat to the Islamic countries and as such they ought to prepare a joint strategy to face this challenge.
WTO regime will cripple the local industries of Islamic countries on the free arrival of products from
the developed countries, after the liberalization of trade.
The developed countries have been putting various restrictions in the shape of levying higher duties on
the import of agricultural products from the Islamic countries. The mutual trade volume between
Islamic countries stands at only US$ 40 billion per year out of the total US$ 400 billion.
South Asian Association for Regional Cooperation (SAARC): SAARC countries are facing barriers
in marketing access to the developed countries. It is a matter of concern for the developing countries as
to whether the course of globalization is affecting their economies. Even in the developed countries it
is being regarded in some quarters as highly exploitative.
Pakistan, a nation, equipped with abundant, efficient, skilled and hard working labour force, vast
natural resources and having strong agricultural base can not go begging, if it manages its affairs in a
planned and systematic manner.
Equitable and balanced allocation of land for the production of various cash and minor crops keeping in
mind the local demand would yield long term economic benefits for the nation.
Exploitation and development of natural resources such as coal, oil and gas particularly in Sindh and
Baluchistan would turnaround the entire economy of the country.
COMPARATIVE INPUT COST AND SELLING PRICE OF INDUSTRIAL PRODUCTS
(ii)
CEMENT: Taxation is the major limiting factor in economic revival of cement industry in Pakistan.
Estimated demand is 9.9 million tonnes against the installed capacity of 19.50 million tonnes. If
Pakistan achieves internationally competitive price of about US$ 45 to US$ 50 per tonne, it can easily
capture at least 20% (about 4 million tonnes) of regional export market, which will give the country
much needed foreign exchange of about US$ 180 million to US$ 200 million.
SUGAR: Balanced policy for cultivation of four major cash crops should be chalked out and incentive
be provided to the growers for cultivation of sugarcane on 1.50 million hectares to become self-
sufficient.
VEGETABLE GHEE/COOKING OIL: Raw and Packing materials constitute the bulk (above
95%) of the production cost per tonne in Pakistan and Bangladesh. It is much cheaper in Bangladesh
mainly due to freight, for Chittagong is nearer than Karachi from the Indonesian and Malaysian Ports
from where these countries import RBD Palm Oil.
CHEMICAL FERTILIZER: Production costs of fertilizer in Pakistan is more or less the same as in
India. However, selling price of Urea in Pakistan is 50% higher than in India. This indicates that
Pakistani fertilizer Companies are not giving adequate advantage of cost benefits to the farmers (users),
consequently making the agriculture input costs and agricultural products more expensive than in India.
PAKISTAN WITHHOLDING TAX REGIME: This indicates that majority of income taxes are
collected through this regime, which should be further strengthened for improvement of tax collection.
Simplification of procedure can only produce fruitful results if traditional contact between the taxpayers
and the taxation officers is eliminated.
CUSTOMS TARIFF
SECTOR PAKISTAN SRI LANKA INDIA
Cement 35% ad. val. 25% per 50 Kg bag 25%
10% for bulk
Sugar - Rs. 350/Tonne Rs. 850/Tonne
Vegetable Ghee/ Cooking Rs. 10800/Tonne 25% on CIF 100% + 4%
Oil For RBD Palm Oil for Palm Oil
Fertilizer – Ammonia 5%
Urea 10% ad. val. 5% on CIF 35% basic duty
Regulatory duty 16% countervailing
duty
4% Surcharge
APPEAL MECHANISM in Pakistan is too lengthy and complicated as compared to India and Nepal.
It is felt that suggested measures if given due consideration for implementation will not only help the
ailing sectors, but will also help in achieving a turnaround of the economy.
(iii)
PART I
Foreword i
Executive Summary ii
P Acknowledgement
INPUT COST
CEMENT INDUSTRY OF PAKISTAN, BANGLADESH AND INDIA
INPUT COST
CEMENT INDUSTRY
There are 21 cement factories in operation in Pakistan with total installed capacity of 16.10 million
tonnes of clinker/cement production per year. Projects on three more factories are in advance stages of
commissioning with 3.40 million tonnes installed capacity. With the completion of three more factories
the total installed capacity would soon increase to 19.50 million tonnes. The demand for cement was
estimated to be 9.90 million tonnes at the end of year 2000. This means that 9.60 million tonnes or
approximately 50% of capacity would remain unutilized or idle.
According to a recent report the annual demand for cement may increase @7%. This indicates that the
cement industry would have enough installed capacity to cope up with the assumed increase in demand
up to the year 2010.
COST OF SALES:
Main reasons for the underutilization of capacity has been the gross decline in the demand of cement
due to high prices as a result of high Government taxes & increased input cost particularly during the
second half (1996-2000) of the last decade. Economic recession of the last decade in Pakistan coupled
with uncertain economic & political climate and stability had compounded effect on the depressed
demand for cement.
GOVERNMENT TAXES:
Government taxes (mainly excise duty) constitute 41% of selling price of cement.
DEPRECIATION OF RUPEE:
Over the last decade Pakistani Rupee has depreciated 140% against US dollars (from Rs. 22.0 to a US$
in 1990 to Rs. 35 in 1995 to Rs. 52 to a US$ in 2000) resulting in high cost of imported packing
material, refractory material and spare parts of machinery & equipment.
60
50
40
30
Rs/US$
20
10
0
1990 1995 2000
FURNACE OIL PRICES:
Furnace oil prices increased by 583 %(about 6 times) during the last decade, most of
which has been in the previous 5 years. (from Rs.2043/tonne in 1990 to Rs. 2965/tonne
in 1995 to Rs.13948/tonne in 2000).
14000
12000
10000
8000
6000 Rs/Tonne
4000
2000
0
1990 1995 2000
ELECTRICITY CHARGES:
211% increase in electricity charges (from Rs.1.38/kwh in 1990 Rs. 2.65/kwh in 1995 to
Rs.4.29/kwh in 2000).
It should be noted that fuel and power (energy) constitute over 54% of the factory cost
of elements of cement production in Pakistan as compared to 6.6% in Bangladesh and
46.5% in India.
4.5
4
3.5
3
2.5
2 Rs/kwh
1.5
1
0.5
0
1990 1995 2000
COMPARISON WITH OTHER ECONOMIES OF THE SAARC REGION
Government Taxes (mainly Excise Duty) 1521 41.1 570 10.3 465 15.2
Factory (Mfg) Cost Before Depreciation 1641 44.3 2497 45.0 1426 46.4
Other (Selling, Administrative, Finance & 534 14.4 454 8.2 1337 43.6
Depreciation)
6000
5000
4000
3000 Sales
Cost of Sales
2000
1000
0
Pakistan Bangladesh India
6000
5000
4972
4000
3000
2605
2000
2182
1000
0
Pakistan Bangladesh India
1600
1400 1521
1200
1000
800
600
400 570
465
200
0
Pakistan Bangladesh India
Distribution of Wealth
Pakistan
14.4% 0.2%
41.1%
44.3%
Bangladesh
10.3%
36.5%
45%
8.2%
India
43.6%
5.2%
15.2%
46.4%
Government Taxes (mainly Excise Duty) 632 20.5 570 10.3 465 15.2
Factory (Mfg) Cost Before Depreciation 1641 53.2 2497 45.0 1426 46.4
Other (Selling, Administrative, Finance & 534 17.3 454 8.2 1337 43.6
Depreciation)
The revised distribution of wealth for cement industry in Pakistan is based on the following
additional assumptions.
CURRENT REVISED
The above scenario could be achieved in the short term, provided the Govt. changes it’s current
applicable tax rate on cement.
See table for computations
Following table shows the make up of the elements of production cost of cement before depreciation in
Pakistan as compared to Bangladesh and India.
* Bangladesh imports clinker hence higher raw material and lower energy cost
Schedule I – Cement
Schedule II- Cement
Schedule III- Cement
Schedule IV- Cement
Schedule V- Cement
ELEMENTS OF PRODUCTION COST
Pakistan
9% 23%
8%
6%
54%
Bangladesh
88.0% 2.0%
6.6%
3.0%
0.4%
India
8% 6%
34%
46% 6%
FURNACE OIL:
It is quite obvious from the previous tabulation that energy constitutes more than 50% cost of cement
production. Up until late fifties cement industry has been using coal as fuel for clinkering of raw
material. After discovery of natural gas all cement plants were converted into gas. In the early eighties,
the then Government decided to preserve gas for fertilizer & domestic consumption. All the cement
plants were advised to switch over to furnace oil. As highlighted earlier on, the price of furnace oil has
witnessed unprecedented rise in the last few years resulting into almost 210% increase in the cost of
cement production in the last five years. It is estimated that cement industry imports furnace oil of
about US$ 240 million per year.
The increased level of furnace oil prices strongly suggests that Pakistan cement industry should switch
over to coal firing system. Almost 90% plants in the world use coal for clinkering. Pollution is no more
a problem due to advanced technologies arresting gas emissions. Cost of coal firing is estimated to be
2/3rd of the cost of furnace oil if imported coal & local coal is used in the ratio of 50%. However, if
huge coal deposits in Thar & Sondha which have lower sulphur content are developed, saving in fuel
cost will be more than 50%.
Following Table shows the revised and adjusted wealth distribution ratio of cement industry in Pakistan
under above mentioned three situations, namely
Current short term effect: 50 % reduction in Government Taxes representing 22% reduction in selling
prices
Medium Term Effect: 50% reduction in Government Taxes and switch over to coal firing @ 50%
imported coal and 50% local coal.
Long Term Effect: 50% reduction in Government Taxes and switch over to 100% local coal.
In the larger national interest, immediate action on the part of the government would halt the declining
demand and increasing price of cement in Pakistan and set the condition for economic revival and
growth of cement and related industries. Increase in demand of cement would result in increased
production / capacity utilization which would facilitate further reduction in the prices due to
reduced unit cost of fixed charges and overheads.
USES OF CEMENT:
According to a report the consumption of cement in Pakistan is estimated at 72 Kg/head per annum,
which is one of the lowest in the world. India and Sri lanka have 89 Kg and 105 Kg per capita
consumption of cement respectively. Thailand, Malaysia and Taiwan on the other hand have 600 Kg,
870 Kg and 1004 Kg per capita cement consumption respectively. Per capita consumption is
considered to be one of the major indicators of a country’s size and pace of development.
It is quite obvious from the above figures that Pakistan will have to create conditions for investment in
housing and industrial projects. It will also have to reallocate resources for infrastructure development
in a planned manner if it has to catch up with the required regional pace of development. Cement
consumption can also be enhanced by switching over to concrete roads which have much longer
life than bitumen roads. Studies carried out in India have proved that vehicles plying on concrete
roads save 14 % on fuel consumption.
Canal lining and maintenance thereof is another area which can consume huge amount of cement on
a continuous basis. This will also save wastage of about 40 % water besides easing out the problems of
water logging.
If the above suggested fiscal measures and development plans are given serious consideration it is
envisaged that the consumption of cement in the country will increase at much faster rate than 7 % per
annum, most probably by 15 % to 45 % in the short and medium terms and thereafter at the annual rate
of 7 %. With the increase in local demand by 15 % to 45 %, Pakistan’s local consumption would
increase to between 11.4 million tonnes and 14.4 million tonnes in the short and medium terms
representing approximately 105 kg/capita consumption which is an increase of 45% over current rate
excluding the factor of population growth.
20
15
10
m illion tonnes
5
0
2000 2001 2002 2003 2004 2005 2006 2007
EXPORT POTENTIAL
Pakistan is surrounded by a number of countries which have to import cement, either because they do
not have limestone reserves or short in limestone deposits.
Export potential in Central Asian countries namely Uzbekistan, Azerbaijan and Tajikistan etc is yet to
be explored and quantified.
If Pakistan achieves internationally competitive price of cement of about US$ 45 to US$ 50 per
tonne, it can easily capture at least 20% (about 4 million tonnes) of regional export market, which
will give Pakistan the much needed foreign exchange of about US$ 180 million to US$ 200
million.
It can be seen that local demand and export put together, Pakistan, within the course of next three to
five years may very well reach a point where it can maximise its capacity utilization, and may have to
consider increasing its installed capacity beyond 2004.
25
20
15 Exports
10 Local
0
2000 2001 2002 2003 2004 2005 2006 2007
SOCIO-ECONOMIC BENEFITS OF SUGGESTED MEASURES
Reduced prices of cement due to suggested short, medium and long term measures would trigger off
various economic activities, which will have multiple long term far reaching socio economic
advantages. Some of the major benefits are as follows:
CONSTRUCTION INDUSTRY
Enhanced Private, commercial and industrial construction including infrastructural and related activities
will increase employment opportunities for construction and related workforce.
CAPACITY UTILIZATION
Further reduction in unit cost due to reduced overheads per unit of production, added employment
opportunities in cement industry Increased profitability Higher contribution to Govt. exchequer.
Creation of jobs in road planning & construction sector. 4% savings in fuel consumption of vehicles
plying on concrete roads. Foreign exchange savings on fuel in respect of (2) above.
COAL FIRING
50% savings on current cement industry imports of furnace oil bill of US$ 240.0 million in the short
and medium term and 100% savings in the long term. 33% reduction in production cost. Improved
turnover due to reduced prices.
Coal, mining, exploration and development would give rise to use of coal as alternative source of
energy generation.
Creation of employment opportunities in the mining sector.
Infrastructural development in the mining area would add to employment opportunities.
Improved quality of life in respective mining and adjoining areas.
Foreign exchange savings of import of fuel and furnace oil in the medium and long term
EXPORT POTENTIAL
As discussed in the body of the report there is a great potential for export provided we offer competitive
prices.
GOVERNMENT EXCHEQUER
A. TAXATION REVENUE
Loss of revenue due to reduction in tax would be offset by additional tax on increased production.
Additional tax generation through improved employment opportunities.
Additional generation of indirect taxes on increased consumption of various production materials.
B. FOREIGN EXCHANGE
Savings due to 14% fuel consumption for vehicle plying on concrete road although cannot be
quantified but could be substantial.
OTHER BENEFITS
COMPONENT PERCENTAGES
MFG COST) RS. (000) RS. (000) RS. (000)
RAW &PACKING MATERIAL 474779 385 23.5 809183 2196 88.0 902353 478 33.5
STORES & SPARES 116847 95 5.8 17934 49 1.9 165369 88 6.1
FUEL & POWER 1094470 889 54.1 61223 166 6.7 1253615 663 46.5
LABOR 151664 123 7.5 28054 76 3.0 217251 115 8.1
OTHER OVERHEAD 132897 108 6.6 10246 28 1.1 67862 36 2.5
WIP ADJ.(DEC./-INC.) 50606 41 2.5 -6784 -18 -0.7 87753 46 3.3
TOTAL 2021263 1641 100.0 919856 2497 100.0 2694203 1426 100.0
Schedule II - Cement
CONSOLIDATED INPUT COST AND PROFITABILITY OF THREE
PAKISTANI SAMPLE COMPANIES
FOR THE YEAR 1998-99
COMPONENT PERCENTAGES(MFG
COST)
RAW &PACKING MATERIAL 777404 809183 2196 88.0
STORES & SPARES 17230 17934 49 1.9
FUEL & POWER 58819 61223 166 6.7
LABOR 26952 28054 76 3.0
OTHER OVERHEAD 9844 10246 28 1.1
WIP ADJ.(DEC./-INC.) -6518 -6784 -18 -0.7
TOTAL 883731 919856 2497 100.0
Exchange Rates applied 23-10-2000
Bangladesh Takka 52.84 = US$ 1 Pakistan Rs. 55.00 = US$ 1
Schedule IV - Cement
CONSOLIDATED INPUT COST AND PROFITABILITY
OF TWO INDIAN CEMENT COMPANIES
FOR THE YEAR ENDED 1998-99
PARTICULARS CONSOLIDATED CONVERTED EQVT PAK % TO
OPERATIONS INTO EQVT RS PER GROSS
INDIAN RS PAK RS TONNE SALES
TONNES 1889553
LOCAL SALES 4398063 5800803 3070 100.0
EXPORT 0 0 0 0.0
GROSS SALES 4398063 5800803 3070 100.0
Less:EXCISE DUTY 666676 879309 465 15.2
SALES TAX / VAT 0 0 0 0.0
SUBSID,INCENT,REBATES,ETC 0 0 0 0.0
666676 879309 465 15.2
NET SALES 3731387 4921494 2605 84.8
Less:INPUT COSTS
RAW &PACKING MATERIAL 684148 902353 478 15.6
STORES & SPARES 125380 165369 88 2.9
FUEL & POWER 950468 1253615 663 21.6
LABOR 164716 217251 115 3.7
OTHER OVERHEAD 51452 67862 36 1.2
WIP ADJ.(DEC./-INC.) 66533 87753 46 1.5
COST BEFORE DEPR.(MFG. COST) 2042697 2694203 1426 46.4
DEPRECIATION 216248 285219 151 4.9
COST AFTER DEPR.(COGM) 2258945 2979422 1577 51.4
FG ADJ. (DEC./-INC.) 4352 5740 3 0.1
COGS 2263297 2985162 1580 51.5
ADMN. EXPENSES 226771 299098 158 5.2
& SELL. & DIST. EXPENES 1079417 1423691 753 24.5
FINANCIAL CHARGES 367515 484732 257 8.4
OTHER EXP. 20448 26970 14 0.5
3957448 5219653 2762 90.0
OPERATING PROFIT/(LOSS) -226061 -298159 -158 -5.1
COMPONENT PERCENTAGES(MFG % TO
COST) TOT COST
RAW &PACKING MATERIAL 684148 902353 478 33.5
STORES & SPARES 125380 165369 88 6.1
FUEL & POWER 950468 1253615 663 46.5
LABOR 164716 217251 115 8.1
OTHER OVERHEAD 51452 67862 36 2.5
WIP ADJ.(DEC./-INC.) 66533 87753 46 3.3
TOTAL COST 2042697 2694203 1426 100.0
Schedule V - Cement
CAPITAL EMPLOYED:
FIXED ASSETS 6714422
INVESTMENT 1019388
CURRENT ASSETS 1712522
TOTAL ASSETS 9446332
Less:CURRENT LIABILITIES -1893072
CAPITAL EMPLOTED 7553260
REPRESENTED BY:
EQUITY 2967164
LONG-TERM LIABILITIES 4586096
CAPITAL EMPLOYED 7553260
COMPUTATION OF RATIOS
RATIOS:
Note:
* The CAPITAL WORK IN PROCESS has been excluded from the total
assets for the computation of the rate of return on capital employed.