Informal economies are considered a barrier to inclusive growth and exclude a majority of people from accessing opportunities of productive growth in the economic realm, depriving them of entitlement at work because of their informal status.
In comparison, workers engaged in formal, registered, tax-compliant businesses and units are legally covered for social protection. The undocumented economy or the informal economy also hinders proper economic planning for socio-economic development.
The growing influence of the informal economy, especially in developing countries is a big challenge for political and economic managers. However, compelling domestic realities and enabling international discourse are encouraging countries to take up the challenge of either eliminating the informal sector or reducing its size to the minimum. Several Latin American and Caribbean countries (ie Argentina, Brazil, Ecuador, Dominican Republic, Uruguay) have succeeded in reducing informality through a mix of policy measures in four key areas: improving economic capacity or productivity, legislation, provision of incentives and oversight. Countries in our region such as India and Bangladesh are also vigorously pursuing policies aimed at eliminating informal economies.
According to different surveys and reports, the informal economy in Pakistan accounts for 35-50 percent of the total economy. The informal sector in money terms is well in the range of $85 billion. For a country like Pakistan, which is confronted with serious economic challenges, it is absolutely essential to focus on documenting the economy. The amnesty scheme announced by the PTI government has twin purposes – documenting the economy, and welcoming the business and trading community to participate in the legal economy. It offers yet another opportunity to them to legalize their hidden assets and businesses to avail the benefits that come by associating with the informal economy.
The major and significant difference between the present scheme and the one announced by the PML-N government is that the current one aims to eliminate the difference between a filer and a non-filer. It requires the declarer to deposit all the in-hand cash in Pakistani banks and declare all assets held within and outside the country. The previous scheme was mostly availed by filers and it attracted only 25 percent declarations in immovable properties abroad, mainly in UAE, UK and Canada and most people preferred to keep the money outside Pakistan. The scheme was mostly used for whitening money as it did not lead to higher tax returns. Undisclosed properties and bank accounts mostly remained undisclosed as its major focus was on attracting a higher number of declarations.
The amnesty or the assets declaration scheme announced by the PTI government proposes to tax all assets other than immovable property at the rate of four percent, domestic immovable properties at 1.5 percent, foreign liquid assets at six percent, unexplained expenditure at four percent and undisclosed sales at two percent. The default surcharge, which may be called the wait and watch payment, goes up to 40 percent of the total tax amount. So your six percent becomes 8.4 percent. As is evident, it is a comprehensive scheme that covers all aspects of the informal economy.
In a bid to accelerate the process of documenting the economy, the Federal Board of Revenue has enforced Benami Rules to start the process of attaching benami immovable and movable properties and intercept transactions of such properties carried out on fictitious names. It has also been empowered to take action against the benamidar or the fictitious person on whose name the benami property has been transferred or held.
The government has also taken decision to make the Benami Act operational. By making this law operational, all those bank accounts and properties which are kept on the name of others will be seized and then the relevant tribunal will decide the process of sale of confiscated bank accounts and properties under the Benami Act. As part of the government’s efforts to document the economy, the law will allow the government to take strict action against those who got their movable and immovable assets registered with fictitious persons in order to evade taxes.
The government has also obtained information from 26 countries in respect of 150,000 people who have properties and assets abroad; and in case they fail to declare by the given deadlines they could be awarded seven years imprisonment as well as face confiscation of their properties. People who hold undeclared properties and business with the country will also be treated similarly in case they fail to come forward voluntarily.
Doing business in a legal way, paying taxes and holding movable and immovable properties in a legitimate way is not only a legal responsibility of every citizen but also a moral duty towards the state and fellow citizens. At the same time, the government is under the obligation to ensure that the benefits of development and other steps aimed at public welfare are judiciously and equitably accessible to all its citizens. This is only possible when the economy is properly documented and the government is able to generate enough indigenous resources. A country cannot be run on loans unproductively spent. The current economic situation makes it imperative for the government to take credible and concrete steps to rectify the maladies afflicting the economy. The best way to do that is to increase the size of the formal economy.
The government on its part has already taken some harsh decisions which have to some extent hurt certain vulnerable sections of society; but these decisions were necessary to stem the rot. They have led to a decrease in the current account and budgetary deficits whose impact will start showing in due course. While the government is working hard to lift the economy out of the quagmire it is stuck in, it is also incumbent upon the citizens and the business community to appreciate these measures in their true perspective and also contribute their bit to make this effort successful.
The country belongs to all of us and its future development and prosperity depends on our sense of patriotism and realization of our obligations towards the state as its citizens.
The writer is a freelance contributor. Email: ashpak10gmail.com