Documentation of the economy refers to the organised collection and recording of financial data, transactions, and activities within a country. This can include details about income, expenses, taxes, trade, and much more. The aim is to have a clear and accurate picture of the economic situation. With good documentation, the government can make better decisions on policies and laws. It also helps in monitoring and regulating activities, making it easier to spot irregularities like tax evasion or corruption. In essence, documenting the economy is like keeping a health check on the nation’s financial well-being.
Documentation of the economy refers to the organised collection and recording of financial data, transactions, and activities within a country. This can include details about income, expenses, taxes, trade, and much more. The aim is to have a clear and accurate picture of the economic situation. With good documentation, the government can make better decisions on policies and laws. It also helps in monitoring and regulating activities, making it easier to spot irregularities like tax evasion or corruption. In essence, documenting the economy is like keeping a health check on the nation’s financial well-being.
In Pakistan, the need for documentation of the economy is especially urgent due to a range of challenges the country is facing. One major issue is the low tax-to-GDP ratio, which has been around 10 percent for several years. This low ratio contributes to a current account deficit, meaning the country is spending more money than it’s earning. Additionally, there are problems with corruption and bad practices when it comes to spending government funds. These issues weaken the economy further.
On top of that, hoarding of essential goods like wheat and sugar disrupts the market and affects the common people. Smuggling activities, including the illegal movement of hard-earned dollars, further drain the economy. The misuse of Afghan transit trade also adds to the complications. In light of these challenges, documenting the economy is not just helpful but essential for turning things around.
The sad irony is that when experts in Pakistan think about documenting the economy, many jump to quick fixes like changing currency and demonetisation or discontinuing the Rs5,000 note. These solutions can be seen as knee-jerk reactions to much deeper problems. While such steps might bring short-term changes, they don’t address the root causes like corruption, tax evasion, or smuggling. Stopping the use of a particular banknote might make it harder for people to hoard cash, but it doesn’t fix the low tax-to-GDP ratio or prevent the misuse of trade routes. In essence, focusing solely on such measures oversimplifies the complex challenges we face and distracts from finding long-term, effective solutions.
It is important to mention that changing currency to discourage cash hoarding and to improve documentation of the economy has been tried in various countries with varying degrees of success. One of the most talked-about examples is India’s demonetisation in 2016, where the government discontinued 500 and 1,000-rupee notes. However, the move led to immediate economic disruption and the long-term benefits are still debated. Another example is North Korea, which carried out a currency reform in 2009 aimed at cracking down on free market activities and cash hoarding. This caused massive inflation and had a minimal positive impact on the economy.
Moreover, Zimbabwe also tried to change its currency multiple times, largely due to hyperinflation rather than cash hoarding. However, these attempts did not result in any substantial improvement in the economy. Likewise, Nigeria also attempted a currency change in the 1980s under a program called the “Structural Adjustment Program” to tackle corruption and hoarding. The move failed to achieve its intended objectives and led to economic hardship for many citizens.
Overall, these examples suggest that simply changing the currency or discontinuing high-denomination notes is not a foolproof solution for economic challenges like cash hoarding, corruption, or tax evasion. It often causes immediate disruption and the long-term impacts are not always beneficial.
Rather than focusing on short-term fixes like demonetisation, it’s important to consider more sustainable and effective ways to document the economy and solve underlying issues. One such approach is promoting online and credit card payments. Shifting away from cash transactions to digital means makes it easier to trace financial activities. Countries like Sweden and South Korea have successfully moved towards cashless economies, which has not only streamlined financial systems but also led to increased tax revenue. Sweden, for instance, has one of the highest tax-to-GDP ratios in the world, partly aided by its well-documented, mostly digital economy.
Financial inclusion is another important aspect. Many people in Pakistan don’t have access to basic banking services, which keeps them out of the documented financial sector. By providing easy access to bank accounts, digital wallets, or other financial services, we can bring the masses into the formal economy.
This makes it easier to monitor and collect taxes, thus improving the revenue for the country. India has made strides in financial inclusion through its “Jan Dhan Yojana,” a scheme to provide affordable access to financial services like banking and credit, which has had a positive impact on its economy.
Lastly, changing tax laws can encourage documentation of the economy. By simplifying tax laws, reducing rates, and offering incentives for compliance, people are more likely to participate in the formal economy. This will create a virtuous cycle where increased compliance leads to higher tax revenues, which can then be invested back into the country for further development.
Countries like Estonia have successfully reformed their tax systems to make them more transparent, efficient, and conducive to economic documentation. Their example shows that it’s possible to build a well-documented, robust economy through intelligent policy changes.
The recent change in the Islamabad Capital Territory (ICT) Sales Tax on Services is a commendable step towards encouraging economic documentation. By reducing the sales tax rate to 5 percent for customers who pay their restaurant bills with a credit card or digitally, the government is incentivising formal, traceable transactions. Extending such tax benefits to other sectors could be a game-changer for the documentation of the economy. This could serve as a model for a broader, more comprehensive approach to documenting Pakistan’s economy.
In conclusion, hasty, knee-jerk solutions for documenting the economy could do more harm than good, especially in Pakistan’s already fragile economic system. Such quick fixes may lead to public mistrust and destabilise the economy further. What is needed instead is a thoughtful, long-term approach that encourages digital payments, financial inclusion, and tax reform. By focusing on these sustainable solutions, we can successfully document the economy, improve tax collection, and create a more transparent and stable economic environment for the future.
The recent change in the Islamabad Capital Territory (ICT) Sales Tax on Services is a commendable step towards encouraging economic documentation.
By reducing the sales tax rate to 5 percent for customers who pay their restaurant bills with a credit card or digitally, the government is incentivising formal, traceable transactions. Extending such tax benefits to other sectors could be a game-changer for the documentation of the economy. This could serve as a model for a broader, more comprehensive approach to documenting Pakistan’s economy.
In conclusion, hasty, knee-jerk solutions for documenting the economy could do more harm than good, especially in Pakistan’s already fragile economic system. Such quick fixes may lead to public mistrust and destabilise the economy further. What is needed instead is a thoughtful, long-term approach that encourages digital payments, financial inclusion, and tax reform. By focusing on these sustainable solutions, we can successfully document the economy, improve tax collection, and create a more transparent and stable economic environment for the future.
– The write is Additional Commissioner Inland Revenue
