Rent seekers

LAHORE: Perceptions about corruption in Pakistan are based on actual experiences with paying bribes by the investing firms. It reveals that the firms making investment in Pakistan have to pay bribes even to get water, gas, and electricity connections.

Corruption is largely associated with the business-government interface and reveals that the menace is more widespread here as compared to other countries. Many attempts to eliminate this interface through technology have failed.

Filing of refunds electronically detailing documented evidence of claim do not result in automatic refunds. Probably some loopholes are left in the software (at the behest of rent seekers) that reject genuine refunds.

Applicants are asked to appear in person and justify the claim to the concerned bureaucrat. For those that agree to pay the rent the claim is accepted. While those who refuse to pay and insist that the claim is genuine and fully supported by documents have to wait for longtime for refunds.

Entrepreneurship flourishes when all citizens are provided a level playing field. Level playing field is denied in all corrupt societies.

Imports would be restricted to few when under-invoicing is allowed to those that grease the palms of concerned officials. When a new entrant explores the foreign markets for importing products popular in the local market, he/she dare not accept any offer of global suppliers that quote the actual prices. The new importer after assessing the impact of duties and taxes realises that importing at quoted price would not be commercially possible.

After some probe it dawns on him/her that the product is being imported at less than half its actual global rate. Only those new entrants would venture into imports, who are prepared to follow the entrenched importers.

For the new entrant, this is not an easy job, for they have to look for a hundi operator, who could transfer the amount of under-invoicing to the foreign supplier (not all suppliers agree to under-invoice) and also look for a firm in that country to prepare the invoice. When the goods arrive in Pakistan, the new importer must pay the rent for clearance.

Thus, a vicious circle of rent seeking boots entrepreneurs out of our system and promotes crooks who have mastered the art of bypassing the system at every step of their business. They evade import duties and sales tax as well as income tax.

Similar corrupt practices at import stage then creep into domestic trade as well. The government imposes duty on imports to provide some advantage to domestic producers. The duty advantage is usually 5-10 percent.

The state charges uniform sales tax of 17 percent at import or local manufacturing stage. Local manufacturers pay 17 percent sales tax on the retail price of their product.

Importers in reality pay much less than 17 percent even after paying import duty and sales tax on duty paid value of the invoice because of under-invoicing. This way the advantage of competition tilts towards imports.

As a counter measure, local manufacturers must either under-report production to save most of the sales tax or close down. Those that refuse to join the crooks close down, while the remaining just survive and rarely flourish.

For a prosperous Pakistan, the government must prefer to eliminate corruption in the business dealings. Investors would come in large numbers if they were assured that they will get a level playing field. Controlling corruption in all avenues would take some time, but corruption at business and taxation level can be eliminated with immaculate software.