Revenue challenges

LAHORE: Informal economy particularly on the scale it is prevalent in Pakistan cannot be condoned as it operates without paying government taxes. There is no difference between smugglers and the traders, both of whom operate outside the tax net.

Pakistan badly needs tax revenue to operate without outside help or loans. We are not generating revenues according to our potential or needs.

The universal barometer of adequate tax revenue is its ratio to GDP. Pakistan’s tax to GDP ratio is below 10 percent, which is among the lowest in the world. The revenue leakages come from traders, transporters, and service sectors.

Traders are at forefront in this regard as they dispose of every item that is produced after paying tax or without paying taxes. They also dispose of smuggled and under-invoiced goods without documenting any of these sales. A spectre is haunting our economic planners – the spectre of the “informal” economy.

The informal sector includes all businesses that have not been registered with the tax authorities and even those that under-report income.

Traders in Pakistan operate without proper documentation. They are not required to show the purchase receipts or their sales record.

All they have to do is to deposit 0.7 percent to 1 percent of their annual turnover as final tax including income tax and sales tax. Even the turnover is determined by the trader without forwarding any supportive documents. The amount that they pay as final tax liability is not in line with their lifestyle.

The trouble in Pakistan is that there is no money trail of most of the economic transactions. A firm importing under-invoiced goods say at 10-20 percent of original price would sell it to traders at above the original price but slightly lower than the price of similar locally produced item.

Since the trader does not have to show purchase of sales price the importing firm escapes the profit it charged.

Had the trader been fully documented and required to give the trail of its business, he would have deposited the purchase receipt with tax authorities and charged GST on its sales price after adjusting the sales tax paid by the importer at import stage.

The importer could then be confronted by income tax authorities to pay the income tax on high profit.

He would then prefer not to under-invoice imports. Similarly smugglers would not find an outlet to dispose of their smuggled goods.

Proper documentation starts at the retail stage where the entire money trail is available. But if we waive retailers from proper documentation, the entire system collapses.

Retailers are the dumping ground for smugglers, and all those that steal taxes one way or the other. It is an enigma as to why traders and transporters remain outside the tax net in Pakistan.

We should learn from our neighbour India, where Indian traders have accepted proper documentation through GST.

In the developed world as well, the retailers are the main source of collection of consumer taxes like GST. Tax evasion creates an unfair advantage for informal firms.

For others, programmes that target the informal sector distort the playing field.

Economists and policymakers have disregarded the physical aspects of urban life that promotes informal work. Housing policy is typically discussed with blatant disregard for urban transport and the locations where industrial and business zones are authorised. Governments have to start doing some good things, not just stop doing some bad ones.