Traders told to reform, document to deter tax raids

LAHORE: The growing demands of bringing tax evaders into tax net first, before auditing, raiding and scrutinising the registered firms and persons, clearly indicate that most of the taxpayers are not fully compliant.

Tax audits and raids are a norm in the world even in the neighboring India, where tax officials have the authority to even search the residences for hidden wealth. In Pakistan, even raids on shops that are flooded with smuggled items are strongly resisted. In what can only be described as the lamest line of reasoning, the traders of smuggled items insolently argue that instead of cracking down on sellers, the authorities should go after the smugglers.

This excuse is illogical and only makes the sellers of smuggled items an accomplice. Similarly, the buyers of stolen items would blame the thieves. It is true that intuitional weakness is one of the biggest reasons behind the rampant smuggling and under-invoicing. The capacities of these institutions would never increase, if the most logical step of verifying the documents through raids and audits becomes a threat for buying illegally imported items or items entering market untaxed.

It seems that the raiding authorities are not serious in plugging these loopholes. The raids in fact are conducted selectively without any transparency. If a raid is conducted on a particular shop in a market flooded with smuggled goods then there is a possibility that the targeted trader might not have been ‘compliant’ to the ‘normal terms’ of business of the raiding officials in terms of speed money, commonly known as bribes. This does not mean that the shopkeeper should be sparred but others shops in the same market should also be brought to book.

Experts rightly believe that no illegal activity in business could be conducted without the connivance of public officials.

The traders strongly protest raids. The one-off raid is conducted with their (traders) approval to officially prove that taxmen are making all out efforts to raise the collection; however, the true aim of the bust is to threaten the businessman, who has refused to cooperate with them. After this raid the traders and the local chambers of commerce and industry lodge strong protests with the authorities and the raids stop for a while.

These orchestrated raids thus serve the cause of traders as well as tax officials, who continue to benefit from illegal trade activities.

The government and some experts are misguiding the public by saying that the tax-to-GDP ratio in Pakistan is low because of the huge size of the grey economy. Ironically, we are not even collecting taxes the way they should be from the documented economy, which according to the government has crossed $300 billion.

A modest tax-to-GDP ratio of 15 percent would easily fetch the government a revenue worth Rs4600 billion, but the current collection is Rs1100 billion less than that figure. If we bring some non-documented sectors into the tax net then the size of economy would also increase. If the documented and non-documented economies are of the same scale, then its combined size would reach $600 billion.

If we continued to collect taxes the way we are doing now the collection would grow to Rs7000 billion and the tax-to-GDP ratio would remain the same. If the tax-to-GDP ratio is increased to 15 percent the tax collection would shoot up to Rs90,000 billion.

The rulers and experts should realise that the key in both cases is the tax-to-GDP ratio. We can meet most of our needs even at the current level of documentation, if we increase the tax-to-GDP ratio to 15 percent. And if we succeed in documenting the economy fully then it would be an icing on the cake.

It is not possible to document the economy following the current approach. The government will have to withdraw all discretionary SROs besides announcing a deadline to dispose of all smuggled goods within a period of six months.

There should be a media campaign during this period warning businesses that after the expiry of six months all smuggled and untaxed goods would be confiscated and destroyed in public.

Destroying these goods would set an example and act as a deterrent against further handling of undocumented items. It’s time to give traders a chance to reform and document.