Comment: Economy to languish as long as the menace of graft lingers large

LAHORE: It is naive to calculate the amount of bribe as the total quantum of corruption in the country as expert estimates point out that for every rupee paid as bribe the national exchequer suffers a loss of up to Rs100.

Everyone agrees that any malpractice is injurious for the economy. Corruption inhibits the growth of genuine and honest businesses. It reduces job creation in the economy and reduces the quality of infrastructure and government supplies.

It is a known fact that contractors reserve 10-30 percent speed money in their bids to be paid as graft at various stages of an infrastructure project. The bidder either compromises the quality of inputs or bids higher to accommodate bribes to be paid during execution of projects and rendering of services.

In case of a compromise on input quality, the life of the project is shortened appreciably and in some cases it becomes a total loss. We often hear stories that a bridge built somewhere in the country collapsed within months or years after its completion. In such cases the loss to the exchequer is Rs100 or more for every rupee paid as bribe. In case of a higher bid the nation wastes 30 percent of the project cost that has been paid as bribe.

In the same way, the power theft that is carried out with the connivance of the staff of power distributor, plays havoc with honest consumers besides pushing the power distribution companies towards bankruptcy. If the consumer pays a bribe of Rs1,000 to get its genuine consumption bill of Rs10,000 reduced to Rs3000, the power distribution company loses Rs7000 or 70 percent of its actual revenue.

The thief enjoys air conditioning and other high-power-consuming facilities, while an honest consumer cannot even afford to use ceiling fans according to his family’s needs for a power bill of Rs3,000. The other impacts of this theft include inability of the company to maintain its distribution network. Those that are not paying their bills for years are causing 100 percent loss the company.

Smuggling, under-invoicing and under-filing of production are done invariably in collusion with concerned government officials. The first two transfer jobs outside Pakistan because domestic manufacturers cannot compete with no-duty- or nominal-duty-paid products and opt out of business because they do pay 16 percent sales tax on their products. The smugglers pay no sales tax and if under-invoicing is to the tune of 10 percent of the original cost they simply pay one-tenth of the sales tax besides evading import duty.

Similarly under-filers of production evade large amounts of sales tax and have huge edge over those domestic producers that declare their actual production. This denies the taxpaying producers a level playing field. The bribe-taker might have taken a minor amount but the loss to economy is major.

Tax rates in Pakistan are high because the state milks money from compliant taxpayers, while tax evaders roam free with impunity. The most of those, who remain out of tax net, do so by bribing the income tax officials. Moreover, the amount they pay is peanuts compared to what they save. Since tax evaders are in millions even nominal amounts add up to bring fortunes to the takers. The fallout of this evasion is that informal economy is growing in Pakistan at a higher pace than the formal. Income tax evasion can be judged by the fact that Pakistan’s tax to GDP ratio is marginally above 10 percent. It was 13.9 percent in late 90s. Even if we bring the tax to GDP level to 13.9 percent, the increase in taxes would be Rs735 billion. (Pakistan’s GDP is $300 billion. Additional tax if tax to GDP ratio rises to 13.9 percent will be $6.7 billion or 6.7 x110 =735 billion).

The loss that the nation suffers as a result of this tax evasion is very huge. Genuine investors including domestic and foreign investors are opting out of high tech manufacturing business (where tax evasion is difficult) and prefer engineered trade that saves them huge duties and brings them enormous profits. The cost to the economy is huge as the country is losing its manufacturing base.