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June 19, 2019

Dealing with the double jeopardy of ‘tax-flation’


June 19, 2019

LAHORE: In its thrust to stabilise economy the government has neglected the plight of the consumers that have been badly impacted by the dual burden of massive rupee devaluation and increase in indirect taxation.

Pakistan sure needs high revenues to manage the government expenses. At the same time, it also needs more employment opportunities, better governance and rule of law. Indirect taxes are passed on to the consumers but we continue to rely on these taxes to jack up revenues. This time around the government aims to increase tax revenue by 34 percent.

It has suggested various measures to achieve the target. It seems improbable that the target would be achieved with these steps. But achieving revenue target is imperative under the promises made with International Monetary Fund (IMF). In case of any slippage the sales tax rate would be increased to plug the promised revenue gap. It would hurt the poor consumers more than the affluent ones of the manufacturers and service providers.

At the same time the consumers are bearing the burden of cartelised behavior of the businesses. The government has lost its writ to control these collusive monopolists. Though, industry and business in Pakistan are operating under the principle of open market economy the consumers however remain at the receiving end due to weak regulations and wicked cartels.

There is no effective consumer protection institution in the country. There are no effective consumer protection laws.There is no check on irrational increase in prices of everyday commodities. The rates of milk, wheat flour, vegetables, pulses, edible oil, mutton, beef, chicken, eggs, tea, etc, are regularly on the rise. A new entrepreneur class has emerged that manipulates the rates of most of these commodities through hoarding.

The principle of supply and demand no longer applies. When the demand is high the prices naturally increase but when the supplies are high the vested interests suppress them by withholding production or hoarding the stocks to create artificial shortages and keep the rates high.

Thus the better-organised sectors like cement, flourmills, ghee manufacturers, and sugar producers, manage to shield themselves in over-supply situations through their respective associations and maintain higher prices that ensure them high profit.

Processed food industries are doing a roaring business in Pakistan. Most of the food-related industries are catering to the local needs only, yet their production capacities are higher than the local demand. They have no export market but even then they have registered mushroom growth.

The flourmills have the capacity to produce at least three times the wheat flour needed in the country, yet there is no competition between them. The efficient and inefficient flourmills are thriving because they don’t compete with each other because of their cartelised alliance.

Similarly, the most efficient and the highly inefficient, sugar mills, edible oil units are in business because the retail rates are determined in such a way that ensures the viability even of the most inefficient ones.

Consumers in Pakistan pay more for electricity because the government agreed to unrealistic high payments to the independent power producers. They are forced to absorb the high electricity losses that are included in cost and occur either due to corruption or inefficiency of power distributors.

They pay higher price for steel because the state protects the steel monopoly of the Pakistan Steel Mill. The soda ash is costlier for many value added industries as a multinational enjoys duty protection.

Health services in the country are exorbitant as the government fails enforce transparency in the public sector health center and due to its inability to regulate the private sector.

The operation costs in heart or orthopedic surgeries are 10-50 times higher in private sector than charges taken by public sector hospitals. The rates of medicines in Pakistan are irrational due to over regulation by the Health Ministry. Rates of relatively common and cheaper drugs are fixed low while the rates of third-generation medicines are out of reach of common man.

Substandard candies and chocolates are openly sold in the market. The regulation of fares in public transport is lopsided. The auto-rickshaws and taxis operate without meters that are fixed by the government to charge the approved per kilometer fare.

The institutional weaknesses of regulatory bodies and corruption encourage exploitation of consumers. The benefits accrued from sales during short supplies are rarely depicted in their tax returns.

The bottom line is that for as long as the economies of the households are languishing under the double jeopardy of ‘tax-flation’, there will be no economic stabilization in the country.

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