Documentation measures painful, but necessary to increase tax net

LAHORE: Documentation measures taken by the economic managers are justified, but are extremely painful for those that never paid their due taxes. These measures also hurt the masses, though leniency on any one measure would undo the entire documentation process.

The checks and balances introduced on all economic transactions have created panic among those that used to avoid taxes and documentation. The withdrawal of zero-rating on export sectors was strongly resisted by the exporters.

However, the government remained steadfast and told the exporters point blank that many of them also serving the domestic markets were not paying sales tax on local sales after buying the inputs at zero-rate.

After some resistance the entrepreneurs realised that their local sales were exposed, and they would not be able avoid taxes on local sales. Most of the exporters have stopped protesting the withdrawal of zero-rating.

If the government ensures prompt refunds transparently, the issue would be settled once and for all. However, the exporters would find it hard to document many subsectors of the value-chain that have been avoiding the tax net.

In that case, they would not get any refunds on work executed through those untaxed suppliers or service providers. This will increase the cost and in the short run slow down exports.

Ultimately, every tax avoider would have to come under the tax net and exports would then grow on sustainable basis. Exporters would deal in goods that they could produce at competitive rates. Many of them would go for high value-addition as well.

The condition of providing Computerised National Identity Card is the bitterest pill to swallow both for the manufacturers and the traders. Most of the taxes are pilfered at sales stage.

Even the documented manufacturers used to dispose of their products to any buyer that approached them. Now for any purchase above Rs50,000 they have to mention the CNIC number of the buyer.

The CNIC number would be automatically transferred to the Federal Board of Revenue (FBR) data base that would record and compile the total purchases and sales made against that CNIC number.

The purchaser would have to justify that purchases were made from legal money. In view of the seriousness of the issue, the FBR deferred CNIC condition till August 1.

Now CNIC number is compulsory on all purchases above Rs50,000. The businessmen are pleading with the government to defer the CNIC condition for one year. This is an illogical demand as without imposing this condition the grey economy would continue to flourish.

Moreover, what is the guarantee that the businesses would accept the CNIC condition after one year? The tax evaders would never agree to come under the ax net. The situation would remain the same as it was before June 2019.

The resistance against documentation would be very stiff. It would slow down the economic activity appreciably. The economic activities would dip whenever these measures are implemented; then why not do it when the economy is already under stress due to the taxation measures.

Reforms always result in economic slowdown because the vested interests are badly impacted. They try to pass on the heat to the masses.

This government might not have performed prudently, but its measures on documentation are near perfect. All loopholes have been plugged in one go.

So the stress will have to be accepted in one go. Postponing any one of those loopholes that impede documentation would nullify other measures on documentation and we will be back to square one.

One step that has not been much talked about is the cancellation of prize bonds worth Rs40,000. There are people, who have thousands of such bonds in their possession.

Many of them would not be able to justify the huge amount they invested in these bonds. Now prize bonds with denomination of Rs40,000 would be registered in the name of the buyer.

Pakistan may well see demonetisation of Rs5,000 currency notes on the same pattern that was adopted in India by Modi. The equivalent amount of legal currency would be re-funded to those who simply prove that the demonetised money was earned through legal means.

It is high time that all avenues of parking black money were plugged as soon as possible. Fair business practices, if introduced, would provide level playing field to all Pakistanis instead of only the elite class.

This would unleash the huge pool of less resourceful entrepreneurs waiting to enter the market on availability equal opportunities.