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August 23, 2019

Better policies needed to remove loopholes in taxation system


August 23, 2019

LAHORE: There are tax havens around the world where entrepreneurs, politicians and bureaucrats park their ill-gotten money, but Pakistan is among a few countries where policies are so formulated to create a tax haven within the country.

About a year back, the most abused concession was remittances as the law permitted inflows of foreign exchange without any questions asked. The law remained in force for over 25 years before it was recently quashed.

The incomes parked in real estate were also under immunity from investigations and only recently some steps have been taken to reduce the abuse of this facility. Agriculture is another avenue where the income is almost free of income tax that is payable by other groups on their income. Capital gains in capital market are also exempt from ‘real’ tax.

We cannot leave any space for tax evaders be it remittances, real estate, stock market or agriculture. Tax evaders would park their money in these avenues without apparently violating any law. Then there are certain sectors or businesses that are exempted from taxes.

It would be interesting to note that the exempted sectors of the economy almost always post healthy profits. You draw the exemptions the profits vanish. This amounts to facilitating a few at the expense of masses. The exemption of income tax on agriculture induced the manufacturers to enter the farming business.

Now almost every big manufacturing family owns hundreds of acres of agricultural land, livestock and some state of art dairy farms. They are at liberty to declare as much profit they want from agriculture and induct that capital in their manufacturing concerns.

It is worth noting that all large dairy farms belong to the industrialists of this country. The large poultry farms are also owned by the businessmen and not farmers. These industrialists, particularly exporters, diverted illegal incomes to industrial estate business and many are a name to reckon with in this field. Withdrawing exemption from agriculture is an uphill task.

The government needs to muster political will to bring agriculturists into the tax net. If we go through records, we will find that most tax evading sectors availed the immunity on remittances to avoid taxes and at the same time expand their business. Most of the contractors in the construction sector paid nominal taxes but expanded their business empire by arranging remittances from abroad.

It is because of the presence of avenues to conceal wealth legally the country is not moving up economically. Tax base would automatically expand if exempted sectors and services are brought under the tax net.

There is no doubt that the economy has expanded during the last 15 years, which is evident from the exponential increase in tax collection from Rs500 billion to Rs4,000 billion. The point to note is that despite such increase, we have not been able to make our ends meet.

The obvious reason is that the grey economy has expanded more than the documented economy. Informal businesses are using the government infrastructure, facilities free of cost. They are deteriorating the infrastructure more and are creating need for further infrastructure and facilities. The government lacks the resources to cope with increasing expenses, as at least 55 percent of the economic activity is outside tax net.

The state owned enterprises are adding further burden on the exchequer. Almost all of them are highly inefficient and have not upgraded their technology. Despite enjoying monopoly in most fields they operate on losses due to incompetent workforce recruited on political grounds.

The equipment and technology in these enterprises is not properly maintained, with inefficient machines. Sustained growth and equitable development is possible only through good governance based on six basic principles stated by governance guru Daniel Kaufmann. It includes the process by which those in authority are selected and replaced –voice and accountability, political stability and absence of violence and terrorism.

Pakistan’s position on all these counts is not commendable. There’s no capacity in the government to formulate and implement policies. Thus, governance remains ineffective, impacting the quality of regulations. The government of Pakistan has not been able to control prices, hoarding, smuggling and tax evasion. It seems that the government lacks will to implement its writ. Lastly, there is no respect of citizens and state for institutions.