Thinning govt writ, fattening black economy

LAHORE: The current economic crisis got out of hand because bulk of the economic activities in Pakistan were already being controlled by the undocumented entities, while a thinning government writ compounded it further.

In the last two decades the Musharraf regime showed some seriousness about economic reforms as it liberalised the economy but when it came to confronting indirect taxation that did increase the revenues but at the same time paved the way for under-filing of production and under invoicing of imports. It bowed down to the protests of traders.

The following Pakistan People’s Party (PPP) regime reversed many measures introduced by the previous government. One of them was reinstatement of all the employees of public sector institutions sacked by two previous regimes, despite the fact they were duly compensated at the time of their removal. The hit was taken by the economy.

The Pakistan Muslim League-Nawaz (PML-N) regime tried to introduce reforms for the documentation of the economy but had to resort to massive indirect taxation after failing at it. The revenues did increase but it forced the documented sector to under-report production in order to compete with highly under-invoiced imports.

The under-invoicing increased despite substantial reduction in duties. Even the items with zero duty were imported at under-invoiced prices. This was because the rate of sales tax was and still is very high. Our average import tariff on all imports has been less than 10 percent. For most items, the duty ranges from 5-15 percent. The sales tax rate is 17 percent. The reduction in duties was neutralised by high sales tax that encouraged both under-invoicing and under reporting of production.

The present government at the start of its regime seemed resolved to introduce reforms. However, it backed off on documentation of economy. The best reform introduced by this government was to announce that the foreign remittances would be subject to scrutiny. The beneficiary would have to be blood related. The blank immunity to remittances was withdrawn. This plugged the biggest avenue for whitening black money. Some warned that it would hit our remittances but on the contrary the remittances increased.

The hawala agents used to gathered foreign exchange from the overseas workers and pay the agreed amount in local currency to their dear ones. The accumulated foreign exchange was then remitted to those that wanted to whiten their money.

Now that the hawala avenues have been largely eliminated and workers’ remittances are coming through official channels in small amounts. In contrast the remittances in some cases were in very high amounts to unrelated recipients.

With this exception there have been no reforms, while the loosening of government writ has made many reforms introduced in the past redundant. It is regrettable that the trade and industry has not played its due role in guiding the economy towards a sustainable growth path. Creditable global institutions in fact praised the Musharraf regime for introducing economic reforms that were fiercely resisted by the private sector.

This resistance resulted in a lopsided implementation of the reform process. The same institutions pointed out that in contrast the reforms in India were led by the private sector and its willingness to reform facilitated the Indian government introducing them without any resistance.

This contrast in the mindset of the businessmen of Pakistan and India has in fact made the difference between the leap taken by Indian economy over Pakistan. The Indian tax collectors for instance have the authority to check even the residences of the businessmen to find out any hidden wealth.

The Pakistani tax authorities cannot even dare to make a list of stocks displayed openly by the shopkeepers. Indian regulators could confiscate any smuggled item found in the markets. The Pakistani regulators turn their eye the other way as almost all its markets are flooded with smuggled goods.

Under-invoicing in India is not possible as the local industry jealously guards its interests and frustrates all such measures. The customs authorities in India have no option but to confiscate the under-invoiced goods. In Pakistan even after proven under-invoicing of over 200 percent, the importer is let off by allowing him to pay the duty according to the actually assessed value. He thus is not a loser even if caught.

Government of Pakistan has been trying to impose a general sales tax on traders since 1987 and all attempts by Nawaz, Benazir and Musharaf, Zardari and PML-N and now the Pakistan Tehreek-e-Insaf regime since then have failed to impose this value-added tax as traders strongly oppose it. The Indian government introduced value-added tax in most of its states fifteen years after Pakistan and the compliance of the traders has been remarkable.

The import of banned items in India is not possible. Any item which is banned and is imported would be taken over by Indian government, but in Pakistan, it’s a breeze. For instance, banned used auto-parts are imported dirt cheap from foreign junkyards and are cleared after payment of penalty up to 150 percent (which is practically nominal in view of very low import prices).

The rules in Pakistan allow this practice. Brand new engines are imported under the garb of used by immersing them in old black engine oil. The machine is then cleaned after clearance and sold at very high rates.