Two steps forward, three steps back

LAHORE: Withdrawal of tax exemptions is a bold step in right direction but the ordinance giving timeline to increase power tariff is punitive and acknowledgement of state’s failure to eliminate losses through efficiency.

Tax exemptions distort the market and give advantage to the specific beneficiaries. These exemptions are against the principle of open market economy. We might have withdrawn concessions worth Rs140 billion but we still do not know the quantum of exemptions granted to the housing sector. Businessmen knew the exemptions would finally be withdrawn.

Every political party during the election promised withdrawal of tax exemptions. In the past seven years most exemptions were withdrawn. The remaining exemptions have finally been withdrawn through presidential ordinance. These exemptions acted as entry barriers for other investors. The housing sector exemptions are offered to all and as such are not distortionary in nature. However this provides an opportunity to whiten black money.

All governments somehow tend to facilitate the vested interests. For almost three decades we provided opportunity to the tax evaders, smugglers and everyone with illegal wealth to make it legal through foreign remittances. No questions were asked on foreign remittances. People used to pay those currency dealers millions in rupees who arranged remittances at nominal charge. This door was closed last year. However the housing sector exemption has been opened to legalise the illegal money.

The government also loosened some conditions to facilitate the holders of black money. More than a year back the import of used cars was conditioned to the payment by the buyer living abroad from his/her foreign bank account maintained in the country of residence, the taxes and levies were also to be paid in foreign currency from the same account.

This practically stopped the import of used cars by commercial importers (this facility is meant for expat Pakistanis or their immediate families living in Pakistan). This was done because black money was used to buy used cars in bulk abroad and the money was transferred through hundi (illegal transfer through certain exchanger dealers). This condition has now been relaxed. Now the buyer is allowed to transfer money from other places like Dubai and book the car.

The import levies could also be made through that account. The import of used cars has now restarted. This shows that loopholes still exist in our system that allow illegal transfer of money to other countries. This concession was granted to facilitate the used car importers.

The reaction of the businessmen to withdrawal of exemptions belies logic as even those that were not the beneficiaries of exemptions are protesting. The withdrawal may impact the consumers but will open doors of investment for the non-exempted investors/businesses in many sectors where exemptions were the barriers.

They are also protesting against the vast powers conferred to the tax officials to check tax evasion. This in fact is a global norm but governments in Pakistan including the present one stopped the tax officials to use powers that were earlier available to them. They were stopped from raiding business premises/markets. They were asked to go soft on tax audits. One hopes that they would be allowed to operate freely after further increase in their powers.

Electricity tariff was already the largest expense of most middle class families in Pakistan particularly in summers. It is not so in our neighbouring countries. India, Bangladesh, and China produce power from almost the same fuels as used by us. Four years back furnace oil was the major power generation fuel in Pakistan. Now it has been replaced by natural gas, coal, nuclear power and hydroelectric power (in summers hydro power is the largest component of power mix). With this change the power rates should have gone down.

The ruling elite says with increase in power production capacities the capacity charges have increased that add to power cost the government must pay to idle capacities. If it is so then why is the government still signing new power generation agreements? The idle capacities exist because in three years the power consumption has declined against at least 10 percent yearly increase even during lean economic activities during 2008-13 when Pakistan People’s Party was in rule.

Had the power consumption increased at the same rate as in the previous regime of Pakistan Muslim League-Nawaz there would have been no need to pay capacity charges.

The capacity charges could not pinned on the previous government but on the incumbent for failing to maintain economic growth.

Power consumption has also declined because the honest consumers (that do not steal power) have drastically reduced power use because of previous huge hikes in the power tariff by this government. Conversely the power consumption by the power thieves has increased as is evident from slight increase in distribution losses.

The distribution losses of around 20 percent must be in the range of 5 percent if power theft is eliminated. The inability to recover 100 percent billed amount is adding heavily to recoveries every year. If the power theft is eliminated and payment of the billed amount is assured there would be no need for power tariff increase.