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April 17, 2021

Fall of machines


April 17, 2021

LAHORE: It’s time to let go of the mindset of protecting inefficiency and embrace the idea of enabling small entrepreneurs to upgrade with better technology.

Our planners have let the small and medium sized entrepreneurs operate without coming into the tax net. They remain small even after decades because they cannot justify the upgrade of their processes with better technology as no taxes means no official savings. In the process we have made our country a market for other economies. Better quality imported products continue to replace the inferior products produced from low technology.

Two decades back probably in 2001 our imports were almost equivalent to our exports (trade deficit only $494 billion). Almost 40 percent of our imports were raw materials and machinery. In 2021 our trade deficit is double than our exports even after import compression. Raw materials and machinery hardly account for 25 percent of our imports.

The small and medium entrepreneurs have negligible share in import of machinery. Finished products account for almost 30 percent of our imports.

These products include numerous items that were locally produced in yester years. The inability to upgrade technology paved the way for imported stuff.

Our toy-making small industry has died as the better finished Chinese toys are available at lower price. Our shoemakers (both famous brands and others) are importing footwear from China, Indonesia and other Far Eastern countries. Even the packaging material (corrugated cartons) and plastic bottles are being imported. Consumerism flourished as local buyers saw the difference between local and imported staff. Consumers are lured by imported stuff to the extent they buy imported biscuits and toffees at three times the price of the best local brands.

The imports are coming from countries that were almost at the same stage as we were 30 years back. But in other economies gradual improvement of technology was possible because tax compliance of the smallest entrepreneur was better than the compliance of our small and medium entrepreneurs. The government did try to suppress through regulatory duties but failed. People accustomed to better products are ready to pay higher prices for better quality.

The mindset of our small businesses is to operate without paying taxes and the mindset of our consumer is that imported products are better than local (it is not always so, our branded milk or non-alcoholic beverages for instance are at par in quality with imported milk but still there is a market for imported stuff.

We have large-scale unemployment because after years of resisting taxes many small units have closed down as they were unable to upgrade.

We are seeing a surge in large-scale manufacturing. That is a good sign but the SMEs are still operating under stress. They complain of low access to finance but most of them do not maintain proper accounts so that banks could assess their real worth. Over 70 percent of the employment comes from SMEs that are not in good shape.

The large-scale industries are not large-scale employers. Most operate with 300-1,000 workers. The well-established SMEs employ up to 4,000 workers (stitching units with 1/20 times less investment than spinning mills that employ 600 workers). But millions of SMEs employing 3-10 workers including the owner are finding it impossible to pull on. These SMEs pay less than half the official minimum wage because they are not registered (even the registered ones escape after paying bribes).

Now that these low paying SMEs are in trouble the livelihood of millions of extremely low-paid workers has been disturbed. These SMEs need upgrades and similar SMEs must operate to cooperate to lower cost and enhance technology. Better technology would reduce the number of workers but the enterprises would become sustainable. They could upscale their businesses if they register into the tax net.

Tax compliance is not only essential for generating revenues but also for the businesses to upscale from white money. The state would have to ensure that no individual or business operates without registering with the income tax department and filing returns annually.

The idea to force all businesses to display their tax registration number prominently at their business premises should be tried. Those not registering would be identified. Tax registration does not mean you have to pay the income tax come what may. The tax would be applicable when income crosses a threshold.

But registration ensures all business dealings are documented. Many suppliers providing materials to the SMEs through proper documentation would be paying large income tax on those supplies. Tax compliance could be easily achieved if there are no exemptions.