The borrowing republic

LAHORE: Despite the government’s tall claims the borrowing-dependent economy is far from being in good shape and a change in the economic management was made when the damage was already done.

The new finance minister does not have a magic wand to alleviate the miseries of the masses. He is talking about controlling inflation while the government is still committed to take measures under IMF directive that are inflationary in nature. Would he risk abandoning the IMF program or renegotiate it? His task is not easy. The fiscal gap is too high that has to be plugged through borrowing. This factor alone triggers inflation. The rates of essential items are constantly increasing. He needs strong government support that has abdicated its writ in many affairs. He needs the support of institutions that are very weak. He would have to put his foot down on public appeasing expenditures. Would the rulers allow him that?

The economic recovery depends on many if and buts. The first task would be to increase revenues in a way that does not hurt the common man. The tax gap in Pakistan is very high. Majority of the people with taxable income do not pay any tax at all. Successive governments had tried to increase revenues through indirect taxes that in fact are implicit tax on the poor. Indirect taxes distort the economic situation as the consumers have to bear the entire burden. Tax gap in Pakistan is not only because of tax evaders, but also those in the tax net who do not pay their full taxes by manipulating imports and under reporting production. The compliant sectors resort to unethical means because they have to compete with smugglers and others that do not pay any tax at all.

Our economy is caught up in a vicious cycle. Everyone is trying to conceal actual income. If the potential taxes could be recovered we may have a surplus budget after accounting for both current and development expenditures.

The PTI government after assuming power vowed to double the revenues to Rs8,000 billion in its first two years. No one questioned this claim as every economist in Pakistan is convinced that the potential of tax is much higher than what we yearly collect. This government however failed to even increase the revenues even to cover the high inflation in its first two years. The tax potential is still there and it needs courage of the finance team and full support of the prime minister.

To realise the actual tax potential the state would have to explore avenues. The tax evaders without any exception should be brought into the tax net. Up till now the federal board of revenue had been sending polite letters to those possessing huge wealth to explain their source of income. Hardly a few bothered to reply. Some settled the matter unofficially with the tax collectors. This time around the tax collectors should send a tax demand based on unaccounted wealth of over Rs5 million and ask them to deposit the tax within a month. The tax evaders would be forced to either justify the wealth or deposit the tax. Simply sending polite letters has not worked but the fear of confiscation of assets would force the non-compliant individuals to register in the tax net.

At the same time all the traders should be warned to provide documentary proof of the duties paid on their imported goods stocks. They would get the proof from the suppliers if the goods were genuinely imported. Otherwise the shopkeepers and traders should be asked to pay the actual duties on smuggled goods if the same are not disposed of within three months.

This may look like a harsh measure but the soft measures have failed to deliver and the markets are flooded with unethical imports. It has been established that the importers mostly under-invoice their imports to save sales tax.

The smuggling did not stop when the last government allowed Chinese truck tyres at zero duty as the importers continued to under-invoice to save sales tax, while a local manufacturer that imported the same tyres at actual value was unable to sell its stock.

The rates of imported items would not increase as the importers pay the actual price to the foreign suppliers but invoice is made on much lower value. This way they keep their rates slightly lower than local products on the basis of saving in sales tax. As far as under invoicing is concerned the simple solution is to assess the import value on the basis of sales tax paid by the local manufacturers on the same items produced domestically. The domestic production would boost as a result of fixing the same value of sales tax of local and imported items.