Tuesday November 30, 2021

The missing taxes

October 27, 2021

LAHORE: The economy is in chaos, but it is not a priority of the government that is engaged on other fronts.

The government may be desperate to save its rule, but the country is even more desperate to regain its economic independence. To operate smoothly the government has to take the economy seriously.

We have to generate resources from within the country. The option of obtaining loans or foreign aid has been exhausted.

Pakistan has a lot of potential to generate resources locally; however, the will to tax is missing and collection almost absent. To bring in non-tax compliant sectors into the tax net and to withdraw tax exemptions, the government needs to show some strength.

But the will to correct wrongs is so weak that the International Monetary Fund (IMF) had to ask the government to close the accounts of numerous government departments in commercial banks and transfer that amount to the State Bank of Pakistan.

Legally government money cannot be kept in commercial banks, but hundreds of billions of rupees were being kept with commercial banks. Certainly, holding large amounts of different government departments benefited the commercial banks, but at the same time, someone from the government probably also received favours from the banks for these deposits.

There is no end to human greed, be it government officials or businesspersons. Laws are made prudently to ensure that no one benefits unduly or hides income.

Every businessperson wants to make as much money as possible. At the same time, everyone looks for ways to avoid taxes.

The state has to ensure full tax compliance. Economic issues cannot be tackled in isolation. Every product or service that is produced locally or imported is disposed of in the local market.

Policy should provide equal opportunities to both local and imported products. Local manufacturers have the right to get slight protection against imports, but in Pakistan, importers of finished goods usually enjoy a huge advantage over local products due to massive under-invoicing, which nullifies the protection and reduces sales tax.

The solution to this issue is simple. The import tariff price of the imported finished product should be based on the amount on which the local producer pays the sales tax.

If the local producer pre-sales tax price is Rs100 the ITP of the similar imported product should also be Rs100 (converted into dollars). This way the importer would pay the actual protective duty and sales tax on duty paid value.

This way would not violate WTO rules, as the prices would be near the global level and cover the antidumping advantage of local producers. Government levies would multiply even when the imports go down.

If implemented, the local industry would prosper and operate without fear of unethical competition. Government could then monitor local production through technology to eliminate the chances of under-reporting of production (through which local manufacturers save 17 percent sales tax).

On paper, it seems like a simple solution, but the implementation is not easy. It would deprive the corrupt officials of the rent that they gather on a regular basis from the importers (for under-invoicing) and from the manufacturers (for under-reporting production).

For looking the other way, corrupt officials pocket billions of rupees annually. The job will not be complete until the menace of smuggling is also effectively checked (currently around 30 percent of the items in large markets are smuggled).

Smugglers have routes in the corridors of power and reining them would be an uphill task. The economy however would not improve unless all these ills are tackled in one go. The economic chaos would continue if one is targeted, while the other is neglected.

The cost of doing business in Pakistan is high because of rampant corruption. The power rates are higher because of power theft and other corruption in the system like maintenance of equipment.

Stopping corrupt practices will bring the power rates in Pakistan down to regional level. There would be no need to give power subsidies.

The state should facilitate the businesses short of providing any subsidies. The penalties for avoiding taxes should also be harsh.

Our regulators are so meek that despite being empowered by the law to put tax avoiders behind the bars, no tax avoider has ever been arrested and persecuted.

The high-rise buildings scattered around the country dare the tax collectors to ask for the source of income from which these were constructed. All attempts to tax real estate on capital gain have failed in the past.

Most of the black money is parked in property. Government inaction in this regard has promoted land mafias in the country. These mafias cannot flourish without state protection. We can no longer enjoy the luxury of letting informal trade flourish.