Finance Minister Ishaq Dar has been compelled by the force of circumstance to slap additional import duties and taxes on a wide range of goods to raise an extra Rs 40 billion in revenues in the second quarter of the current financial year. Reportedly, the IMF is refusing to release the last tranche of over $500 million in balance of payments support until Mr Dar makes up for loss of projected revenues that is threatening to widen the fiscal deficit beyond agreed limits.
Mr Dar has tried to calm popular nerves by stressing that the measures have been imposed on “luxury” items and should not adversely impact the layman’s basket of everyday necessities. A cursory look at the list of 350 plus items on which cumulated duties and taxes have been increased 1% to 15% suggests that his explanation is broadly correct. But the measures will certainly fuel inflation because of the “demonstration effect” on other commodities of which these are inputs of one sort or another.
Nonetheless, some pertinent questions need to be asked. Why has the FBR let down Mr Dar yet again by not sufficiently enlarging the tax net and catching tax dodgers? Why has the retail GST on the trading and professional classes not been imposed and collected? Why has the Rs 5000 note that is the lynch pin of the cash black economy not been withdrawn? Why has the miniscule levy on cash withdrawals from banks to discourage non-documented transactions been reduced further? Why are legitimate taxpayers being harassed to “pay more” while the cheaters are being let off the hook because they are greasing the palms of greedy tax inspectors?
Dozens of reports on how to reform the tax structure and improve tax collection are collecting dust in the Ministry of Finance. This explains why every government is constantly borrowing or begging from domestic and international sources to get along. Part of the reason has to do with politics and part of it is due to the vise-like grip of the corrupt tax bureaucracy that resists every effort to become efficient and honest.
The GST on retail is a norm in every developed country. It has been talked about since the mid 1990s. When the PPP is in power, the PMLN sides with the traders and won’t allow the tax to be imposed. When the PMLN is in power, the boot is on the other foot.
An effort to bypass the corrupt tax bureaucracy at the port of entry in order to ensure that imported goods are not under-invoiced so that proper duties are paid was made by the second PPP government in 1993-96 when it appointed pre-inspection Swiss agencies SGS and Cotecna to evaluate imports. Much to the chagrin of the tax bureaucracy, this led to a significant increase in customs revenues and would have served as a building block for other reform measures if the project had not been derailed by credible allegations of underhand commissions taken by Mr Asif Zardari on the fees paid to the two agencies by the PPP government. The corruption charge against Mr Zardari has not borne fruit in Pakistan because the prosecution could not present original documents to prove guilt. This, despite the fact that both SGS and Cotecna have admitted their guilt in a court in Switzerland and been fined for corrupt practices, and we know how the original documents “disappeared” from Geneva during Mr Zardari’s time as President of Pakistan.
Some of the foreign exchange laws of the country are also designed to help tax dodgers. Anyone can buy foreign currency on the open market, stuff his suitcase with a wink from the custom official, or hire a boat on the open seas, take it out of the country and then remit it back via official banking channels to make it “white” because no questions can be asked about the source of remittance. The net cost of this transaction is less than 2% whereas the potential tax saved on black money can be about 20%. It was originally designed to facilitate expatriate workers’ earnings to their families in Pakistan but has now become a scandalous scheme to whiten black money. Like the 5000 rupee note, all that is required to stop its misuse is to prescribe a limit to any inward remittance at any time if the remitter does not want to explain the source and purpose of the transfer.
Perhaps, if Imran Khan’s “dharnas” had not destabilized the PMLN government, Mr Dar might have actually made bold to carry out some sorely needed though unpopular tax reforms by now. But midway through his term, with local elections breathing down his neck, allegations of bad governance rocking his government’s ratings and conspirators predicting the end is nigh, one cannot expect the finance minister to act like a wizard and set all things right overnight. It is a small miracle that he has succeeded in keeping the rupee below Rs 120 to the US dollar.
Mr Dar has tried to calm popular nerves by stressing that the measures have been imposed on “luxury” items and should not adversely impact the layman’s basket of everyday necessities. A cursory look at the list of 350 plus items on which cumulated duties and taxes have been increased 1% to 15% suggests that his explanation is broadly correct. But the measures will certainly fuel inflation because of the “demonstration effect” on other commodities of which these are inputs of one sort or another.
Nonetheless, some pertinent questions need to be asked. Why has the FBR let down Mr Dar yet again by not sufficiently enlarging the tax net and catching tax dodgers? Why has the retail GST on the trading and professional classes not been imposed and collected? Why has the Rs 5000 note that is the lynch pin of the cash black economy not been withdrawn? Why has the miniscule levy on cash withdrawals from banks to discourage non-documented transactions been reduced further? Why are legitimate taxpayers being harassed to “pay more” while the cheaters are being let off the hook because they are greasing the palms of greedy tax inspectors?
Dozens of reports on how to reform the tax structure and improve tax collection are collecting dust in the Ministry of Finance. This explains why every government is constantly borrowing or begging from domestic and international sources to get along. Part of the reason has to do with politics and part of it is due to the vise-like grip of the corrupt tax bureaucracy that resists every effort to become efficient and honest.
The GST on retail is a norm in every developed country. It has been talked about since the mid 1990s. When the PPP is in power, the PMLN sides with the traders and won’t allow the tax to be imposed. When the PMLN is in power, the boot is on the other foot.
An effort to bypass the corrupt tax bureaucracy at the port of entry in order to ensure that imported goods are not under-invoiced so that proper duties are paid was made by the second PPP government in 1993-96 when it appointed pre-inspection Swiss agencies SGS and Cotecna to evaluate imports. Much to the chagrin of the tax bureaucracy, this led to a significant increase in customs revenues and would have served as a building block for other reform measures if the project had not been derailed by credible allegations of underhand commissions taken by Mr Asif Zardari on the fees paid to the two agencies by the PPP government. The corruption charge against Mr Zardari has not borne fruit in Pakistan because the prosecution could not present original documents to prove guilt. This, despite the fact that both SGS and Cotecna have admitted their guilt in a court in Switzerland and been fined for corrupt practices, and we know how the original documents “disappeared” from Geneva during Mr Zardari’s time as President of Pakistan.
Some of the foreign exchange laws of the country are also designed to help tax dodgers. Anyone can buy foreign currency on the open market, stuff his suitcase with a wink from the custom official, or hire a boat on the open seas, take it out of the country and then remit it back via official banking channels to make it “white” because no questions can be asked about the source of remittance. The net cost of this transaction is less than 2% whereas the potential tax saved on black money can be about 20%. It was originally designed to facilitate expatriate workers’ earnings to their families in Pakistan but has now become a scandalous scheme to whiten black money. Like the 5000 rupee note, all that is required to stop its misuse is to prescribe a limit to any inward remittance at any time if the remitter does not want to explain the source and purpose of the transfer.
Perhaps, if Imran Khan’s “dharnas” had not destabilized the PMLN government, Mr Dar might have actually made bold to carry out some sorely needed though unpopular tax reforms by now. But midway through his term, with local elections breathing down his neck, allegations of bad governance rocking his government’s ratings and conspirators predicting the end is nigh, one cannot expect the finance minister to act like a wizard and set all things right overnight. It is a small miracle that he has succeeded in keeping the rupee below Rs 120 to the US dollar.