The US$ 82 question
Pakistan’s economy has two major fundamental problems that don’t seem to go away, viz (1) more than 90% of the economy is not documented and thus are out of the tax ambit and (2) of the 10% that does pay taxes, only the salaried class pay anything close to their actual dues, the self-employed (i.e. businessmen, trades-people like doctors, engineers, etc) do not pay even 10% of what they actually should. Of the 90% undocumented, more than half are in the rural sector i.e. almost the entire tax burden today is on the shoulders of the unfortunate salaried class who make up about 50% of the 10% who do pay. And they pay only because most of it is deducted at source. This principle of deduction at source can be applied elsewhere though in different mode and style. The other area of major loss of revenues are the Customs and Excise duties, customs rebate being an open scandal. If Pakistan has to survive economically a major effort has to be made to raise revenues so as to have money to meet not only our non-development and development expenditures but also the amount needed annually for debt-servicing. As the PM explained quite graphically in a recent Investors Conference, we are borrowing money externally to meet our foreign debt commitments and internally to meet our recurring governmental expenditures, paying out from one hand what we are receiving on a beggar’s platter. Unless we simplify our tax laws which are presently confusing (and as such very fair game to be circumvented) and bring down taxes, customs and excise duties into simple, affordable slabs, the problems will persist as it gives the tax collectors enough room both in volume and ambiguity to manoeuvre pilferage.
When the Nawaz Sharif regime came to power, it was on the crest of public belief expecting radical change for the positive in the economy. Politics has never been a strong PML suit but the advent of a businessman PML leader saw a marked perception in public opinion that fundamental reforms would see the amelioration of their miseries. One year later, public opinion is not so sanguine anymore as the perception has developed that even this businessman PM is a hostage to special and vested interests, most of whom are averse to paying taxes and duties of any kind. It is evident that instead of implementing far reaching reforms the regime is still groping for ideas from external sources with very few clues how to implement these suggestions. They are also rather too sensitive to their own business constituency as the threat by the traders to go on strike on the GST issue is nothing but open blackmail. No wonder the PML hierarchy are now looking to expatriate Pakistanis to come and rub some of their magic charm on the homeland to reinvigorate the economy.
Let us take the potential taxable sectors one by one. First are the half a million or so unfortunate souls in the salaried class, bearing most of the tax burden, a majority percentage being government servants. The initial premise must be that everyone who gets a salary must pay taxes, irrespective of the size of his salary structure, on a flat basis, clubbing together all his receivables. Suppose we were to levy 5% on all income, the person getting a minimum Rs.3,000 per month would get Rs.150 deducted and someone getting Rs.15,000 per month would get Rs.750 deducted and so on. This premise must be then implemented for all the self-employed without exception, whether it be a small trader, a barber, a tailor, etc. A local Council must decide the quantum of flat tax to be levied, the minimum slab being designated by the Federal Government. For those getting under Rs.3,000 per month, the employer will have to pay 5% taxes without deducting any tax from employees – but everyone who earns a salary must be in the tax slab without exception.
As regards Corporate taxes, these should be brought down to 30% of profits, calculating profits at 15% of total revenues. The aforementioned can be computed into a flat 5% on the corporate revenues, something in line with the GST. So as not to allow revenue slippage at the lower slabs, Corporations will be restricted to paying at the very minimum what they had been paying on the average for the past 3 years. It would be the duty of the local Union Council to ensure that everyone and every property in their area is registered as a tax-paying entity. To cover various loopholes experts’ advice must be taken. We must get everyone into the tax net, one way of doing this is to decentralize the levying of taxation down to the grassroots level with revenue proceeds deposited under Federal Heads in Banks. Every area wants to show they have more population so as to get more government funds, increase in population means need of more civic services. Commensurately the local taxes must be related to population size. The fundamental premise is to lower the tax rate and get everyone to pay taxes according to his/her estimated earning. Further there is a need to levy heavy fines as well as confiscation of property for tax dodgers. This country has paid enough for their sins of omission.
There is a dire need to reducing customs and excise duties as the present high rate means more pilferage. For all finished goods and products the customs duties must be 15% while the excise duties must not be more than 5% with capacity tax levied on industries to avoid manipulation by individuals. On raw material, spares etc the customs duties must be kept at 5% so as to encourage the manufacture/assembly of products in Pakistan in view of the cheaper labour available. Instead of protecting industries which are not viable, this would encourage our small industries to establish manufacturing relationships with outside entities. To protect against the slippage of revenues, industries will not be allowed to pay less than what they have been paying on the average for the past three years. Private sector expertise can be obtained by the government in locating tax dodgers with an incentive remuneration of 10% of whatever extra taxes are collected.
Within days of Mian Nawaz Sharif coming to power, he reduced taxes across the board to generate enthusiasm among businessmen. While congratulating themselves for getting the concessions, what the businessmen gave back to the PM was a kick in the teeth as they demanded more and more concessions. The moral of this example is that this is a bunch whose greed can never be assuaged. On a recent visit with the PM’s entourage a gentleman came down the aisle in the aircraft bearing envelopes containing US$ 82 as daily allowance for the three days stay. While it was understandable that the government functionaries needed the money as they have limited means of income, except for one or two exceptions none of the top 16 businessmen of this country accompanying the PM refused the US$ 82. Some of these honourable gentlemen bought perfumes duty free for several hundred dollars but the US$ 82 they took as a matter of right. And we expect this bunch to pay their taxes! Most of them are defaulters in the banks and still are brazen enough to flaunt their wealth, both here and abroad. What they need is focussed private sector investigation to locate their income and wealth, with no mercy of any kind for looters.
In essence what we have to do is to dangle the carrot but also display a big stick. The US$ 82 symbolises both a question and an answer, nobody will pay taxes voluntarily unless we reduce taxes but a visible threat must be there to make sure everyone pays or else this country is headed down a financial black hole.
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