The latest release of FBR’s tax directory didn’t get many headlines; nor prime time moments; sans a few economic observers who expressed concerns over the fact that less than half of SECP-registered companies, and less than 50,000 AOPs out of at least half a million AOPs across the country even file tax returns. This, they said, is bad for the country’s tax system and preventing Pakistan from realizing the much-needed tax-to-GDP potential. Raising tax-to-GDP, however, is only one side of the coin, there being a clear case of fixing tax for more than just tax sake.
Let’s take the monetary example. Included in the list of reasons why central bankers around the world, including Pakistan’s, are championing the cause of financial inclusion is monetary policy effectiveness. It is difficult to have an effective monetary policy without having a much bigger proportion of the population included in the money question itself. Yet, one of the biggest widely recognized impediments to financial inclusion growth is a tax system that discourages banking and the fear of the tax man. Recent tax imposition on banking transactions in Pakistan is a clear example of that.
Or take another example from the theme of financial inclusion. The central bank in Pakistan wants SME lending to grow, because SMEs after all are deemed to be the engines of growth and employment, whereas the SECP has been trying to make the stock market a meaningful channel to raise financing for corporate Pakistan.
Yet one of the key reasons why SMEs don’t want to raise financing through banks or through the stock market is because they have access to equity financing courtesy their own untaxed pool of money or that of their close family and friends. Some are even happy to obtain informal lending at much higher rates than what the bank loans might cost, because high rate of informal lending is still smaller than the direct and indirect benefits derived from being outside the tax net.
This affects the supply side of financing as well, of which insurance sector is a big player. In a recent interview with BR Research, Tahir Ahmed, the CEO of Jubilee General Insurance, said that the biggest reason that has kept a check on insurance expansion in Pakistan is the existence of a large undocumented economy.
“To give you one example, there is not one jewelry shop in the developed world that is not insured, whereas not a single jewelry shop is insured in Pakistan for the simple reason that they are not documented. So when you are saving so much by evading or avoiding taxes, there is little need for you to get insured; that’s what stops people from getting insured,” he said in an interview published on August 25, 2017.
Similar is the story of innovation and industry-academia linkages. Granted that there is a government that plays deaf, and that there are IPR issues amongst many other problems, but taxation also lies at the heart of the innovation deficit in Pakistan.
The reason why any firm invests in innovation of products or process is to boost top-line or margins with or without the intention to beat out its competitors. But when half of the earnings are already untaxed or under-taxed, or they are already rent seeking via state protection enabling them to get dizzying ROIs, then must they go through the hassle of innovation and R&D.
One of Pakistan’s many problems is a looming housing shortage, which is to a considerable extent stoked by ballooning real estate prices. That real estate is Pakistan’s very own on-shore Panama - a tax haven where properties are valued and taxed at throw-away prices. In fact real estate is not just a parking lot for untaxed money, but also for money obtained through ill-gotten means such as bribery and other modes of corruption.
Everyone in the system, from the FBR to the property registration office, to NAB, the mortgage-providing banks and the judiciary, knows this. Yet everyone turns a blind eye, including the so-called honest taxpaying citizens because they too benefit from the system.
Fixing Pakistan’s tax system isn’t just necessary to avoid the fiscal deficit problem or to pay for critical government expenditure on security, or poverty/ inequality reduction by way of wealth redistribution. Fixing taxation and the ancillary documentation problem lies at the heart of the solution to Pakistan’s many social and economic issues, including corruption.
This critical theme should not be lost in the political noise following the Panama judgment. Failure to make taxation/documentation a major issue at prime time and at barber-shop conversations will come at a huge expense: ten years later there will another Panama, and another political family in crisis, but behind it the masters of the dark matter will continue to thrive at the expense of common polity
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