Squeezing lemons: the fallout of lazy reforms

The government is resorting to lazy reforms, putting pressure on the known and compliant while ignoring systemic inefficiencies. This is glaringly evident in the power sector, where Independent Power Producers (IPPs) are being targeted, yet theft and leakages in the transmission and distribution systems go unchecked.

Similarly, the Federal Board of Revenue (FBR) is filling GST gaps by squeezing big corporates and holding CFOs responsible for the tax liabilities of distant suppliers—while the informal economy and SMEs remain untouched.

The government’s strategy is to squeeze those already in the net. It is easier to analyze data and make top-tier businesses and the salaried sector shoulder the burden. Efforts to tax retailers, traders, and SMEs in the manufacturing chain, however, yield little.

The taxation system, already regressive and skewed toward formal players, is pushing them toward non-compliance.

Following the recent budget, large corporations and banks are finding ways to evade taxes, through non-taxable perks, ghost employees, or using charitable routes for tax credits. The risk? Even white money is turning black.

The government’s coercive measures are adding more shades of grey to an already troubled economy. This harassment-driven culture is damaging investment prospects.

Talented professionals are looking to leave, while business groups are expanding outside Pakistan, leaving the country starved of investment. What was supposed to be growth is now a slow drain of Pakistan’s brightest minds and resources.

The latest move by the FBR to hold CFOs liable for the entire value chain’s tax compliance has created a stir. CFOs are being asked to submit affidavits, holding them responsible for fake invoices submitted by suppliers they barely interact with. This is not just unfair; it is impractical.

How can formal sector employees ensure compliance in a value chain marred by corruption, when it is FBR’s officials who turn a blind eye to tax evasion?

Economist Milton Friedman once said, “I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.” Yet, what we see today is the opposite—a taxation system that penalizes those who are visible while protecting those who operate in the shadows.

The FBR chairman deserves credit for stirring the pot, but these measures—similar to ineffective power sector reforms—are short-sighted and damaging in the long run.

The solution is not in squeezing corporates or salaried professionals but in addressing the root causes of evasion: corruption within FBR, smuggling, and underreporting by traders. The broadening of the tax base cannot happen overnight, and it certainly cannot occur by using strong-arm tactics on those already compliant. The FBR needs to ask itself why it cannot target smuggled petroleum, untaxed tobacco, or coal suppliers evading taxes, instead of placing undue pressure on formal businesses.

Musadaq Zulqarnain, Chairman of Interloop Limited, said, “If we cannot adjust input tax, we won’t be able to compete. How can we take responsibility for a genuine supplier not submitting tax?” This system of collective punishment is pushing even the best-run companies into the shadows, dampening investment sentiment further.

As the government tightens its grip on the formal sector, it is slowly strangling the middle class—the engine of any economy. These are the professionals, the managers, the ones with the skills and knowledge to keep the wheels of the economy turning.

But if this pressure continues, many will follow the path of their peers, fleeing for better opportunities elsewhere. Without a vibrant middle class, Pakistan will not grow. It’s time to stop squeezing the lemons dry and plant new seeds for growth.

Copyright Business Recorder, 2024