Cash economy

Sitting in front of the television and multitasking, writing an article while watching the 23rd March parade, is perhaps not necessarily a bright idea; as the Khalid Tanks go by the dais, you want to write about bombing the hell out of your enemies, rather than the comparably mundane topic, cash economy. And that was a confession from, as I would like to believe, a mature and educated mind, at least by current standards; which is why war hysteria is perhaps more dangerous than war. Sane minds lose their ability to think rationally; us against them becomes the only truth. Nonetheless, some of us are in any case not qualified to discuss military strategy and so let's move on.
Recently came across a publication of the Australian Inspector General of Taxation, courtesy a colleague to whom I am thankful for his efforts, which, although was as old as 2012, was rather interesting since it reinforced the view that Pakistanis are not from Mars. By hindsight, the view that nobody would pay taxes if they think they can get away with it, is a global truism.
According to the Australian Tax Office (ATO), in 2017, 15% of the Australians believed it's fair to use cash to avoid paying their fair share of tax; "There are however, some that deliberately hide income to avoid paying the right amount of tax or superannuation. One of the ways they do this is by not recording or reporting all their cash income or electronic transactions. This is what we call the cash and hidden economy and it's not fair". Perhaps the key difference is that in Pakistan 85% of us believe it's fair not to pay taxes; notwithstanding that this belief has resulted in the government moving more and more towards regressive modes of taxation, with the unwanted consequence that the poorest segments of the society ended up paying taxes on necessary consumption.
A quick reading of the "Review into the ATO's use of benchmarking to target the cash economy" highlighted that taxpayers in Australia have issues with their tax collector which are quite similar to what Pakistanis crib about. Critically, tax compliance costs are high and take up significant productive time of business operators. Apparently, the world still struggles with inventing an easy way to pay taxes; perhaps the solution is as elusive as a cure for baldness or the perfect mouse trap.
However, it seems that benchmarking, if appropriately implemented and efficiently communicated, perhaps might be a workable option. In Pakistan, while there is a practice of benchmarking gross profits in certain cases, history of a particular business remains the key factor for the tax collector to assess taxes payable; this perhaps is the singular reason why we have failed to provide an easy path to the informal sector to cross over to the documented economy. The fear that any deviation from historic financial numbers will undoubtedly open up a Pandora's Box by providing the tax collector an opportunity to play havoc with past assessments is the primary reason businesses prefer not to document actual results. The powers of the tax collector to open up past assessments at whim, or at all, need to be eliminated.
Even in the case of amnesty schemes, I have always held the view that for any such scheme to succeed, the break from the past has to be absolute, appropriate and across the board. Any provision whereby the State is perceived to have the right to annul an amnesty will adversely impact the credibility of the scheme. And irrespective of the criticism against amnesty schemes, when corrupt practices have been the norm for doing business, it can be argued that providing an opportunity to come clean might be a reasonable strategy, before adverse actions. If you keep digging up skeletons in the closet, you cannot move forward.
Getting back to benchmarking, it would appear reasonable to assert that the tax collectors in Pakistan will require professional help in building models that benchmark retail businesses, more prone to cash handling. The models will have to be as current as possible, will need to take into account geographic factors and will need to be communicated to tax payers well in advance. Finally, there needs to be a realization that benchmarks are exactly that, benchmarks, and that there will be instances where businesses are outliers for good reasons.
Essentially, the biggest takeaway for me from reading the ATO publication on benchmarking the cash economy was the realization that we can learn a lot from how the developed economies transited their informal sector to the formal economy. Rather than haphazardly trying to reinvent the wheel, and experimenting by picking and choosing, perhaps a study and analysis of the experiences in the West is a better path. At the end of the day if we want to collect taxes we need a robust solution for tackling the cash economy.
(The writer is a chartered accountant based in Islamabad. Email: [email protected])