Profound challenge of smuggling

Alarmed by a massive increase in smuggling, FBR has shown determination to curb it under a well orchestrated strategy. It is reported that effective September 1, 2019 special joint teams of the FBR would be visiting major shopping areas and large retailers to check import documents for imported goods available for sale to consumers. This is not a new exercise. Way back, in 1958, when General Ayub Khan imposed martial law in the country, there was a massive drive against smuggling with raids conducted on retail outlets by taxmen to flush out imported goods.
It is estimated that a massive around 600% increase has taken place in smuggling of certain goods in the last one year, which were placed under imposition of regulatory duties. Before the imposition of duties, these goods were largely imported through official channels
Ground realities add strength to the stated increase in smuggling. There were apprehensions that after the imposition of regulatory duties the imported items, specially the food items, would disappear from the shelves of retail outlets, hurting the retail businesses. But this has not happened. On the contrary, however, the variety of imported items on shelves has further diversified while prices have not escalated as expected!
Although FBR has not made big gains by imposing regulatory duties on imported items, the black money has found smuggling as a lucrative channel to be exploited.
There are three parallel economies operative in Pakistan: the documented economy, the grey economy (legal business but undocumented) and black money (illegal business and undocumented).
In other countries, the said configuration also prevails but with a difference that in these countries the percentage of grey and black economies is much smaller than documented economy regime's under which all pay taxes. Also, in these strong economies, the businesses under documented economy offer attractive returns, leaving little incentives to risk venturing into undocumented business segments.
In Pakistan, it is estimated that the size of grey-black economy is much bigger than the documented economy's. Under the cardinal principle of money flow it is said that money like water makes its own ways and flows in the path of least resistance.
With the imposition of regulatory duties by FBR on imported items smuggling became an extremely lucrative business for the well-knit fraternity in this business with each having a bigger slice of cake. The one year of the incumbent government primarily focussed accountability and documentation of economy. However, it could not push its tax enhancement endeavours up by providing an enabling environment and incentives for legitimate businesses to find its way into industry, exports and investments.
This resulted in a woeful slowdown and in some cases the suspension of transactions and businesses in documented economy. Meanwhile, the grey economy opted to go into hibernation waiting for the right opportunity to arise. An opportunity did arise in the shape of lucrative smuggling business.
Managing smuggling by raiding retail outlets is complicated and prone to corruption, accruing only little benefit to FBR. Moreover, border management requires massive human resource reforms, coordinated border management (CBM) strategies and investment in systems and processes.
A 2015 'confidential' report of the FBR had revealed that Pakistan was losing a staggering $2.63 billion worth of revenue a year due to ATT-related smuggling of just 11 goods (high-speed diesel, vehicles, tyres, tea, auto parts, mobile phones, garments, cigarettes, plastics, television sets and steel sheets), which were making their way through porous borders, and more alarmingly, through high seas and containerized cargoes with full support of the state machinery. The 2019 figures could show over $ 4 billion in FBR revenue losses on account of smuggling.
The incumbent government's scheme of amnesty did widen the tax net base but it failed to increase the tax collection volume. Apparently, the middle class opted to move into documented economy out of fear of losing moveable and immovable assets. The 'big guys', by and large, however, preferred to stay out of it.
The profiling of these 'big guys' indicates that many of them were earlier in regulated businesses like textile, exports and similar. Discouraged by low or no returns on investments on account of escalation in cost, absence of ease of doing business and lack of government incentives, they opted to move into grey economy areas such as real estate and 'dollarisation' and in the process made good money which at the moment is parked or invested where exposure is limited. The challenge for the incumbent government is to provide a way, fair opportunities and healthy margins on investments to mobilise this lot of big investors.
It has to be understood that business is all about profitability, whereas state governance is all about tax collection and its equitable distribution for the social welfare of its citizens. Both parties have to respect this cardinal principle in order to ensure the existence or formation of a stable government, equitable distribution of wealth and a just socioeconomic order in the country.
(The writer is the former President of Overseas Investors Chambers of Commerce and industry)