Taming the untamable

The problem with writing a regular column is that even at times when you are not at your best, to put it mildly, you still have to write and submit something; and after rereading last week's submission - clearly, that was one of those times. The objective there was to highlight our unpreparedness in the age of technology disruptions, but the piece was all over the place. Humble apologies, with a personal commitment to revert to the topic at a more conducive time.

Hats off to those who write a daily column! Albeit, on the other hand, those covering politics do have it easy, what with a continuous circus going on within the domestic political landscape and everything going wrong on the international horizon.

Comparatively, on the economic front, things seem to have become relatively mundane, with two schools of thought battling it out - which is getting rather irksome - on all kinds of media; those who believe that the economy has recovered and those who believe it is tanking. The good news is that both are clueless and, if anything, the economy remains uncertain.

Whether or not we will keep passing the IMF periodic exams is not the greatest concern; with a few waivers here and there we are likely to manage. What the economy will look like when we come out of the IMF programme is the big question - since last time around we faltered immediately after we had passed the final IMF exam with flying colours.

Without going into the debate over whether or not a higher interest rate does bring down inflation in Pakistan or what is the right level of interest rates to accomplish that, it can perhaps be argued that at these interest levels, coupled with a depreciating rupee, capital investment in new projects is unlikely. A focus on reducing the fiscal deficit at the cost of development may also not contribute to the growth of the real economy. And the FBR focusing on collecting more taxes from the informal markets is perhaps also not a positive. Our obsession of meeting the target of tax-to-GDP ratio is likely to negatively impact the markets, and this coming from someone who is eternally opposed to free markets!

But don't get me wrong at the outset, the objective is not to champion the cause of the undocumented economy, definitely everyone needs to pay their right taxes, and no, I did not get a lifafa from the All Pakistan Shopkeepers Association (if there is one) yet. However, without going into the debate of what is the right amount of taxes any segment of society should be burdened with, the best strategy is not to venture into uncharted waters in haste.

Every economic decision has consequences, seen and unseen, and while the recent changes in tax laws, designed to document each and every business, may or may not get the exchequer nearer to the budgeted tax revenues, taming the untamable may have some unwanted side-effects. As already pointed out above, one is not known to be a supporter of the free markets; however, that does not mean one does not appreciate the necessity and importance of the market place: any attempt to control the market transaction-by-transaction through CNIC is likely to have serious consequences.

Let's look at our markets. The standard retailer probably has to pay a "bhatta" to someone, in addition to which he probably pays a monthly off the books charge for the supply of his utilities, and for any other service that his business may require. And on top of that, he probably has to borrow from the informal moneylenders at exorbitant rates since the banks won't touch him with a 10-foot pole. Finally, all of these costs cannot be claimed by him in his income tax returns, and even then his tax return is likely to be challenged, and he may end up with demands for taxes of the wrong kind. So if without addressing all these problems, he is one fine day asked to pay a minimum tax on his turnover and document all his suppliers and prove all his expenses, guess what happens?

What always happens - the big fish will survive, and may, most likely, eat the smaller ones; that is, if the latter somehow manage to survive.

The market is a place for innovation and vibrancy and, to take a bet, the informal economy perhaps provide the maximum number of jobs in the retail sector. In a country where everyone does not have a CNIC, the government cannot provide education to everyone, and health services are not available to all and sundry, requiring every person engaged in any business, profession or vocation to get a business licence or pay the penalty is a bit, well, strange.

Again, I am definitely for everyone paying the right taxes; but when the tax laws can be readily modified for foreign investors for economic reasons, and the rich can be pampered with lower taxes and incentives for economic growth, the pay tax or go to jail strategy for the domestic markets without considering its economic impacts makes little sense - unless somebody has done a detailed economic analysis on actual data collected most recently, taking cognizance of the current wave of inflation. That being the case, this week was a waste too!

All of the developed world transited their informal economy into the formal at one time or the other, but my educated guess is that the process was informal, amicable, and long drawn. It would be wise to study how different countries coped with this problem, rather than reinventing the wheel in the shortest time possible to meet IMF conditionality.

It will not be a walk in the park, taming the untamable.

(The writer is a chartered accountant based in Islamabad. Email: [email protected]. The views expressed in this article are personal. The views are not necessarily those of the newspaper)