Sitting down to write this week's column, I am rather confused; are we or are we not in a lockdown. Whilst the Islamabad city administration has been performing admirably in an extremely challenging time, the current extension order is a complicated, if not confusing, read; when you have three pages of exemptions, is it not party time?
On the positive side, perhaps the nation's prayers have been answered, and hopefully by the time this article is published, life is coming back to normal, as best as it can after the Virus wars. This optimism is strengthened by the fact that anchors on the media channels, whom one was forced to watch during the lockdown, are screaming and jumping less and less, and other kinds of breaking news has started creeping in. One can only hope that this is not because of sheer exhaustion, and that the worst is actually over.
The nation remains eternally grateful to all the health professionals for their exceptional efforts in this time of need. Kudos!
Assuming that the tragic and painful phase of risk to human lives is indeed on a decline, the difficult phase of reconstructing and reviving the economy is the next challenge. And this is a worrying bit as well.
Even during normal times, governments across the globe, and specifically our own, have, by and large, failed in their endeavours to tinker with the economy, and in most cases have ended up making things worse. Undoubtedly, the heart is in the right place, but for some unfathomable reason, actions always fall short of the stated target.
The problem lies more in the planning phase; albeit perhaps the execution leaves a lot to be desired as well. Lack of complete data, incomplete analysis, rudimentary scenario building and sketchy legislation are perhaps the usual suspects of this failure. In this information age, there is a need to invest, significantly, in an efficient data collection mechanism, as well as in an effective monitoring and evaluation system.
Beyond processes, clarity of thought, alignment of objectives with actions and a broader vision are an absolute must. Affirmative action need not be limited to handouts, lower interest rates, and tax incentives including amnesty. The history of tax legislation is replete with various forms of tax holidays and amnesties and just a couple of years ago, interest rates were at pretty low levels, and whilst the GDP may have grown, the productive capacity of the real economy remained stagnant. Capital investment never really kicked off!
So why would it work now? Nonetheless, free cheese is still better than no cheese.
However, more to the point, we somehow get giving free cheese wrong too - for some very strange reason we generally seem to inordinately complicate incentive-related legislations - basically ending up with free cheese in a mousetrap.
Take the recent Tax Ordinance - the stated objective is to incentivise the construction industry via simple reduced tax. The central bank, thankfully and arguably, by reducing the interest rates, created considerable fiscal space for the government, allowing it to focus on reviving the real economy at the cost of reduced tax collection.
Beyond reduced tax, since the government wanted the construction industry, to immediately start investing in projects, when the business environment is pretty much uncertain with minimum to zero buyers, admittedly an amnesty, i.e., not asking questions about the source of income, perhaps was a necessity. Except, if you understand the definition of corruption, the primary source of unexplained income, one side of the equation is always a public office. And the definitions of criminal offence and money laundering by and large include concealed income. So is the tax office not asking questions a sufficient incentive?
Legislation can never tamper with a business cycle or a business model. In the construction history of Pakistan, it can be safely argued that no project of substance has ever been completed in 2.5 years and never have real estate developments been financed by other than other people's money. So who is the builder, the person who invests or the contractor who constructs? It will be a pleasant surprise if the project completion conditions, as envisaged by the legislators, are met by projects of substance.
Business cycle and business model aside, the state apparently believes it can fix selling prices for real estate; have such experiments ever succeeded in the past? If a builder or a developer for that matter makes a profit more than 10 times of the tax paid, what should he do with such profits? Conceal them!
Finally, the conditions relating to becoming eligible for the scheme, and processes necessary for availing the exemption, bring to mind the punch line of a popular Punjabi joke - feir na hi samjheay!
Admittedly, there is always a serious risk of abuse and misuse of any tax incentive scheme, but if you tighten the screws beyond a point, the probability of the scheme failing becomes pretty high. Perhaps ignoring this very compromise is the primary reason for our dismal record of gains from similar schemes in the past.
The bigger, rather key question for the leadership remains - is the scheme designed to collect taxes or incentivise economic activity!
If it is an incentive, it should look, feel, smell and taste like an incentive.
What never works is free cheese in a mousetrap.
(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)
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