Un-documenting documentation

Dars fiscal policies seem to be focused on enhancing tax base and documenting the economy. Steps, such as widening the gap of withholding taxes rates between filers and non filers, especially WHT on banking transactions are supposedly meant to document the economy.
But the numbers are telling an entirely different tale. Yes, the tax collection has increased in the process, but there is a side effect of growing informal economy. After the imposition of WHT on banking transaction for non filers, there has been a huge surge in money going out of the monetary system.
The currency in circulation during ten months of this fiscal year jumped to Rs472 billion, an increase of 50 percent over the corresponding period last year. This means people are choosing to hold bearer certificates over keeping money in bank deposits. Yes, people are holding hard cash - Rs640 million recently recovered from places like water tank of a Baluchistans public servant residence is case in point.
The efforts of documenting economy have proved to be counterproductive so far. CIC to M2 (Money Supply) ratio was always high in Pakistan - close to double of that in India and four times of that in the developed world. No wonder, tax to GDP ratio Pakistan is proportionately less; and more importantly the savings to GDP in the country is too low - almost one third of that in India.
Any policy measure that exacerbates these ratios is not good for the country in the long run. It may yield more taxes in the short run but will incentivize small and medium businesses to transact in cash and tend to be informal.
This column supports penalizing non-filers; but the efforts deployed so far are not fruitful in the absence of strong enforcement. For instance what has FBR yielded from the 700,000 plus list of people who own luxury cars and frequently travel abroad? Why can tax authorities not collect taxes from real estate transactions on its real valuation? Black money in Pakistan is parked in real estate market while that in offshore accounts is a mere fraction of it.
Instead of addressing the core issues, new tax policies are designed to get incremental collection, without engaging 26,000 plus force of FBR, in the form of indirect taxes and WHT. In the absence of enforcement this simply incentivizes marginal tax payer to sway away from paying its due share, and for businesses and individuals to under-document.
That is why, this year to date, bank deposits growth has declined by one third to Rs270 billion as people are preferring to keep cash in rupees, prize bonds and foreign currency. The stock of bank deposits in Pakistan is around Rs9 trillion, while the CIC is Rs3 trillion. Another popular form of savings in Pakistan is National Saving Certificates, the stock of which is Rs3.1 trillion, one-fifth of which are prize bonds. Thus, the cash economy, without foreign currency holding in cash, is around 30 percent of the formal economy.
Holdings in bank deposits and NSS (barring prize bonds) are traceable; but there is absolutely no track of CIC and prize bonds. Nobody knows the trace of one forth of total money supply in the country. And even in bank deposits and NSS holdings, the benami accounts where the account holders are dummy and the real hands behind them are invisible, are countless.
In case of foreign currency holdings by locals, there is no record to show for. And the money that is flown in form of hundi and hawala is often kept in cash with no record. People are keeping that money in bank lockers, safes at home and so and so forth. The worrisome fact is that both CIC and prize bond flows are abnormally high this year, which is clearly showing that informal economy is booming. Dar and team have to carefully analyze this data and come up with a policy to counter this trend in upcoming budget.