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Tax and the trust deficit

If there is one thing the present government is consistent in, it’s inconsistency. For the nth time, in its three years of rule, the government has taken back one of its earlier decisions – this time choosing to give the sales tax amnesty to the export-oriented sectors.

While moves likes these show that democracy is working with people having a say in policy-formation due to freedom of expression, freedom of association, and a free media, taking back decisions which shouldn’t have been taken in the first place makes a mockery of its governance.

The case of textiles, in particular, is one that needs a bit more enumeration, being the biggest dollar earning sector.

In this paper’s recently released publication, Industry Review 2010, all textile leaders interviewed said they were in favour of the sales tax under VAT mode. Yet almost everybody opposed it. Why?

Well, that’s because there are structural issues in the taxation system – such as the lack of automation, lack of technical capacity and capability of the tax officials, and the ill-documented nature of the economy. These put formal players at a commercial disadvantage to those operating in the grey economy.

“The cognizance of the issues involved is largely absent at the top level, and that’s why the government had to take the decision back,” says Adnan Mufti, a tax expert at Shekha & Mufti (S&M) Chartered Accountants.


But there is another much bigger problem that makes the businessmen shy: rampant corruption.

This view is held not only by textile players, but is almost a commonly shared national belief regarding the corrupt nature of the taxation department.

The June 2010 publication by Transparency International (Pakistan) on corruption perception, which enlisted taxation authorities in the top-ten, somewhat stamps this notion, whereas reports from the ground also point to the same.

“Approximately, 10 percent of the refund has to be paid under-the-table to tax authorities to get the refunds back; in fact, in some cases, this equals 20-30 percent of the refund value,” says Mufti.

Textile players have no option but to make these extra payments to the “undue harassment under the garb of tax jargons,” says Mufti. “When millions of funds get blocked for 6 months then you really have to pay the ‘quickness allowance’, otherwise your financial costs keep going higher and higher,” one textile player based in Lahore told BR Research on the condition of anonymity.

When asked how, then, can the government fill this trust deficit, the response from textile players is simple: improve performance in other sectors, which can then generate a “positive word of mouth about FBR’s performance,” according to another textile maker.

“We just want an affirmation that the FBR will live up to its word as regards timely refunds, and given their historical performance and their performance in other areas such as income tax, we won’t take their word alone,” he said.


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