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EDITORIAL: Speakers at a briefing arranged by Ipsos for parliamentarians to discuss tax evasion in five major sectors – real estate, tobacco, tyres and auto lubricants, pharmaceuticals, tea – hit the nail on the head, even though they only stated the obvious, when they accepted that domestic industry and employment generation were suffering and Pakistan’s dependence on foreign goods was increasing due to smuggling, creating a vicious cycle.

For example, estimates reveal that the total annualised tax potential of the tobacco industry alone in FY2023-24 will be around Rs500 billion, yet the powerful smuggling mafias will steal more than 50 percent of it right under the government’s nose.

Estimated tax evasion in the real estate sector, another unending headache for tax authorities, is Rs 500 billion every year. Club that with estimated annual leakages of approximately Rs 250 billion in tobacco, Rs 106 billion in tyres and auto lubricants, Rs 65 billion in pharmaceuticals and Rs 45 billion in the tea sector, and it’s clear why the government is worried about the subsequent threat to legitimate businesses, employment and livelihoods of tens of millions of people.

Successive administrations could, and indeed did, brush such things under the carpet with typical disregard for crucial indicators and even the law in the old days, but now they are forced to find ways of raising revenue and stopping losses in the absence of bailout funds from friendly countries as well as financial institutions.

Headlines are already talking about the decline in large-scale manufacturing, corroborated by PBS (Pakistan Bureau of Statistics), having a detrimental long-term impact on industry, employment and exports.

And, naturally, the first thing they see when they even begin to scratch below the surface is how much potential revenue they are allowing to go waste because of smuggling and tax evasion.

The best way to check this and begin to record immediate and welcome additions to reserves is for the government to exercise its writ and stop these violations of the law, which should have been obvious, but it can and should also employ other novel techniques and policies in the meantime.

“We will be seen as a business-friendly nation only once we work towards creating a level-playing field for fair market competition” and “tax harmonisation is important for business growth”, Qamar Zaman Kaira, PM’s adviser on Kashmir Affairs and GB, very rightly said at the forum.

While the government struggles to counter the smuggling and tax-evasion mafia’s clout politically and legally, it can be equally effective by acting smart economically. Corruption and smuggling are further fuelled by excessive tax rates.

Tax rationalisation, then, is key and also brings the benefit of a wider spread of the tax net as opposed to squeezing more out of the small existing tax-paying base as evasion and smuggling goes on unchecked.

It’s bad enough that the government is only just starting to lament the loss of around a trillion rupees in tax evasion every year while also admitting, more or less, that the lobby that inflates the black economy is just too powerful to be apprehended at the moment. But it’s much worse that it still hasn’t fine-tuned its tax regime; not even got the ball rolling on crucial FBR (Federal Board of Revenue) reforms.

Surely, nobody understands better than the government itself, its usual politically correct rhetoric notwithstanding, how close to default we really are this time. And since the well from which we would easily get foreign aid at crunch time has all but dried now, any delay in mobilising local revenue streams, especially tax and earnings lost to evasion and smuggling, will only bring default nearer.

It’s not enough to identify a long enduring problem, especially this late in the game. The government needs to implement policies that will show results.

Copyright Business Recorder, 2023

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KU Jun 24, 2023 11:35am
Common sense is a blessing, while intelligence is a double-edged sword, and both are used to benefit the smugglers as well as the authorities. Two kinds of smuggling racquets have existed for many many years, small goods smuggling by people who have no employment opportunity and must survive or suffer their leaders, the other kind is a novel kind who smuggle with patronage. The novel kind thrives because the duties/taxes on certain goods aid their profession, and the policymakers know this and get their trickle-up share of the revenue.
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