Huzaima Bukhari & Dr. Ikramul Haq
ARTICLE (September 20 2008): Tackling twin menace of black money and tax evasion has always been a failure in Pakistan. Successive governments, instead of dealing with these issues with an iron hand, have been pardoning the corrupt and appeasing tax evaders through various laws and amnesty schemes. The result is obvious.
There is an ever-growing informal economy undermining national growth and promoting lack of transparency in all spheres of life. Political culture is fraught with favours to those having money power and control over economic resources - both, anti-thesis of a true democratic set up.
All steps and schemes taken in the past to document informal economy have miserably failed and black economy has relentlessly been growing rather than there being any sign of decline. The present size of underground economy at US $85 billion, almost half of formal economy, is symptomatic of a deep illness of the system where the corrupt rule and the honest suffer, the rich thrive and the poor strive yet starve.
The corrupt, occupying top positions in State institutions, are giving blanket protection to offenders and plunderers of national wealth. In other civilised societies such anti-State elements are treated with iron hand, their ill-gotten money and assets are seized through proper legislation and exemplary punishments awarded to them.
The latest tax amnesty scheme, announced by the Federal Board of Revenue (FBR) under the name of 'Tax Investment Scheme', is yet another attempt to protect tax evaders asking them to pay just 2% of fair market value of their untaxed incomes and assets and no question would be asked about their sources.
Like all previous schemes, it will also prove a fiasco, being a move in the wrong direction: "persuading with helplessness" the corrupt to pay tax without realising that it is they who now control the State and are least pushed to whiten their colossal money and wealth lying outside Pakistan.
This scheme will further shatter the confidence of law-abiding citizens in the system of governance, besides adding to the prevailing illusions that even the so-called elected representatives in parliament are capable of passing such erratic laws.
The recurrent appearance of amnesty schemes and money whitening instruments/modes shows that the State has conceded the failure of its tax machinery in performing its main function of collection of tax from wherever it is due. This nation has become addicted to easy money and such schemes/instruments have become a routine matter for them.
Those people, hooked on ill-gotten wealth/income for the last many years know for certain that every now and then, there will be an amnesty scheme giving them a chance to get their income/assets whitened by paying far less the amount than what they are required to pay under the normal tax regime.
It is a tragic situation where the entire State apparatus is subservient to those who blatantly manage to hide their income and wealth. It is an ugly joke with those who have been paying their taxes honestly at much higher rates than those offered to tax evaders (2%) under the ongoing scheme.
One of the worst consequences of black money and tax evasion is its pernicious effect on the general moral fabric of society. It puts integrity at a discount and places a premium on vulgar and ostentatious display of wealth.
This shatters the faith of the common man in the concept of dignity of honest labour and virtuous living. It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its doom.
Apart from direct monetary costs of corruption, other significant costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment, are destroying the very fibre of civil society in Pakistan. Judging from different studies and reports published in print media from time to time, Pakistan's underground economy has the following salient features:
Since 1979 (courtesy General Zia's legacy of speed money culture and its adoption by all the subsequent governments, notably that of Benazir Bhutto, Nawaz Sharif and Musharraf et al), our underground economy has developed at a surprising rate. Its large size ranging between 22% to 35% of GDP is a cause of great concern for both official and independent economists. Its manifestations are very wide. It is not only large and all-pervasive but also exists in daily life of every Pakistani.
It includes production of fake and substandard goods, smuggling, "black society" economy, human trafficking, contraband drugs, massive infringement of copyrights, interloping, tax evasion with the active collaboration of tax officials, financial corruption and rent-seeking [exchange of power for money] activities of government officials, plundering of bank loans, just to name a few and significant ones.
Massive migration towards big cities confirms that a huge population of Pakistan is directly engaged in underground economic activities. Large-scale mobility of people is also a contributing factor in generating underground economy eg high demand of local private houses to accommodate the mobile population.
Active participation of government officials is the most disturbing feature of Pakistan's underground economy. The rent-seeking activities of the government functionaries emerge in an endless stream. They are the single most important catalyst for accelerating the growth and sustainability of underground economy.
The State has miserably failed to check rampant corruption amongst their officials. They have emerged as the most powerful mafia whose control over the underground economy is now invincible. The government must constitute an expert committee to determine the negative effects of underground economy.
It has certainly created distortions in the statistical data vital for economic planning and macroeconomic decision-making, but its one most devastating and direct effect is considerable loss of tax revenues of the State. Theoretically, losses of tax revenue not only refer to a static result, ie the tax revenue lost by the fact that the taxes payable failed to be levied or collected for all kinds of reasons, but also mean a dynamic loss process.
TAX REVENUE LOSSES CAN BE DIVIDED INTO THREE CATEGORIES:
1. tax revenue loss of a compliance nature;
2. tax revenue loss of an administrative nature; and
3. tax revenue loss of an institutional nature.
Among these three categories, revenue loss of compliance nature results from underground economic activities because of taxpayers' evasion and fraud by non-compliance with tax laws, and such a loss is characterised by erosion of the tax base. The latter two types of tax revenue losses exist in the public economic field, and are characterised by reduction in effective tax rates.
In Pakistan, tax revenue losses due to inefficient and corrupt tax machinery are equally significant. Tax officials do not only properly enforce the promulgated laws, are always hesitant to probe tax frauds but also take active part in providing their "expert services" for exchange of money to tax evaders and plunderers of national wealth. They are active and potential generators of untaxed black money in the country.
IN PAKISTAN, TAX REVENUE LOSSES STEMMING FROM THE UNDERGROUND ECONOMY CAN BE BRIEFLY SUMMED UP AS UNDER:
Taxpayers do not register with the tax departments. One reason for this might be the activities they undertake which are illegal or even criminal, and another reason might be that the taxpayers attempt to escape registration and interlope for the purpose of tax evasion, despite the legal nature of their business;
Although a taxpayer registers with the authorities but he resorts to non-reporting. Taxpayers indulge in under-reporting so that a wide gap exists between the tax liability reported and the tax which would have been payable if tax returns were correct. On the basis of different studies conducted to determine the size of underground economy in Pakistan, in terms of different taxes, the following table shows the ratio of the lost commercial and industrial taxes to that of actually collected in the last 20 years:
Year % (losses)
As evident from above, our underground economy has caused substantial loss of revenue during the last 20 years, and brought about plenty of negative economic effects forcing the national growth to deviate from the objectives of efficiency and equity.
(To be concluded)