Pakistan’s leaky tax budget 

The euphoria in Pakistan over the International Monetary Fund (IMF) deal was never really going to last. After rallying for a few days, the rupee is once again falling against the dollar much like a rollercoaster that edges ever so slowly to the top of the loop and then plunges down while the occupants scream in delight and horror. Mostly the latter in this case.

There’s a lot to scream about; IMF relief is a band-aid on a severed artery and the difficulty in negotiations leading up to said relief – along with the stringent conditions applied — shows us just how uncertain the IMF is about (a) our willingness to stick to what’s been agreed, and (b) to actually, genuinely, get our very messy house in order.

There’s a lot to be done on that front, so much that to even list it all would mean a document running several dozen pages at least. So, for the sake of focus and brevity, let’s focus solely on the tax regime. Here we see, time and again, that any talk of increasing tax collection only means that, in practice, general indirect taxes will be imposed and/ or increased and that the salaried class will be squeezed till they give us their last drops, much like a toothpaste tube in a Pakistani household. 

We know what has to be done, what is needed is the will to actually do it. 

- Zarrar Khuhro

This kind of extraction is how the Federal Board of Revenue (FBR) managed higher tax collection in the last fiscal year and, as per FBR data, in the recently ended fiscal year salaried persons paid Rs 264.3 billion rupees in income tax, which is 40 percent more than the previous year. Note also that this is apparently 200 percent more than the taxes paid by exporters and retailers combined. It’s the easy thing to do; the actual hard would be to curb massive tax evasion which – if done – would ease the government’s financial burden and also give the salaried class a break.

How much cash does Pakistan lose due to tax evasion? According to a recent report published by global research firm IPSOS, the number is estimated to be a staggering 956 billion rupees. For those of us who can’t comprehend just how much that is, IPSOS makes it easy, and depressing, by providing a handy list of what we could have done with that amount of money, which is around ten times the federal education budget: we could fund the Benazir Income Support Fund for a whole year with enough left over to build the Mohmand dam and also provide (mostly) safe drinking water to all of Pakistan. Alternately, it could pay for the entire Public Sector Development Programme. Point being: It’s a lot of money to not be getting into government coffers.

Which sectors see the most evasion? The report lists real estate (Rs 500 billion annually), tobacco (240 billion), tires and automobile lubricants (106 billion), pharma (65 billion) and tea (45 billion) as the prime culprits.

It’s no surprise that real estate tops the list given the incredibly opaque nature of the transactions in this sector which are conducted largely in cash and see massive under-invoicing to the tune of the declared value of properties being 60-70 percent less than what they actually sell for. The fix isn’t hard: all that is needed are improved valuation methods, documentation and legislative enforcement. Unfortunately, the strength of the property mafia and dealers is such that all such attempts have met with failure. Money talks, valuations walk.

Then we come to tobacco, which is the most heavily-taxed industry in Pakistan. Now we generally agree that this is a good thing; cigarettes are extremely harmful and increasing taxes on them may act as a disincentive for buyers. In theory, this is perfect but in practice it doesn’t quite work this way because consumers and retailers both have easy access to smuggled and illicit cigarettes which have now become even more competitive than before. While the sale of legal cigarettes has plummeted 50 percent in the last year, the market share of illicit/ smuggled cigarettes has risen to 45 percent as smokers puff away at the cheaper smuggled smokes. So, not only is the purpose of discouraging people from smoking not being achieved (the illicit cigarettes may be even worse for you), the higher tax rates also won’t significantly boost tax revenues because the market share of the legal (and taxed) cigarettes is plummeting given that their production has halved in the last year, though this doesn’t seem to have affected the sector’s profitability too much.

When it comes to tires and auto lubricants, a whopping 65 percent of the industry is either undocumented, smuggled or non-tax paid which means that the 20 billion rupees tax collected is a mere fraction of what could be collected. Add to this under-invoicing in the ‘legal’ sector and we have a potential tax shortfall of Rs50 billion, more than twice the current tax revenue.

Pharma is another sector where increasing costs and low availability of medicines creates a black market where counterfeit and smuggled drugs flourish. Here the damage is not just to our exchequer but also to our health.

Finally there’s tea, where the smuggling is linked to the misuse of the Afghan-Pakistan Transit Trade Agreement where tea meant for Afghanistan is instead off-loaded and sold in Pakistan, thus evading taxes. 

So yes, we can pour all the water we want into this bucket, but unless we plug the leaks we’ll just end up wasting every drop. We know what has to be done, what is needed is the will to actually do it. 

- Zarrar Khuhro is a Pakistani journalist who has worked extensively in both the print and electronic media industry. He is currently hosting a talk show on Dawn News. Twitter: @ZarrarKhuhro