Focusing on untaxed income

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Pakistan has a variable economy, which can sustain itself without any external aid or loans. According to a World Bank Federal Board of Revenue (FBR) study, 57 percent of the income in Pakistan is not taxed due to smuggling, under invoicing and tax evasion. The FBR’s latest estimates put the untaxed income at round 79 percent of the Gross domestic Product (GDP). The taxed income presently yields revenue of about Rs.2.0 trillion. If the untaxed income is brought into a wider tax-net, FBR can generate revenues close to about Rs.6.0 trillion. This would in turn mitigate the reliance on foreign aid, loans and credit, which are often given under onerous stipulations that invariably are at the cost of local investment, production, exports and employment generation.

There are pressures on investment, production and exports due to the reduction in tariff- the so called rationalization- without which investment cannot be attracted. The worst part is that there is no cohesion between the various ministries including the planning Commission, investment Promotion and Ministry of Industries. There is an overlap of functions. The Planning Division, whose job is developmental, is wrestling with tariff.

Ministry of commerce is meddling with industries and Ministry of Industries- Engineering Development Board is flirting with the Planning Division. Historically, the Ministry of Finance has had to play a parental and a moderating role whenever such a situation arises. It is of paramount importance that the Finance Ministry plays its historical role. The vacuum can no more be filled in through any other foreign resource are increasingly becoming hard to generate.

Otherwise, the desired revenue targets will be missed and the investor confidence may be lost as it has done previously at the time of nationalization and various periods of mismanagement and misgovernance. This cohesion is necessary to keep the present investor at ease and peace in these difficult times that includes challenges like lack of socio-physical infrastructure, political instability, deteriorating law and order and the never-ending energy crisis.

These challenges are forcing many investors to move out of the country. The government should aim at least to retain those, who have already invested and have managed to attract further investment.

In the good old days, aid, loans and credit used to be in the form of grants as stipulated by the Bretton wood System through the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO). These grants were really a help to the socio-politico-economic harmony of a country. Aid, now encompasses in addition to WB, IMF and WTO individual countries like United States and the United Kingdom. This ‘aid’ burdens the economy as it is generally stipulated with imports from the donor countries payable against the hard earned foreign exchange by the recipients. Sometime it is more than 30 percent earnings, even at the cost of socio-physical infrastructure like energy and means of transportation much needed by the recipient. Latin American countries come in the forefront. Pakistan is no exception.

The developed world, largely due to its own economic malaise, in fact, is no longer interested in financing the developing economies. They now assert that such countries first must rely on their own resources. The recent stand of the IMF on Pakistan underlines this fact.

The Anglo Saxon capitalism is also under question. There are demonstrations over 1000 cities all over the developed world that the Anglo Saxon capitalism has led to more of “have-nots than have”. The uproar is against the Wall Street symbolizing capitalism. Now the slogan is “Kill Wall Street”. The trend is more against private companies as against public limited companies listed on the Stock Exchanges- also because of the 2008 upheaval against professional managers, who went on exercising their right of options and bonuses whether there were profit or loss. The trend now is no bonus if no dividend. In such circumstances, the developed world is in fact not in a position to finance the developing world that once it was!

Further America’s socio-politico economic situation is also getting vulnerable and foreign developmental aid is now increasingly scrutinized by the congress. According to the economist of November 5, 2012; “Strikingly, by about three to one, Americans feel their country is on the wrong track. The US sovereign debt has been downgraded. Unemployment remains stubbornly above nine percent with the long term unemployed making up the largest proportion of the jobless since records began in 1948. As the superpower’s clout seems to ebb towards Asia, the World’s most consistently inventive and optimistic country has lost its mojo”

Following this trend, the US foreign Secretary Hilary Clinton, on her exist to Pakistan last year reaffirmed this stance by stating that “while the American tax payers have delivered 2.0 billion dollars to Pakistan as assistance, but it is very unfortunate that there are only 2.0 million dollars people in Pakistan paying taxes with a total population of 190 million, “She added that “while USA is committed to helping Pakistan economically it does not want to provide the assistance as charity.”

Further, the US Ambassador, Mr. Cameron Munter, in an interview to The News published on November 4, 2011 said, “I hope fifty years from now, Pakistan will not be a recipient of assistance, but instead will have joined us and other likeminded nations in helping others succeed. Development assistance cannot be a substitute for the change that must come from within Pakistan”.

Luckily, Pakistan possesses a viable economy. It is amongst the best agriculture producers in the world, has the fifth largest textile industry and the 4th largest exports of yarn in the world not to mention sizeable, unexplored coal, copper, silver and gold mines. Moreover, Pakistan are dynamic, hardworking and innovative. Return on Investment in Pakistan is one of the highest in the world with five percent GDP growth on average for the last 62 years.

Be that as it may, revenue collection and internal resource mobilization is the essence to the economic viability. The revenue collection depends on investment, production and export. This alone will self-sufficiency, nothing else.

 


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