Tax lax

Business interest is bullying the government

Tax lax
This has now become an all too familiar pattern with the PMLN government. Ishaq Dar, the Federal Minister for Economic Affairs, introduces tax collection schemes, the business community protests the reforms, both the parties engage in negotiations, and the business negotiators successfully render the new proposals toothless. The business interest strong arms the government using all the tricks in the bully book. They lament the corruption and incompetence within the government, use the media to generate public sympathy, and finally, threaten to take their investments abroad.

This is exactly what happened when, in June last year, the Senate Standing Committee on Finance and Revenue approved a 0.6% tax on transactions through regular banking channels of above Rs. 50,000 for people who do not file their taxes. This scheme was supposed to penalize non-filers and nudge them to file their taxes in the subsequent years. The trader community all over the country took to the streets and forced the government to reduce the rate from 0.6% to 0.3%, which was later revised to 0.4%. The traders were brazen enough to first break the law by not filing their tax returns, and then demanding a lesser penalty for doing so. Even though the trading community forms the backbone of the PMLN in Punjab, it installed banners supporting Gen Raheel Sharif in the markets and warned that they would support the PTI candidate against PMLN’s Ayaz Sadiq in the NA-122 re-elections. The government eventually backed down and the results are such that in one year since this scheme was adopted, only 0.1% more traders have filed their taxes. The penalty as low as 0.4% does not off-set the benefits that non-filers get from avoiding professional tax, sales tax, and excise duty by operating outside the tax system.
The government needs tax money to develop infrastructure

The government came up with another tax reformation scheme last month to rope in the lucrative real estate sector this time. The real estate sector of Pakistan not only evades taxes by falsifying the property value, but also serves as a secure mechanism to store black money. The government proposed that The State Bank of Pakistan will determine the property values, and a 10% tax would be imposed on the profit if the property is sold within 5 years of its purchase. For comparison purposes, this rate is 30% for property sold within 3 years and 20% for sold within 4-5 years in India. This scheme is meant to bring some portion of over $100 billion black money generated in Pakistan annually into the tax net. It would enable the government to impose an indirect tax on people who do not file their taxes, and also discourage harmful property speculation.

As predicted, the real estate and property interests launched a vicious campaign through media outlets to put pressure on the government to take the scheme back. Doubts were raised on the government’s ability to set property prices, some observers termed this scheme as an attack on free economy, builders refuted the accusation of tax evasion in the property market, and finally, the government was threatened that property money will flow out of Pakistan if the scheme is implemented.

This pressure hasn’t subsided even after the government agreed to form a joint committee with the Federal Bureau of Revenue (FBR) and property dealers to determine property prices instead of the State Bank. The business interests are not ready to pay their due taxes even when the proposed tax is already regressive and indirect, benefitting the businessmen at the expense of small individual market players. All this resistance in a country which already has less than 10% tax-to-GDP ratio, where almost one-third of the economy operates outside the tax net, and only 0.57% of the population pays taxes on their incomes. These low collection figures threaten the viability of the state since the government faces a 4.0 percent annual fiscal deficit that it has to meet with debt.

The government needs tax money to develop the infrastructure businesses can be established upon. Business need a viable judicial and law enforcement system to protect their property rights. They need access to roads and sewage systems so they can sell their properties at better rates. The businessmen might be able to send their own children to private schools, but their under-paid employees need government schools and hospitals for their families. The country cannot function without earning enough revenues to maintain these services that subsidize the businessmen, allow them to make more money, and bring economic prosperity.

But never mind, let’s take a look at the concerns raised against the new tax scheme and see how hollow they are:

  1. Government agencies are corrupt and incompetent: If this is the case, the government needs your tax money to reform its services and establish transparency mechanisms. You can’t put the carriage in front of the horses. Why not negotiate reforms and mechanisms with the government agencies that would allow the state systems to be more effective?

  2. It is true that market speculation is a legal activity supported by the free market, but where on earth does this speculation go unregulated and un-taxed? A weak regulation of the property speculation market was, in part, responsible for the property market bust of 2008 in the U.S. and the subsequent economic recession. Taxes are not an attack on the free market economy, they help sustain the free market.

  3. Will the new property survey make housing too expensive for Pakistan’s poor? No. In fact, property prices have already started to decrease by up 20% in some areas since the announcement of this scheme. This scheme will reduce the infusion of black money into the market, which will lower the prices for everyone, including the middle and poor classes.

  4. The Association of Builders and Developers of Pakistan (ABAD) recently rejected the proposed scheme as they denied any falsification of value and tax evasion in the property market. They also raised concerns on the ability of the State Bank and FBR to set property values appropriately. Indeed, setting property prices is a complicated matter, but there are solutions available to this problem such as allowing the government to intervene and buy any property at 20% above the stamped value if it suspects falsification by the sellers. This way the government does not set property prices, and honest property dealers gain a windfall of 20% if the government intervenes in the deal. Will ABAD be willing to take this route?

  5. And finally, please don’t threaten us to take your money elsewhere. As long as you pay your due taxes, you have all the right in the world to invest your money abroad through proper channels. Your un-taxed money is not of much use for the rest of us in any case.

The write is a lecturer of Public Policy at the University of Massachusetts Amherst.


Twitter: @RamblingSufi