Pakistan has a population of more than 22 million. Hence, its economy is dynamic. The trouble is that a major part of the economy is not part of the official system in Pakistan. The black market is thriving and growing amid concerns made by the State Bank of Pakistan and Federal board of Revenue. The reasons for governments to fail on the economic front is the mistrust of both investors and businessmen regarding government institutions. The paradox is that policy makers are clueless on how to bring all businesses into the tax system.
Tax evasion is very common and tax avoidance is for smart businessmen. The main discussion is the Sales tax regime in Pakistan. The indirect tax collection of the GST is for consumers of any product. Here one will need to take an example of a small general store where local or imported products are sold and local consumers purchase them believing that they are paying the GST over the purchase.
We know that none of these small shops are registered with FBR or the local tax department. So the tax is not being collected and the manufacturers pay the brunt of it. Small beverage manufacturers are selling their products, which are being distributed to small shops around Pakistan. The products state that the tax is included, but how many retailers are paying the GST to FBR on the sale of such beverages? I believe that this is one of the major reasons the black economy is uncontrollable. If the retailer pays, so should the distributor, importer and manufacturer. The system is flawed. The collection of tax from the port is deducted but after getting a clearing from the port a lot of the products sold are inclusive of the GST without the GST being actually paid by the consumers.
Azam Cloth market, Shahalam, Joria, Bilal Gunj, Bolton market and Shershah are some of the biggest markets of Asia. Here, products are traded in millions of dollars everyday. The government of Pakistan does not collect the tax from these markets, as they should. Such is the failure of our tax system. If sales tax is to be collected the income tax revenue along with excise will eventually increase. The system does not need to be burdensome but should support businessmen and encourage them to pay the taxes without pressuring them. The hawkers we buy the vegetables and fruit from, how many of them are tax registered? And we as consumers are not paying taxes on the products we buy from them. Hence, businessmen, small or big who produce agrarian based good, say they are not taxable. The system is not friendly enough to bring them into the tax net.
Government policies should encourage citizens to trust banks with their monies and not encourage parallel banking systems, which exist in local markets. The tax registration system in Pakistan is very difficult, and also needs an overhaul. Small businesses when registered are not issued GST numbers until they have commercial meters or small transformers for industry. Small manufacturers will never become part of the mainstream economy if the tax system is not supportive
Another argument is that these small businesses should be encouraged and supported. I agree to this but not on the behest of not contributing to the economy. The rich should be taxed more but we need to train the small businesses as they grow to become medium or large enterprise. The small retailers of Lahore and Karachi are seen in franchise chains, and their tax evasion has cost the economy of Pakistan. If we do not train small retailers to pay GST then how can we expect them to be part of the larger system when they outgrow other businesses. This requires training from the state to its citizens. The problem is mistrust of the people towards the state.
The reasons of this mistrust are corrupt politicians, policy makers and the bureaucrats who people do not trust. In small cafes one finds people discussing politics and all agree that politicians are corrupt, as they haven’t done anything for the people.
There is a solution to this and it is that everyone starts working under his or her domain. The citizens start asking for tax registered receipts, so the tax we pay goes to the government and not the businessmen. The banking system should be smooth as people deposit their funds. In the last decade or half, people encourage not to deposit money in their accounts because of the fear of FBR. This should not be encouraged, the tax system along with other stakeholders should encourage people to deposit their funds in banks without fear from the tax department. Government policies should encourage citizens to trust banks with their monies and not encourage parallel banking systems, which exist in local markets. The tax registration system in Pakistan is very difficult, and also needs an overhaul. Small businesses when registered are not issued GST numbers until they have commercial meters or small transformers for industry. Small manufacturers will never become part of the mainstream economy if the tax system is not supportive. Policy makers should conduct a proper research and implement a policy which helps us get rid of the black economy.
Published in Daily Times, February 23rd 2019.