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SAFEGUARDING SOVEREIGNTY

 Speech given at HBS Pakistan Annual Event 2011 

held at Pearl Continental, Lahore on 24th November’11

By

Yusuf H. Shirazi

 

The Chairman, Federal Board of Revenue has come out with a statement that Pakistan suffers from a deficit finance of US$6 billion and the county is running on borrowed funds.  An earlier World Bank and FBR study stated that 56% of the Pak-economy is under-taxed. This means, additional revenue of Rs 2.162 billion totaling to Rs 3.861 billion can be generated as against Rs 1.699 billion for the fiscal year 2010-11 (July-June). Again according to the Chairman FBR, during the last budget session, there is a gap of 79% between revenue collection and the actual potential revenue. If Pakistan can manage to collect these revenues, she hardly needs any Aid, Loans or Credits which have accumulated to US$ 60 billion at the cost of Pakistan’s socio-politico economic sovereignty. Much of the loans and credits are against purchases of donor countries’ machines, equipments and component parts. Repayment of such loans is against Pakistan’s own foreign exchange earnings.

 

One of the main reasons for low revenue collection is that Pakistan economy is undocumented. The result is smuggling across the borders and under invoicing - more so - from friendly countries and evasion on transit trade from whatever to wherever. The friendly countries however charge full export price and willingly issue under invoices. This leads to lower collection of customs duty in Pakistan. On the other hand, the tax evasion is rampant because of Sales Tax evasion, much too more than Income Tax. Excise and Taxation is another source where evasion is rampant.  Strangely, it is alleged that exports are over-invoiced and the element of over invoiced is routed back through remittances, presently well over a billion dollars per month. It is a fact however that the tax evasion – in whatsoever case - is impossible without the connivance of the tax officers. Also the tax payers have no respect for the tax collectors and do not trust the government for use of the taxes collected. Anatol Lieven, a British author, in his book: “Pakistan a Hard Country” writes that though there is 5% contribution to charitable organizations, one of the highest in the world, Pakistan’s total tax collection is less than 1% of its GDP growth which is one of the lowest in the world! The result, among others, according to Economist, Dr. Shahid is 38% population below the poverty line (currently 25-30% food inflation) and above all 30% population without education and health care.

 

The remedy thus lies in documenting the economy - sooner than later. Let us create trust among the tax payers – respect and regard - not hostility which frightens the tax payer. The Custom duty should be payable on the real price which is readily available through the internet. Customs authorities may take note of it and tax the imports on their real value. Similarly it is easy to recover sales tax when it is ensured that the registration of all registerable items, for example, and particularly the automotive vehicles and more so motorcycles - 65 motorcycle makers from friendly countries  - allegedly not only under-invoice but also get the vehicle registered without paying the sales tax payable. The Excise and Taxation authorities may thus take note of it and particularly the recent controversy in the newspapers that the registerable items are not registered for one reason or the other - without consideration - which belittles the real cost!


The country also suffers from low foreign investment – now local investment also – due to little protection of such investments. The fact is that as soon as investment is made it is put to competition through the imports which are normally under-invoiced and sales tax evasion. Why the foreign investor should invest or, for that matter, now local investor also, who are already shying away due to law and order situation, change of policies with the change of government and, in fact, change of the Minister if not the Secretary. In the neighboring India, nothing can be imported which is produced within the country. This protection is provided through trade and non trade barriers - such as, emission control standards known as Bharat I and Bharat II. Malaysia went a step further and refused to accept foreign aid, loans and credits. As a result, Malaysia is now a highly healthy economy and has attracted foreign investors - from Pakistan also.

 

And, lo and behold, the donor countries – the developed world - are also no more interested to finance developing economies in whatsoever case. They say such countries first must rely on their own resources. The IFIs have been saying it since long. The recent IMF stand against Pakistan is stipulating the same.

 

Hilary Clinton who visited Pakistan recently reaffirmed it saying “while the American tax payers have delivered 2 billion dollars to Pakistan as assistance but it is very unfortunate that there are only 2 million 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 American Ambassador, Mr. Cameron Munter, in an exclusive interview to The News International: The first 50, the next 50 published on November 4, 2011, said: “I hope the 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.”

 

The fact of the matter also is that American’s own socio-politico economic situation is vulnerable. According to Economist of November 5th-11th 2011: Strikingly, by about three to one, Americans feel their country is on the wrong track. America’s sovereign debt has been downgraded. Unemployment remains stubbornly above 9% 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.”

 

Luckily, Pakistan possesses a viable economy. It is amongst the best agriculture producers in the world, has the fifth largest textile industry in the world and has sizeable, unexplored coal, copper, silver and gold mines. Moreover, Pakistanis are dynamic, hard working and innovative. Return on Investment in Pakistan is one of the highest in the world with 5% GDP growth on average for the last 62 years. And as such going forward Pakistan must avoid the trap of Anglo Saxon Capitalism – which has failed the developed world –  the architects of globalization mantra - creating more of haves than have nots, causing disturbances in over 1000 cities and 80 countries - of the world over. Pakistan thus must engineer a home grown, production, investment and savings led economic roadmap. FBR ensuring right invoicing and tax payment. This alone will increase revenues and lessen reliance on foreign assistance ensuring Pak sovereignty – socio-politico – nay political. Let us thus all Pakistanis extend a helping hand to implement the FBR agenda to optimum tax receipts. BRAVO:

 

November 24, 2011

Email: yhs@atlas.com.pk

Website: www.atlas.com.pk

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