Rising taxes and illicit trade

The government has changed the tax regime on the import of mobile phones, laptops and desktop computers

No one denies the fact that Pakistan suffers due to low tax collection. Several changes have been made to the tax regime already to the point that its effects do not just trickle down to the common man, but actively engage more of them than ever before. In its latest move, the government changed the tax regime on the import of mobile phones, laptops and desktop computers. While there was a Rs500 increase on the import of smartphones, computers were exempted from sales tax in a move meant to encourage the use of these gadgets, promote the country’s IT sector and discourage illicit trade while rendering smuggled goods uncompetitive. To be fair, and on paper, the move should see greater import of laptops and desktop computers, leading to a lower cost of doing business and helping students in using the gadgets for greater economic activity. But will it? Not likely. The government never really collected the sales tax it was hoping to because smuggling — so rampant and blatant that there are times one hardly notices the illegality of it — made these items cheaper than they should have been.

This means that there was great money for dealers, retailers and even consumers. The government didn’t pocket much, except when consumers bought the expensive versions from company outlets. Now that the government has exempted the area from sales tax, one expects greater sales at the official level. The government, however, stands to make nothing in sales tax collection. Hence, the question really is: instead of offering tax breaks, why would the government not crack down on illicit trade? The same argument applies to the tobacco industry. Illicit trade costs Pakistan Rs24 billion a year in revenue losses. This comes despite, and due to, heavy taxation on the tobacco industry. What is the point of a revenue measure when the culture of tax evasion doesn’t change, illicit trade is in fact encouraged and cheaper alternatives exist already? Corrupt officials continue to turn a blind eye towards the menace of smuggling and the fact that it is costing Pakistan billions. The government’s counter to corruption and smuggling is simple: raise tax rates for compliant persons to compensate for the corruption that exists within society.

Published in The Express Tribune, July 11^th, 2016.

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