SMEs, tax and rewiring obsolete mindsets

Small- to medium-sized businesses in many developing economies constitute over 90% of the business population. In Pakistan, SMEs make about 90% of the economic establishment. However, they remain elusive to our economy; they don’t contribute towards financial prosperity. Simply put, the government’s income revenue off SMEs is extremely low.

Pakistan’s government does not make much money from direct taxes, quite alarming for a country, where SMEs contribute some 40% to the GDP, while their share in total tax revenues is estimated to be less than 10%. This means a 30% mismatch between revenues and expenses, most probably because the majority of SMEs are not registered with the Federal Board of Revenue (FBR).

The deficit has to be mostly borrowed and repaid with interest. We have to take new loans to pay off older loans. Often, expensive foreign loans become the only resort, also to correct the imbalance in external trade. So the country is trapped in a vicious cycle of debts and their servicing because of lesser direct and indirect taxes off SMEs as well as disproportionate imports.

In developed countries like Canada and most of Europe, SMEs are the engine of the economy and their success is vital to economic prosperity and sustainability. Collectively, small businesses now account for about seven out of ten private sector jobs. These are the benchmarks we want to work towards. So how can we then start doing things a little differently to expect different results?

Individually, we all have to realise that tax is not an end in itself. We have to change the culture of tax evasion. Plug the holes that big and small businesses exploit in connivance with the FBR to cheat the state off revenues. We need to sensitise people at large that taxes are not a penalty or punishment; paying taxes is our responsibility as citizens of this country. Citizens of all developed economies pay their taxes; Pakistanis also need to stop pretending that ‘it is alright because if no one else is paying tax, why should we?’ This prevalent herd mindset ought to be shunned.

Individuals and business owners of SMEs have to start paying their share of taxes. We must learn the difference between tax evasion, which is criminal, and tax optimisation, which is unethical but not illegal.

We must be ready to do our part whole heartedly. Our trust with the state has been shattered for decades but rationality says that we must learn to trust again.

With Shabbar Rizvi as the chief taxman, one would hope new, innovative measures will be taken to rewire the country’s mindset to a completely new way of thinking. The FBR has to inject confidence and lobby for honest tax payment, instead of acting as an extractive and blackmailing institution.

The PTI government has been fire-fighting since coming to power. It will have to repay $37 billion in the next three to four years. And the debt mountain is likely to grow for the simple reason that the capacity of the large-scale manufacturing, SMEs and agriculture has largely remained stagnant. Corrupt practices and mindless imports on the other hand have been a resource drain on a weak and cash-strapped economy. For most Pakistanis, Khan’s endless rhetoric on corruption and foreign loans has become a drag on nerves in times when they have been hit hard by the spiraling inflation.

The new FBR chairman may, hopefully, inject new thinking on revenue collection, and open avenues for greater financial resources. The only way to do so is through radical reform by experts and not civil servants, who are mostly hostage to the Planning Commission regime, and are usually shy of thinking out of the box.

Published in The Express Tribune, May 13^th, 2019.

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