For economic revival, businesses should pay taxes and meet other social contributions. DESIGN: ESSA MALIK
Pakistan provides ample examples of paradoxes, one being the near bankruptcy of the public exchequer and the continuing rise in accumulation of wealth by the business class.
There is thankfully an explanation for this inconsistency. Private businesses have been able to accumulate wealth because the government has failed to tax them effectively despite earning huge profits. Since the emphasis is on indirect taxation, the government has been focusing on taxing the end consumers directly.
Calling it indirect taxation is another example of a paradox. General sales tax (GST) allows the treasury to collect taxes from general masses with a lot more ease than taxing corporate profits. It directly impacts the consumers and hence its effect on prices is more unambiguous as compared to the so-called direct taxes.
Despite the previous government bringing down the popular price indices (CPI, SPI and WPI) to almost half the level they were when it came into power in 2008, the media has successfully managed to create the image of rising prices. This has dampened consumer confidence. A marginal increase in the general price level will dent it further. An increase in GST will certainly have this effect.
Companies also attempt to avoid paying taxes through ingenious usage of legal loopholes or adopting corrupt tax evasion practices (like issuing fake receipts to customers or fiddling with sales ledgers). In the end, the consumer ends up paying higher prices and the exchequer loses out on desired revenue.
This certainty has been the case in Pakistan under the previous government. It will make the life of the new government very difficult if it fails to stop the leakages in the tax collection system.
The reaction of political parties and general public to just one percentage point increase in GST (as announced in the budget) is indicative of the fact that the general public, its parliamentary representatives in opposition and other members of civil society (especially media) have become completely irrational. While the majority rejected the previous PPP-led government for its mismanagement of the economy, failure to solve energy crisis and for being corrupt, one fails to understand how they expect the new government to solve all their problems with a magic wand.
The large businesses, especially those with consumer focus, have done extremely well and have shown to be resistant to the deteriorating law and order situation and the energy crisis. The textile sector is one glaring example of success with 2012 proving to be a particularly good year.
Irrespective of the negative portrayals of the textile sector by Aptma, it remains the fact that there has been an increase in the profitability of the sector even during the so-called dark five years under the previous government.
Similarly, the large landlords have enjoyed the best period of growth in the last 10-15 years. This would mean that beneath the accounting veils, companies are accumulating a large pool of profits but are failing to contribute to the general wellbeing of the country.
The culture of tax evasion in Pakistan is so deep-rooted that businessmen would always say, “Last year was much better than the current year; we are in deep trouble now.” The ground reality is that they have never been in trouble, and have always benefited from the large domestic market, which despite political adversities has always kept on expanding. The situation is admittedly not that good for SMEs, which remain vulnerable to a number of factors.
The current government, being a business-friendly government, has decided to favour the business class in an attempt to revive the depressed economy. This could be a successful policy if the businesses are willing to share their success with the government and eventually with the general public by paying the taxes and meeting their other social contributions honestly and with patriotic zeal. Failing to do so will increase income disparities, eventually leading to social disparities and a possible civil war.
Social media
The rise in popularity of social media in Pakistan means that it will be very easy for any pressure group or political party to bring millions of people out on the D-Square of Islamabad to embark on a revolution similar to what happened in Egypt.
Revolutions seem very romantic when seen from a distance but its outcome always leads to very bitter economic realities as can be seen in the emerging countries of the Arab Spring. If that happens in Pakistan, there is every chance that a new social contract will be written, which will be very disturbing for the large businesses and those who hold vast agriculture estates. This will then create the ultimate paradox.
The writer is an economist and a PhD from Cambridge University
Published in The Express Tribune, July 1st, 2013.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS (9)
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ
In the first part of your article, according to article heading Rising power of business in Pakistan is a part of neo-liberalism economy(recent form of capitalism). The neoliberal ideology was aggressively promoted around the world in the early 1980s by imperial powers to control third word countries economy, for their own regional interests.This is an ideology that is biased in favour of corporations and capitalists.It is the opposite of socialism, which aspires to put people first. In the neoliberal regime, the focus of accumulation shifts more unambiguously to the private sector. Via politics of privatization, the state renounces its direct role in accumulation, and shifts its function from ownership to regulation. But it is not simply accumulation that shifts toward the private sector; so too does distribution. The welfare state is pared back and streamlined: some functions are left to the private sector altogether (private charities have taken up much of the work of poor relief in some countries, particularly in the Third World) . Thus, the government both reduces taxes and shifts the burden of taxation from income to consumption, with an eye to putting more money in the hands of those most likely to invest it. The neoliberal ideology calls for weaker worker unions so that big businesses can have the “economic freedom” to exploit workers to maximise profits.The neoliberal ideology is opposed to strong states that directly ensure the people's welfare, but it supports a strong state to enable businesses and capitalists to flourish freely, to ensure corporate welfare.Nobel economist, Joseph Stiglitz, has rubbished this neoliberal ideology, calling it a “grab-bag of ideas” about markets supposedly serving the public interest by “privatisation, liberalization”, when in fact it is simply “a political doctrine serving certain interests”. Read Stiglitz's article called, “The end of neo-liberalism?” (2008).
Taxes cannot be evaded without the connivance of FBR.AS SIMPLE AS That. Will NS do anything about it. JUST FORGET IT
The writer has no clue on how business function and what is the problem of Pakistan. "Companies also attempt to avoid paying taxes through ingenious usage of legal loopholes or adopting corrupt tax evasion practices Ask any tax expert, using legal loopholes is not considered tax evasion and all multi nationals adopt this methodology. And businesses being better, they why do we have an economic crisis. Do your homework.
@ahmed: Sir Ji. This is the typical anti-taxation corporate line you have put forth and provides a very narrow view of economics (and this single bottom-line focus is getting old even from economic standpoint). It is true that operating businesses in an unfavorable environment like that of Pakistan is an act of courage; but going by hard cold business logic, businesses are there because they believe that the environment provides them the best return on capital vs. all other opportunities available. Now to the point of taxation, we are not U.S. or Europe where state is already extracting sufficient revenues to sustain itself, we are the 155th in the world in terms of tax-to-GDP. Interestingly enough, our low levels of taxation also coincide with our performance on human development index. A state needs certain level of taxation to thrive otherwise it starts to disintegrate, just like it is happening in our country and in the long run, businesses suffer as much from overall degradation of economic environment. We can debate the most effective range of taxation but asking businesses to stay out of it altogether is simply impractical and unfair (especially wrt under-taxed business sectors such as agriculture and services)
^ The writer is apparently an economist and a PhD from Cambridge University.
Why should the people pay taxes when they know it'll contribute to some clown MNA/MPA's prado? What incentive is there that the tax they pay will be indirectly returned to them in the means of security and infrastructure? Is this the reason why Pakistan is one of the lowest per capita tax payer and one of the highest charity payers in the world? If honest and competent law makers and tax allocated come in I promise you the business man will fly to Islamabad and pay taxes with pride and with a smile.
Author is living in the past under socialist economy of Bhuttos. In the new paradigm a company 's prime obligation is to minimize taxation and maximize shareholder value...which is a universal principal of private enterprise ownership. Author lacks basic knowledge of corporate by laws and structures. If a company is legally entitled to a deduction it is its obligation to its employees and shareholders to avail it. In addition while primary obligation of a corporation is to maximize return for its owners (shareholders) it also creates millions in taxation by indentures servants to government ....its employees who pay taxes through their wages and creating millions in windfall by spending in communities they live in. When a corporate thrives it helps communities in millions ways by charitable givings and creating more employments. It is about time people learn the ABC of economics especially those who still seemed to be living in the stone age and believe taxing corporation to death is the way to enhance development. We should admire our corporations that put up with all this nonsense but still do business in this environment of extortion and bhatas bad regulations siffarish and energy shortages.
The author has very little idea ,if any, about political dynamics of Pakistan or how dysfunction FBR of Pakistan is. Do you know that FBR has not issued due tax refunds to tax payers in last three odd months just to show enhanced tax collection and now these refunds total to about Rs 50 billion. People evade taxes knowing that risk of detection is very small and if they do get caught they can buy their way out. As to gathering a Million people through social media in Islamabad, does the author know the population of Islamabad?; it is about 1.5 Million in total