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Enhancing GDP size

Published on 4th Feb, Edition 06, 2013

 

Two of the common complaints are: 1) Pakistan’s GDP size is too small and 2) GDP growth also does not compare well keeping in view population growth rate. Over the years experts have been working on different options but little has been done to document the economy. According to some experts the size of documented economy is just one-fourth of the actual. On one hand this does not allow the government to undertake appropriate policies and on the other hand it is much easier for the tax evaders to dodge Federal Bureau of Revenue. One of the conspiracy theories is that maintaining status quo helps tax collectors to make a fortune and in return they are ready to keep their eyes closed.

At present nearly half of Pakistan’s GDP comes from services sector and remaining half from agriculture and industry. If one takes into account four major crops (wheat, rice, sugarcane, cotton) into account and value addition at various stages the size of agriculture looks enormous. If one also adds livestock, oilseeds, fruits and vegetables the size becomes mindboggling. However, only scanty date is available about the agriculture product because of poor documentation. The situation has prevailed because for years income from agriculture has remained ‘tax exempt’ and no need was felt to record the income of farmers. In fact it has been observed lately that people are clubbing all sorts of income under ‘income from agriculture’ to evade tax, mainly because provincial governments responsible for collection of tax from farmers comprise of ‘feudal lords’ who just don’t want to pay tax.

To achieve their ‘self centered’ objectives they have been saying that imposition of tax on the income from agriculture will affect the small farmers, which is not only incorrect but misleading also. Despite various tax reforms introduced in the country, less than one percent population of the country owns above 90 percent of cultivable land, added to this is ‘katcha area’ for which no record whatsoever is available. Besides this huge orchids are owned by the feudal lords and out of this mango farms alone yield billion of rupees (number can be substantiated from the foreign exchange earned from export of mango) and if one also adds foreign exchange earned from Kinnow to this the level of tax evasion looks too obvious. One must keep in mind that less than 25% percent of mangos and Kinnows are exported.

It is also on record that that Pakistan is among the top five milk producing countries and the turnover of companies selling milk in tetra packs runs into billions of rupees. This is just 5 percent of total milk produced in the country and value of remaining 95 percent can be real mind boggling. Data about milk production can also help in determining size of livestock, beef and hides and skins produced in the country, added to these are dairy products.

 

Tax evasion by owners of sipping mills and sugar producers is also common. One of the saying is that the sponsors of these units make nothing less than Rs20 million of the books. If one multiplies the number of spinning units and sugar mills the amount runs into trillions of rupees. Lately, it was reported that one of the spinning mills owned by a politician consumes around 35,000 cotton bales but the consumption reported in annual reports has hovered around 10,000 bales for years.

This was the state of affairs pertaining to spinning units and sugar mills but it is only tip of the iceberg. The number of large scale industries runs into hundreds but the number of SMEs and cottage units runs into millions. The average income of one of such units may not be ‘too big’ but these are the raw material suppliers of large-scale industries. This could be best understood if one looks at auto assembly plants operating in Pakistan. There are around half a dozen assemblers but the number of manufacturers of parts and accessories is estimated around 3,000. It is estimated that most of these units even don’t have a nation tax number.

Most notorious tax evaders are said to be private hospitals, doctors, engineers, jewelers, attorneys and even bureaucrats but worst are the politicians. Lately, when details of tax paid by the elected members were made public, it became evident that as a group they could be termed the ‘biggest tax evaders’. Most of the elected members are feudal lords turned industrialists and their families own sugar mills, textile units. However, on books these elected members look poorest as they pay paltry taxes, only to the tune of salary paid to them by the government, details of personal wealth are often not given in the statements submitted at the time of filing of nomination papers.

It is also said owners of public transport are also big tax evaders. Though, most of the vehicles are registered hardly a few owners file tax return. In Karachi alone thousands of trucks, buses, minibuses, coaches and rickshaws are registered but no returns are filed by the owners. The situation in other parts of the country is even worst as the owners don’t pay annual vehicle tax.

Only tax collection regime can be held responsible for poor documentation leading to tax evasion. If they follow two cardinal rules: 1) issuing national tax number (NTN) to every national identity cardholder and 2) making filling of income statement mandatory it will help in documentation. Experts say that there is no need to issue a NTN because national identity card number can be used as proxy. Unless habit of filing income statement is made mandatory neither the number of potential tax payers could be identified not the tax collation enhanced. Therefore, the prime objective should be filing of income statement and not the tax return.

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