Dr Ikramul Haq
Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 6365584, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is a member of the visiting faculty of the Lahore Institute of Tax Education (LITE). He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law and global narcotics trade, some of which are co-authored with his wife, Mrs. Huzaima Bukhari.
That there is a considerable informal economy, revenue leakage and black money in Pakistan is undoubted but few in-depth studies have been undertaken to quantify its magnitude and extent. A sound development strategy seeks to reduce the size of the informal economy and bring into the open resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties; and exercises such as demonetizations, taxation has been used as a tool to tap the resources inherent in these areas.
Our top tax managers in CBR (sic) have so far miserably failed to tap such untaxed resources despite claiming that their efforts through the National Tax Survey would yield at least Rs. 100 billion. The fact is that this move has proved counter productive as billion of rupees were transferred by the people and now revenue collections in real terms are showing negative trends. Those who made these tall claims should be held accountable and must be punished for earning a bad name for our Armed Forces by engaging them in this useless exercise. The persistent failure of our financial managers and tax collectors to overcome fiscal deficit and remove fiscal imbalances has created a situation where the very economic survival of the country is at stake.
The Central Board of Revenue, according to all available data and indicators, is the most inefficient, incompetent and corrupt arm of the Government. It is in fact ruled by a band of mediocre and sycophants. In a recent meeting with the Chief Executive, the leader of the band tried to crack a joke, which irritated the already depressed and under pressure head of state and he openly showed his displeasure and annoyance. The CBR, responsible for the collection of federal taxes, has miserably failed to introduce any tax intelligent computerized system, despite the fact that it has a market-wage oriented company, PRAL, at its disposal, to monitor the economic activities of corporate/business sectors. This failure coupled with corrupt practices (according to some estimates at least Rs. 200 billion go annually to the pockets of tax officials) has contributed to generation of enormous black money in Pakistan.
Large-scale tax evasion and the existence of a large black economy while resulting in loss of revenue to the state, tends to reduce the built-in elasticity of a fiscal system to the extent that the tax evaded income is spent on goods and services that help to generate inflationary pressures and raise the prices of real property.
A survey carried out by a reputed Lahore based academic institution early this year, as a part of tax reformation drive, concluded that mainly because of rampant corruption, in combination with a host of other factors, “the country suffers a loss of 64 per cent in income tax, 48 per cent in customs and 45 per cent in sales tax”. Translated into hard cash, it means that for each hundred rupees of genuine income tax payments of a typical Pakistani business, the government collects only Rs 36. “The rest of the money is shared among the three parties – assessor (taxman), the assessee (tax payer) and the middleman (tax practitioner).
According to this study, out of every Rs100 taxable amount, the highest amount of Rs38, of course goes to the taxpayer, a typical Pakistani businessman. The taxman, an officer in income tax department, gets Rs16 for his services to the taxpayer in helping him to conceal his real income. The middleman who is a tax practitioner, advisor or a lawyer gets Rs 10.
If these estimates are taken as true, then the annual national revenue loss can go over Rs 200-300 billion. These estimates are summary judgments of a complex phenomenon. The survey concedes that these estimates may not capture part of revenue loss due to presence of a large unregistered business segment, on the one hand, and smuggling on the other.
It is not possible to predict the precise amount of revenue loss and size of black money or informal economy in Pakistan. The report prepared by the LUMS nonetheless claims that the data collected during the survey “is pointing to a very heavy leakage”. Revenue loss estimated by World Bank because of smuggling amounted to 5.08 billion dollars in 1992-93. Another report estimates revenue loss, because of distortionary tax regulations and administrations, at Rs 40 to Rs 45 billion in 1989-90 and Rs104 billion in 1995-96. Apart from direct monetary costs of corruption, both Pakistani and international literature pin point many other costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment.
Dr. Aqdas Ali Kazmi, Joint Chief Economist, Planning Commission has stated in his research paper Tax Policy and Resource Mobilisation in Pakistan that 70 percent part of economy consists of 36 percent ‘pure’ black economy, 18 percent exempted economy, 9 percent illegal economy, 4.5 percent unrecorded economy and 2.5 percent informal economy (unreported economy). His study says that the problem in the low resource mobilisation is the rigid system of taxation, and the emphasis of the government to increase revenue, ignoring the details of the long-term policy measures.
In the context of the prevailing grave financial crises in the country and the problem of ever-growing black money, (which according to official and independent experts is around Rs. 1.8 trillion, about 70 % of the total economy), there is an urgent need to launch a well-thought for law to unearth this huge money to make it a part of the mainstream economy. However, it is important before launching such a law to identify the sources of generation of black money. If such sources are not eliminated, the black money will keep on growing. The Government must critically examine the features of such a law to unearth black money.
There is a need for a wider plan to document the entire economy once and for all. The present regime must remember that half-hearted measures, typical of tax bureaucracy, will not yield the desired results. The firmness, consistence and steadfastness must be shown to revitalize Pakistan’s economy. Our survival now lies in our economic salvation.
Pakistan has been facing perpetual financial crises; the crisis of resources for its developmental policies, crisis to meet trade deficit, crisis on account of fiscal deficit and balance of payment, forex reserves and what not. One of the factors responsible for the present situation is the great speed with which black money is generated. The Central Board of Revenue is directly responsible for this as its mafia-like operations has helped the people to avoid tax on incomes by paying them “due share”. Through the infamous system of SROs, the CBR’s stalwarts provided “legal” ways and means to the mighty sections of society to amass huge wealth that is now threatening the very survival of State. This black money in the hands of corrupt politicians, bureaucrats and terrorists has played havoc with the entire human community across borders.
According to figures released by CBR on 30 May 2000, the parallel economy is growing at an alarming rate of 22.93% per annum. Every fifth rupee transacted in Pakistan is black, according to the volume of black money generated in the year 1997-98 at Rs. 600 billion or 15 per cent of Gross National Product. This means that everyday tax fraud exceeds Rs. 1.64 million. It is not the final count. We have yet not accounted for kickbacks in foreign trade, smuggling and foreign exchange racketeering, apart from narcotic trade and other criminal traffic. A conservative estimate is that Rs. 600 billion is generated every year by the parallel economy. Add to this, the black money generated through smuggling in goods and narcotics trade that is between Rs. 300 billion and Rs. 500 billion. This makes a whooping Rs. 1000 billion.
When the presence of black money is so apparent, why its criminal accumulation and generation are not revealed and the offenders punished, is a question which has been baffling honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and the tax administrators at defrauding the revenue, or the political system or the ineffectiveness and defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties? Those who plundered the wealth of the nation were set free to have a good time in “exile” and those who abused powers are being invited to come again for ruling and looting whatever is left.
In the Finance Ordinance 2001, announced on June 18, 2001, a new provision was inserted in the Income Tax Ordinance 1979, giving a free hand to money launderers that no question would be asked if they remit their drug money from outside through banking channels and surrender the foreign currency to the State and get Pakistani rupees as encashment. This scheme, presumably announced as a measure to bring huge amounts of dollars into the Pakistani economy, has been used as an easy vehicle by the Pakistani drug barons to launder their money through State patronage. The USA after 11 September attacks in New York is now taking a serious view of such schemes.
The most ugly face of black money emerges in the corridors of power, political as well as administrative. The present government, it is well established now, through the strong and draconian arms of NBA, wants to eliminate its political opponents and no serious effort has been made to get rid of money power and corrupt politico-administrative system. The episode of arrest and release of ex-Chairman of CBR is a classic example where the purpose was not to dig corruption but to use a person as a scapegoat to put pressure on the ex-Prime Minister to leave the country removing a threat to the army rule at least for 10 years. The efficient Chairman who did a lot to improve the working of CBR was released without any charges of corruption and for the sake of face saving the NAB fined him for trivial charges of avoidance of some fee etc. It was sheer mockery of accountability.
The strong and draconian arms of NBA should be used to eliminate the corrupt and not to put behind bars the political adversaries of the regime. Our country is passing through the worst financial crisis of its history, i.e., the crisis of resources manifesting it in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The Government has, therefore, to plan in terms of a well-thought-of asset seizure legislation to draw upon the huge reservoir of the untaxed black money. In case swift action is not taken to seize money and property arising out of corruption, tax evasion and narco-arm-trade, the day is not far when we are dubbed a nation of terrorists, as our present tolerance to black money is a suicidal path leading to self-annihilation.
We must remember that forces of the West are bent upon to destroy us and we are helping them to do so by not cracking down the corrupt, instead, allowing them to leave the country to enjoy a good life in the palaces of comfort and luxury.