Taxation can help declining economy

The following article has been published in Daily Nation, dated 23rd February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-23/page-9 )

(Online: http://nation.com.pk/business/23-Feb-2015/taxation-can-help-declining-economy )

Taxation – Solving Pak’s Dilemma

By: Omer Zaheer Meer

We’re all aware of the fact that it cost money to run countries and these funds are raised by taxes. Taxation is therefore an essential subject warranting attention from all concerned. In this write-up we’ll identify key issues in this regard and propose solutions to solve them amicably which have been presented by me at various think-tanks as well as published and publicized but unfortunately still awaits implementation from the decision makers.

Taxation is an extremely important source of funding for any state to finance the running of the Governmental functions. Even the oil rich Arab states are now beginning to recognize the importance of this and starting to shift towards a lasting economy with citizens contributing to the national treasury with their share of the taxes. To put it simply in all global economies, there is taxation both direct and indirect (in different combinations). Direct taxation is a tax directly levied on an individual or business’s income while indirect taxation entails taxes on products and services whereby consumers are made to pay taxes when they consume these.

In developed countries, realizing that taxation is necessary for providing them with necessary facilities, most citizens contribute their share to the state finances. Direct taxation is the dominant part of the tax system in such countries as it accrues some substantial benefits for the economy, people and the state. Importantly, direct taxation allows richer segments of the society to be taxed more and poorer classes are provided with relief and benefits. This proportionate taxation not only help smooth the flow of money across various classes of the society but it also helps in ensuring that every citizen has a minimum living standard by providing state assistance where required.

However, a different story is at work in Pakistan. A culture of tax avoidance has long engulfed the business horizons. An ongoing cat and mouse fight between the tax authorities and the taxpayers, with the later believing that it would be a waste to pay off their tax bills due to the deep pockets of the corrupt government officials, has led to a greater focus on indirect taxation. While the tax and state officials rightly point out that no state can perform the necessary duties with the empty coffers, the tax payers also have their point in that they don’t see any real delivery of essential services but instead are greeted with stories of herculean corruption rife all around. The plague of corruption is widely believed to be consuming most of the available resources. Hence, there seems to be a massive break-down of trust between the taxpayers and the “tax-man”.

This serious trust deficit leads to a difficult situation where finance ministry overemphasizes on indirect taxation to try to bolster its coffers.  Unfortunately this approach has serious negative ramifications for Pakistan’s economy and people which has manifested in worsening the already declining economic situation of the country.

In Pakistan, ordinary people are taxed indirectly on just about everything. Nowhere in the developed world is indirect taxation utilized as heavily as in Pakistan due to the negative effects that it creates for the economy. In Pakistan’s case (and that of many other developing countries following this strategy) the negative impacts far outweigh the contributions raised in this manner due to the missed opportunity costs.

For example, 25-30% had been routinely charged as an indirect tax on every liter of fuel (mainly Petrol, Diesel, e.t.c.) in Pakistan which is a basic necessity for everyday life compared to only 13% in the USA. This way of collecting taxes indirectly leads to inflationary pressures in the economy as the increased transportation costs translates into increased prices for just about everything including the commonly used commodities. The effects are hyper-inflationary in nature because there is a multiplicative rather than an additive element in the inflation passed-on at every level.

Furthermore the pay-rises are not proportionate to inflation thereby forcing people to rely on expensive credit to make their ends meet. Similarly businesses also require more finance to run their operations. This hyper-inflationary environment then leads to higher interest rate which negatively affects the businesses. With higher finance costs many business projects which would otherwise be viable becomes non-feasible. The resulting lack of employment opportunities combined with the limited money-supply puts recessionary pressures on the market. The above issues lead to the devaluation of the currency which in turn results in increased foreign debt burden. As a result, financing costs of the foreign debts rise leading to a higher proportion of GDP spent on debt financing. All this combined with hyper-inflation drags the already estranged economy further back in Pakistan’s case.

The above is a summary of the mess created by the taxation policies pursued by the previous government which are unfortunately continued by the incumbent finance ministry. The result is that while the standard of living of especially urban Pakistanis is generally considered well-off compared to most developing countries, Pakistan is considered to be lagging behind economically in the league of the nations.

What is actually required is to restore the faith of the taxpayers by implementing a multi-dimensional tax reforms agenda where:

• Taxpayers are encouraged and incentivized for paying taxes.
• Taxpayers are facilitated by making the process easier and fairer, focusing on maximum automation in order to stem out corruption.
• Instead of increasing the tax rates the tax net is constantly widened.
• More focus is given to direct taxation.
• Meaningful tax rebates and reliefs are introduced for the less able sections of the society.
• A system of proportionate taxation is adopted with more affluent contributing more to the treasury.
• Certain exempt sectors are brought into the tax-net (subsidies can be given for assisting any under-pressure areas/products).
• Tax rebates and incentives are introduced to encourage foreign/local investments in key sectors with tax-breaks for transfer of technology, e.t.c. as may be required in a particular sector.
• Tax money is actually spent on public welfare and infrastructure projects, which will improve the spending capacity and the business environment in Pakistan.
• The massive corruption in public contracts/projects, now routinely in the range of 40-50% of tender values, is eradicated for better and efficient use of public money through revamping the pay and accountability structures.

With all the natural resources at our disposal, a high proportion of population been young and hardworking and cheap labor availability, a fairer system of taxation culminating into a fairer economic policy can provide the necessary environment to harness the economic potential of Pakistan.

The key reforms outlined above, if properly implemented, can resolve the current enigma facing the treasury. Should such reforms be made with reliance on local resources and a will for change, there is no reason, why Pakistan cannot stand on its own feet and become an economic hub not only for the region but the whole world.

The writer is a leading economist who is also a qualified chartered accountant, financial analyst and anti-money laundering expert. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

KBD – as big for Pak’s economy as Atomic weapons for defense

The following article has been published in Daily Nation, dated 16th February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-16/page-9 )

(Online: http://nation.com.pk/business/16-Feb-2015/kbd-essential-for-economy-as-nukes-for-defence )

KBD essential for economy as nukes for defence

Pakistan is an agricultural country and needless to say that agriculture is the backbone of its economy. Water management is therefore an integral and extremely important aspect of growing Pakistan’s economy just like for any agricultural economy. However, Pakistan’s water management leaves much to be desired with regular cyclical flooding causing extensive losses to economy along with disrupting millions of lives regularly.

Improper and inadequate water management has not only resulted in shortfall of water in Pakistan but also the tragic wastage of precious water resources which instead wreak havoc in the form of floods every fear years, ending up being wasted without proper water-storage facilities. This is more ironic in the light of the severe energy crisis the country faces and the un-utilized cheap electricity generation option available from most dams.

Think-tanks in developed nations highlight and resolve such issues of national significance. It is therefore extremely important that these issues are deliberated upon, discussed and solutions proposed. Hameed Nizami Press Institute under Mr. Absar Abdul Ali took up the mettle to address this highly neglected issue recently and shared extensive knowledge about the topic as well as proposing valuable corrective measures.

Before sharing some of the key proposals of the experts’ in the conference mentioned above, it is worth mentioning here that just last year alone (in 2014) forty five thousands (45,000) houses and fifteen thousands (15,000) animals were destroyed as well as the losses due to the crops destroyed or damaged in over 300,000 acres of cultivated land, totaling to Rs. 240 billion as per the experts in the said conference. 22 major floods since independence have ravaged Pakistan regularly causing significant economic losses and contributing towards our national dependence on foreign debt and aid. However despite the availability of scientific progressions, practical measures and naturally adequate water-reservoir sites, unfortunately we have been acting as the disobedient son of Prophet Noah (PBUH) and keep on destroying ourselves despite the availability of “ship” which can take us to safety.

The constant floods faced by Pakistan since it gained independence resulted in losses of trillions of rupees due to the destruction of crops, properties, infrastructures, industries, cattle and most importantly human lives. Mr. Fazal Ahmad shared that the former East Pakistan and now Bangladesh used to face worse flooding as compared to the region that is now Pakistan. However their leaders prepared extensive plans to address the situation and implemented it with assistance from international donors. As a result Bangladesh has now materially reduced the problems it faced from flooding, thereby strengthening its economy and improving the quality of lives of its citizens. The question is that if Bangladesh can do it, what is stopping Pakistan from doing the same and reaping the consequential economic benefits?

In this context, former Chairman IRSA Mr. Shafqat Mehmood elaborated that the climate changes are expected to result in erratic behavior of monsoon along-with glacier melting which will cause increase in river flow. To address this potential exacerbation, work is required on both structural and non-structural measures for flood-prevention and protection. Pakistan must increase the storage capacity to mitigate the effect of floods and instead utilize the precious water resources instead of them being wasted. The measures proposed to turnaround the disaster of flooding into a valuable resource includes building dams and water reservoirs, catchment management, high flow diversions, water channel improvements along-with proper regulations, educating the masses, developing reliable flood forecasting and early warning systems, disaster preparedness, flood insurance and post-flood recovery plans.

While smaller dams and reservoirs are being built, there is a general consensus amongst experts that the highly politicized but hugely beneficial “Kalabagh” Dam (KBD) can not only bring significant economic benefits and energy generation capabilities to energy-starved Pakistan but also materially reduce the destruction of floods coming from that path. Former SVP Lahore Chamber of Commerce & Industry and Chairman of its Kalabagh Dam committee Mr. Abdul Basit highlighted this issue.

Unfortunately KBD has been largely politicized in Sindh and KPK. While KPK’s objections can be resolved with proper education that Nowsheha will not be flooded but rather saved from flooding due to KBD as many experts including former heads of WAPDS shared along-with offering financial incentives to soften the anti-KBD sentiments. In Sindh the issue is more of a lack of trust as to the fair distribution of water and recently raised issue of damage to the environment. Both can be addressed by measures including giving governing position of the KBD to Sindh with representation of all provinces in a specially formed body to oversee the administration and running of this mega-project which can change the economic and energy fortunes of Pakistan. Some structural changes and mitigation measures can also be agreed to reduce the damage to the environment.

Having said that, the political will be necessary to accomplish the feat is essential. We must recall that never in the known history of nations has there been an absolute consensus on any such project involving human relocation. Even in Pakistan, Mangla and Tarbela Dams were strongly opposed at first but once the Governments decided in their favor, the state implemented its writ. The affected were compensated and today the whole country is reaping the benefits. Imagine if the Governments at that time had given-in to the political pressures instead of making a decision to stand by the national interests where would Pakistan be standing today without both these mega-dams considering the already crippled energy generation systems and meager water storage facilities.

Those who cite political dogma of parties basing their politics on anti-KBD agendas needs to be reminded that despite divided opinion when the decision making circles made a decision, operation against terrorism ensued successfully. Why, then this operation against economic destruction which is equally important for the survival and growth of Pakistan, cannot be undertaken? It can and should be undertaken for the sake of Pakistan. All measures should be used to address the genuine concerns of all stakeholders but any dissent against national interests of Pakistan based on irrationalism and petty self-interests needs to be tackled as such. KBD can be as big for Pakistan’s economy and energy resources as Atomic weapons were to Pakistan’s defense.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Solving Pak’s Economic Woes

The following article has been published in Daily Nation, dated 9th February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-09/page-9 )

(Online: http://nation.com.pk/business/09-Feb-2015/solving-pakistan-s-economic-woes )

Solving Pak’s Economic Woes

By: Omer Zaheer Meer

Government of Pakistan borrows more from the IMF. World Bank approves next loan tranche to Pakistan. Asian Development Bank sanctions grant for Pakistan. These are the sort of headlines that regularly defines Pakistan’s economic persona in international media. Why a resourceful country like Pakistan has been caught up in the never-ending web of interest-based borrowings without significant increase in economic output over the recent past is a question that should worry our policy makers. More significant still is the answer to the dilemma of how to solve Pakistan’s economic woes in the short term?

While there are many corrective measures including long-term structural reform that are warranted to ensure a functional, productive and self-sufficient economic apparatus, some short-term measures can provide effective support to the economy till the long-term reforms bear fruits. First and foremost is continuously advocated and inefficiently pursued goal of expanding the tax base. Instead the incumbent government, like many before it, is focused on squeezing the existing limited tax-base, further discouraging people from entering the tax-net and encouraging both tax-avoidance (legal) and tax-evasion (illegal).

Recently when the petrol prices crashed-out in the international markets, first the government was reluctant to pass-on the relief to the masses. However owing to political pressure when the government did reduce the prices eventually, it chooses to increase the General Sales Tax (GST) levied on petrol. At present GST on petrol is up-to 27%, an increase of almost 59% from the previous level of 17%. In simple words it means that app Rs. 25 is collected from everyone on every litre of petrol they purchase, indirectly via GST & PDL. Pakistanis are ending up paying more taxes on petrol than they used to before the huge price drop in international market. Similarly four new taxes (surcharges) have been added to the electricity tariffs. At the same time, for some mysterious reasons, the government seems unwilling & unable to widen the tax net by taxing those with more income.

Pakistan has one of the lowest tax-payers to population ratio in the world where less than 1% of the population pays direct taxes compared to just under 5% in India, approximately 58% in France and almost 81% in Canada. One of the main reasons for this is the huge emphasis on indirect taxation. To elaborate this further let’s briefly overview some key taxation statistics. At present there are only a few million tax payers out of a population of 200 million in Pakistan. While those filing income tax returns (many of which are nil) were a meager 711,000 in 2012 while 800,000 till 16^th December 2013 as per official figures released by FBR. This dependence on indirect taxes is worrisome. General Sales Taxes (GST), Federal Excise Duties (FED), Customs Duties, e.t.c. collectively constitute app 74% of all tax collection by the government. I’ve explained before that this high dependence on indirect taxation results in increased costs of production and services, giving rise to inflationary pressures and relatively low economic output results in trade and current account deficits.

This is happening in a country where the bills of import for the luxury items and 4×4 vehicles keep increasing. The property prices are still ballooning with every passing day. In short, Pakistan has no shortage of millionaires and billionaires, let alone a few hundred thousand above the taxable income limit as read from the dismal income tax return filing figures. All that is required is to identify the taxpayers currently not paying their taxes. Integration with NADRA database can be extremely useful for this, more so if various other institutions’ databases can be linked to the main NADRA database. Visualize this, anyone buying a plot in defence or importing a 15-20 million PKR vehicles would be immediately identified by the system and bought in the tax-net (assuming the political pressures are not given in to). As per conservative estimates there are atleast 2-3 million big tax-evaders with due taxes in millions, that can be brought into the tax net in this manner. This translates into hundreds of billions of extra revenue which will greatly reduce the dependence on borrowing. The space provided can then be used to pursue long-term goals to resuscitate the economy. For this we don’t even need extensive time-consuming meetings which lasts the entire tenure of Governments, all that is needed is political will and a few officers willing to implement.

Though FBR has recently taken an important initiative where it has taken data from various institutions including Motor Vehicle Registration Authorities, Car Manufacturing Companies, Electricity Supply and Distributing Companies, Property Registration Authorities, Mobile phone subscribers Cos,  Medical and Dental  council, Pakistan Engineering Council, Pakistan Bar Council and information from Jamal’s Yellow Pages ( about business concerns) and now fed into PRAL’s database, it still needs much to be desired. First of all this data will become outdated soon, secondly each time FBR would need to go through the same exercise to secure the data and thirdly they’ll need to merge it all together in their systems too. On the other hand having a central database where all these and other concerned institutions’ databases are connected with NADRA’s will form a central and continuously updated data pool which can then be allowed to be accessed by FBR. The benefits of such a move would be grand and rejuvenate the ailing taxation system of Pakistan. This would certainly need to be backed with long-term structural reforms including proper resources for FBR along-with an effective accountability system.

Lastly some good news to share about the taxation reforms in the country. A positive measure that has been pursued for quite some time has been approved by the concerned authorities due to the effective campaigning by Lahore Tax Bar Association under guidance of its President Mrs. Ayesha Qazi. The move is to allow the use of CNIC (computerized national identity card) numbers as the NTN (national tax number). This would reduce the hassles in income-tax registrations and will help widen the extremely small tax base. The present system is a sad joke where a citizen has to go and apply for a tax number instead of it being automatically allocated to them via CNIC. If the approved plan is actually implemented (it can later be extended to GST registrations too), this can be a giant leap forward and win accolades for the incumbent government too.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Incompetency Main Reason of Power, Petrol Crises

The following article has been published in Daily Nation, dated 2nd February 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-02-02/page-9 )

(Online: http://nation.com.pk/business/02-Feb-2015/incompetency-main-reason-of-power-petrol-crises )

Economic Mismanagement

By: Omer Zaheer Meer

Economic prosperity is defining the place and clout of nations on global stage in the present world order. The issues of economy and terrorism have captured the national attention in Pakistan too. The need of the hour is to strengthen the economy of the country which in turn would translate in to the might for the state, enabling it to better deal with the menace of foreign-sponsored terrorism.

While there is no doubt that Pakistan’s economy has constantly faced serious challenges over the decades yet there is indeed much left to be desired in terms of the management of the existing resources and structural reforms. Whenever the economic woes of Pakistan are discussed, the rulers point out to the limited resources and the dismal state they inherited the economy in. Fair enough, more often than not, the point conceded here. But fact of the matter is what stops them from properly managing the pool of resources at their disposal as well as inducing the much needed reforms to address the structural inefficiencies?

Many recent crises including the power break-down and the petrol crisis were examples of the incompetence of the highest order by the officials and ministers concerned. By not taking action against the culprits baring few government servants, the incumbent government has strengthened the argument of its detractors about its lack of political will and a vision to guide Pakistan’s economy in the right direction.

Let’s begin with a brief dissection of the two recent crises with most impact. First is the petrol crisis which literally bought the life to a halt across Punjab. Students couldn’t for to educational institutions, patients were unable to reach hospitals, work became stagnant and the life froze. This was down to atleast three major issues. Firstly the dues owed to PSO by state institutions were unpaid despite repeated requests rendering PSO unable to bring in more supplies. Secondly the private companies did not keep the minimum reserves required and OGRA failed to ensure implementation of the law and regulations in this regard. Last but not the least when PSO’s reserves were nearing exhaustion, despite official letters the Government still failed to realize the gravity of the situation. There were ugly exchanges of allegations between the Finance and Petroleum ministers. There are also unconfirmed stories doing rounds that the whole fiasco was created to authorize payments of over Rs 225 billion without due process involving AG office and audits. However, even if one discounts them, all this sums up to the mismanagement and incompetency of the highest order.

As if this was not sufficient for the suffering of the masses and losses to an already ailing economy, an electricity breakdown across the country ensued resulting in blackout in over 80% of major cities. A senior minister from the incumbent Government blamed terrorist activity in Balochistan province but perhaps owing to a lack of co-ordination due to blackout a senior government official acknowledged a technical failure in the transmission systems. The lack of co-ordination was simply astounding. It is no secret that the electricity transmission system is in dire need of overhaul and up-gradation with a severely decayed state at present. Unfortunately the incumbent Government hasn’t been able to do much on this front either despite been in power for the 2^nd year now.

These crises clearly imply that the cause for exacerbation of Pakistan’s economic woes rests with a lack of management. Add to this the issue of the pending structural reforms badly needed in the taxation system along-with the dismal state of the revenue collection and one can easily appreciate the serious improvement warranted in the management of the affairs. One prime cause for this dismal performance is the appointment of non-professional people at the help of affairs of key institutions and ministries. While politicians do run the governments in a democracy, they atleast ensure they have a professional team to assist them. Unfortunately for Pakistan, be it Democracy or Dictatorship, this has been lacking.

While understandably, Pakistan cannot generate resources at par with established first world economies overnight, we can at-least manage our meager resources in an efficient manner. Perhaps it is high-time that Prime Minister of Pakistan Mian Muhammad Nawaz Sharif needs to look inwards within his party and take corrective measures including appointment of professionals to assist if not run the crucial ministries. If not, than a dismal economic performance can only sustain for a short span with the help of foreign aid. Let this also be a lesson for other political parties to ensure they’ve systems, teams, professionals and processes in place to cope with the challenges facing the country, should they be assigned the duty to steer the nation.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk