THE budget presented in June 1988 was an extraordinary one for many reasons. It was hastily prepared in the aftermath of the dissolution of an elected government, the first of what was to become many more dissolutions in the decade to come. It contained some of the most far reaching cuts in expenditure ever undertaken by the state. And it formed the basis of a historic IMF programme signed in November of that year, the first of many to come to envisioned structural reform of the economy.

But none of these things made that budget as controversial as a small and little noticed measure that forbade all businesses from using cash to settle any transaction larger than Rs50,000. Almost immediately an uproar ensued, from some of the largest businesses in Pakistan, arguing that they will find it impossible to carry on normal business under this stipulation.

Also read: Extraordinary expenditures

Many reasons were given for why this measure will be impossible to implement. Their vendors would not accept cheques or pay orders. Clearing procedures would slow down the pace of business, export orders would be jeopardized. And in a matter of weeks, the government caved in and withdrew the measure, promising to implement it from next year’s budget.

Of course that never happened. To this day, cash continues to be the preferred mode of settling transactions large and small across Pakistan, giving us one of the highest cash to bank deposit ratios in the world.

Over the decades, a number of other documentation measures met the same fate. Throughout the 1990s, for instance, attempts to implement the Sales Tax in value added mode, one of the most powerful ways to force documentation of business transactions, floundered.

Most recently, I watched with interest when the previous government, in the days when Shaukat Tarin was finance minister, made it mandatory upon all businesses to keep a CNIC of all their vendors, and tried to impose a tax on all transactions with unregistered parties.

In this concluding piece of a three-part series, a staff writer of Dawn argues that a large undocumented sector has been tolerated for far too long and has created a culture of accumulating wealth outside of the tax net that is undermining the country’s stability.

Once again a furor was raised, led by the traders of Karachi but joined in by almost every segment of the business community. A round of meetings was held, attempts to hammer out a compromise. Once again the same arguments were trotted out: the measure would raise the cost of doing business in Pakistan, it would empower the unregistered parties who would refuse to pay this additional tax, it would dissuade others from coming into the tax net, it would penalise those within the system while having no impact on those who operate outside it.

As has become the norm in all those years since 1988, when one of the first baby steps towards documentation of the economy was taken, the government backed down. And most recently, the government made one other attempt to strengthen its hand versus those who operate beyond the reach of the tax authorities, by giving the tax authorities the power to examine people’s bank accounts, and once again was forced to retreat. Although this time the government fought back longer than most others have in the past.

Over the decades, an elaborate machinery to evade taxes and accumulate riches that are within sight beyond the reach of the tax authorities has developed. Implied whitener schemes such as money brought in through the foreign currency accounts have found legal protection under laws passed in 1992, and tested in the courts in 1996. Periodic amnesties, no questions asked policies on government foreign currency bonds, agriculture incomes that are never assessed, property transactions in cash where the value of the land being transacted is massively understated – all have grown into well-developed schemes that allow the accumulation of tax evaded wealth in broad daylight, with total impunity.

The strength of the undocumented sector is to be marvelled at. Back in 1988, it brought a military government with no civilian component to its knees within a matter of weeks. No ruler since then, whether civilian or military or quasi military, has been able to face down the people who operate within this space. Pervez Musharraf had a documentation of the economy drive, where his government tried to get tough on traders and force them to file their taxes, yet by 2005 his government was issuing the most far reaching exemptions to key sectors. Measures large and small have all failed equally.

Most recently, in a forthcoming report on challenges facing the country, the Pakistan Business Council has acknowledged the growth of the informal sector as one of “the biggest challenge to the government’s ability to influence the economy”, going on to add that the growth of the informal economy today outstrips the formal and documented economy.

Perhaps therein lies the real reason for all the opposition to documentation measures that have bedevilled governments for almost a quarter century now. More money is to be made outside the net of regulation and taxfiling than within it, and those availing themselves of these outsized benefits are reluctant to see the curtain drop on their fortunes. And some of these people wield enormous clout, as the repeated disclosures of the public figures finances and their tax payments reveal.

Documenting Pakistan economy is key to restoring the writ of the state. It connects crucially with other challenges the country is facing, including especially the struggle against violent elements who are like fish in water in the undocumented economy. The forthcoming budget provides the government an opportunity to take up the battle one more time for well thought out measures to promote documentation. The first two articles in this series provided useful suggestions on how this might be done. Perhaps the budget is a good moment for the government to signal that in this battle, we are not without options.

Published in Dawn, May 19th, 2015

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