Taxing times

Published October 6, 2018
irfan.husain@gmail.com
irfan.husain@gmail.com

EVER SINCE I began reading newspapers, I can recall that every new government — elected or military — blamed the outgoing one for the fiscal mess it had inherited.

It’s no different with the PTI, with Chaudhry Fawad Hussain, the belligerent information minister, accusing PML-N and PPP leaders of “robbery and theft” for ransacking the public exchequer. Clearly, Chaudhry has brought the speech pattern of his party’s dharna days to parliament where he was forced to apologise for his uncouth language. But at least he didn’t slap anyone, or throw a glass of water in the face of a TV chat show guest, as his PTI colleague has done.

In fact, his understanding of public relations, the basic function of any information minister, leaves a lot to be desired, descending from gravitas to gibberish in a heartbeat. Who can forget his claim that Imran Khan’s flights in a government helicopter cost a mere Rs50 a kilometre? Could I please hire one at that rate, Chaudhry sahib?

Politicians use foreign debt as a stick to beat their predecessors with.

But back to the broken economy this government has inherited. According to estimates, Pakistan’s foreign debt increased from $60 billion to $95bn during Nawaz Sharif’s last stint as prime minister. By contrast, the US has piled up a $22.2 trillion mountain of foreign debt, while Turkey, a thriving economy, owes $453bn.

What matters is not so much the size of the foreign debt, but the ability to service and pay off these loans. Every country borrows from banks and other financial institutions to finance projects and meet short-term requirements. Pakistan’s problem is that its imports exceed exports year after year. Internally, too, the government spends more than it earns in tax revenues.

Politicians fail to grasp these elementary facts, and use foreign debt as a stick to beat their predecessors with. Imran Khan has vowed to end this debt syndrome as well as unemployment by encouraging entrepreneurs. Unfortunately, he and his team have thus far failed to demonstrate any understanding of the massive changes taking place in the world of finance. And our bureaucrats, raised and trained in an environment where the state has exercised a stranglehold on the economy, have no deeper grasp of the subject than their political masters do.

For starters, capital now can be moved around the world at the click of a computer key. To take advantage of this mobility and the technical advances that are taking place every day, many countries are making it as easy as possible for foreigners to open bank accounts and set up companies on their soil.

Businessmen look for locations that offer cheaper labour, reliable power supplies, low taxes and security so they can maximise profits. It is relatively simple for a Pakistani entrepreneur to establish a company in, say, Singapore, and declare it his primary taxable location. He then directs all payments to his offshore account while sending money needed to Pakistan to finance the running costs of his factory or business there. But he pays virtually no tax there as he is already paying it in Singapore.

All this is entirely legal, and is being done by thousands of firms around the world. I know a successful Pakistani entrepreneur who discovered one day that his company’s bank account had been drained of Rs10 million by tax officials. Apparently, they have the power to do so in case of non-payment of a tax demand and hang on to the money until the claim is settled.

The firm’s owner protested and presented his tax returns to the authorities, proving he was up to date with his payments. While they agreed that he was not in arrears, the officials said they were under pressure to maximise tax collections, and he could claim a refund in the following fiscal year.

For a medium-sized firm to be deprived of its working capital without warning can be a disaster, so the owner has moved his registered head off­ice abroad where he pays the normal taxes, but as he put it: “At least I can sleep soundly at night.” While it works for him, Pakistan is deprived of the tax he used to pay.

Given our restrictive and onerous rules and regulations, combined with its erratic energy supplies and its scary security environment, it is no wonder that entrepreneurship has been stifled. Paying off income tax collectors and a host of other officials is often seen as a cost of doing business. These corrupt practices are now so deeply ingrained in our system that it is difficult to see how even an anti-corruption crusader like Imran Khan can rid us of them.

More than tackling corruption, the government needs to understand the fluid nature of capital. Clearly, we are in no position to attract much foreign investment, given our chaotic business environment. But at least let us try and retain the local businesses that are voting with their balancing sheets to escape our extortionate tax squeeze.

irfan.husain@gmail.com

Published in Dawn, October 6th, 2018

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