The ban on automobile and real estate transactions is back, and it seems like it’s here to stay.
Many have declared their support; it is, after all, important to document economic activity to the farthest extent possible and force people to account for their wealth.
The measure is understandably targeted at people with large, undocumented and potentially illegitimate pots of wealth.
It is therefore difficult to oppose this ban, a situation made tougher by populist rhetoric and name-calling from across the political divide.
While one cannot disagree with the intention behind it, the ban is operationally distortive and, like other indirect and indiscriminate measures, serves to harm the poorest segments within the real estate and automobile industries the most.
Handbrakes for the poor
Consider the automobile industry. The ban applies to sales and new registrations of all local and imported cars.
In other words, a non-filer cannot get an unregistered car, but is still able to purchase and transfer a used or registered one.
In the backdrop of this step, new car sales are down, direct bookings are down, and thousands of people have instead claimed refunds.
Approximately 75 per cent of non-filers opted to cancel their orders instead of filing tax returns.
More concerningly, most of this downtrend is in the smallest category of cars: less than 1000cc, and the largest drops in sales are reported by Suzuki on two of their cheapest models. Sales of Mehran were down 42pc, while those of Ravi were down 50pc.
I would remind you here that Mehran is the cheapest amongst all local and imported new cars in the market, and Ravi serves as the low-cost commercial vehicle of choice for small business owners.
The situation has upended traditional incentive structures in the market.
The automobile industry is generally constrained by limited supply and production capacity.
As a result, buyers have to 'book' their vehicles and wait several months until they get delivered.
Dealers take advantage; they order large numbers of vehicles and offer them to buyers instantly in return for hefty premiums.
Restrictions on first-time registrations add another opportunity for dealers to make a windfall, while consumers and manufacturers stand to lose.
There is a simple opportunity for tax-filing dealers to charge large premiums simply by registering new vehicles and selling them as such to filers and non-filers alike.
If this practice takes root, any additional premium will disproportionately impact buyers with the least purchasing power – those who may have saved for years to buy a car, and those with incomes lower than minimum tax brackets.
While the amended finance act provides exemptions for motorcycles and vehicles less than 200cc, all cars are treated indiscriminately.
As an example, buyers on the lowest rung of the new car market would be crushed by any extra amount they may have to pay in premiums.
They will be forced to choose between paying the premium, filing their returns — which is the aim, even if such filing does not generate additional revenue for the government — or deciding against buying a new car in the first place.
As for rich non-filers, who are ostensibly the target of this ban and whose income may or may not be taxed, an extra Rs500,000 in premiums for a five million-rupee car would not hurt as much.
If indeed a buyer has large undocumented or illegal sources of income, the incentive would be to pay the premium instead of filing taxes. This is consistent with the proportions of decreases in car sales by market segment.
On the other hand, if the slowdown in the automobile industry continues, manufacturers may be forced to shrink production — and leave hundreds of people directly and thousands indirectly jobless.
As reported in articles I have cited above, industry experts and representatives have already sounded the alarm bells in recent weeks.
Deconstructing the economy
Property and real estate markets present an even more complicated scenario.
To start, we would do well to separate speculative holdings of vacant plots and unmarked files from the construction market.
Speculative investments tend towards low occupancy rates, create a shortage of affordable housing supply and cause the market to overheat.
It is also generally believed that dirty money is parked in such investments. They thus represent the dirty underbelly of an industry that has the potential to herald unparalleled growth for our economy.
However, there are other ways to regulate such investments. Building and occupancy requirements are two of the many regulations that cities around the world actively enforce.
Banning transactions is the most unimaginative strategy I can conceive of.
While we can understand the rationale to target rich, possibly criminal, investors, we must consider the impact of such a move on labour.
Construction of housing stock has large external benefits. These accrue in added employment, gross value added and added labour income, and reflect in increases in total output over and above the simple amount invested directly in construction activities.
Because of these multipliers, housing is often referred to as the precursor of future economic performance.
Induced multipliers may kick in after some lag; housing can therefore both indicate and drive economic activity.
While growth, investment and employment generate positive multiplier effects, the converse also holds.
A shrinking industry that does not transform may lead to negative ripple effects, and the failure of an industry or even a single, significant market player may have a domino effect that precipitates a full-blown crisis.
The ban on property transactions is indiscriminate amongst non-filers and precludes both potential home owners and investors from buying or starting new construction projects worth more than Rs4 million.
At today’s prices, Rs4 million will hardly cover construction costs for a single story, 10-marla house without adding the cost of land.
While this would understandably prevent holders of undocumented wealth from accumulating profit on construction and real estate projects, it would also take away livelihoods from labourers who would have worked on those projects.
Most informal jobs in construction are manual labour, which is tedious, underpaid and exploitative. However, it is also the only way for many of Pakistan’s poorest labourers to survive.
Even very little interaction with construction subcontractors in Pakistan’s labour market will reveal interesting dynamics at play. In the past several months, they have described increasingly despondent conditions.
Markets are “ice cold”, they say, and they are only finishing off contracts they had secured before this restriction was put in place. Because most labour is hired on a daily wage basis, the transfer of this slowdown is immediate.
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The transaction ban, then, is intended to target investors with untaxed money, but is having serious unintended consequences for the poorest segments in our population.
Two things are important here: one, to realise that not all non-filers hold untaxed wealth; and two, that informality is not automatically criminal or illegitimate.
Our tax regime is such that salaried individuals may be paying more tax than they owe without filing. Similarly, many small contractors pay final liabilities at source.
Construction is a necessary, integral part of the economy and not an illegitimate or criminal activity like corruption or drug peddling.
Perhaps most importantly, labourers who work in automobile and construction sectors don’t make enough to file and have no recourse to alternative sources of livelihood if their employer is not tax compliant.
Without creating those alternatives, we are only distributing hopelessness and hunger, and losing out on the indirect taxes that these transactions generated for the state before the ban was introduced.
Stuck in a rut
I am not suggesting that we ignore tax enforcement, or that the current low-level equilibrium of informal labour, exploitative wages and uncompetitive industries is the best we can do.
However, a transaction ban does not solve structural issues in taxation or the automobile and construction industries. It just makes for good optics.
As a result of inbuilt inefficiencies, we are unable to enforce even the penalties for tax evasion that are already in place.
Unlike a ban on transactions, formal prosecution is not indirect; it targets and penalises only those who are established tax evaders or criminals with black money.
However, instead of delving deeper into why those enforcement mechanisms fail, we continue to look the other way and escape through solutions like indirect taxes, differentiated transaction costs for filers and non-filers and the latest ban on transactions.
The government can surely do better than a blanket ban on transactions.
We are amidst a well-acknowledged economic crisis: stocks have tanked, real estate markets have slowed down and we are looking at high cost-push inflation and double-digit interest rates in the weeks and months to come. The rupee is at an all-time low, oil prices are high and our deficits are at record levels.
I hope that we will learn our lessons, and also that we will step up in our efforts to introduce structural reforms in tax collection.
Perhaps one day, after those reforms, we will not have to play on the margins like we are doing today.
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