The government’s announcement of tax amnesty scheme coincides with its proposed policy focus shift towards economic growth. How the policymakers will fare is anybody’s guess.

But if one were to go by a noted economist’s view it is the ‘dominant economic narrative’ that is responsible for the low tax-to-GDP ratio and the pace of growth much below its potential.

The policy framework tends to punish the enterprising risk-takers and reward the rentier class which thrives on unearned incomes. The system de-incentivises the hardworking, bright and bold risk takers in agriculture; industry and service sector to report and record their activity.

The framework of formal economy needs re-evaluation with an open mind

Typically ‘rentiers’ are people who live off their savings or inherited wealth. Their close ties with the establishment and political hierarchy perpetuates this trend of unearned incomes. Their defining characteristic is aversion to riskThey end up locking capital which if diverted to productive and socially desirable avenues of investment, that the country desperately needs, can mobilise natural endowments in men and material and propel progress and prosperity.

Dr Asad Zaman, Vice Chancellor, Pakistan Institute of Development Economics (PIDE), is critical of the dominant economic narrative and the economic policy thrust that, in his view, revolves around donors’ inspired stabilisation doctrine.

When reached over phone for comment on the attitude of many successful enterprises particularly in service sector which prefer dealing in cash, his response was different from many others.

There are several thousand small enterprises operating under the tax radar across all sectors. However, over the past two decades many startups in information technology, hospitality, education, health, advisory, fashion and grooming have assumed scale. There might be exceptions but a majority deals in cash only. The wads of high denomination notes at cash counters make one wonder about their tax- evaded earnings.

“It is clear these entities like to stay off the economic radar and the nature of the business allows them the space. Often proprietors are smart individuals who choose what they deem better for growth”, he said.

“I do not consider it useful to try and find faults on their side only. The framework of formal economy also needs re-evaluation with an open mind. It is important to promote socially responsible behaviour but not in a way that suppresses creative energy in the economy”, he said.

“Besides we need to learn to respect entities not just providing goods and services and carving consumer behaviour for stronger aggregate consumer demand that keeps the wheels of economy turning despite multiple odds”, another economist working for the government who agreed with Dr Zaman broadly commented in confidence.

“I believe that it is informal more than the reported economy that caters to the needs in terms of both production and gainful employment. The data of per capita consumption that is more than double the per capita income should be enough to notify the value of the parallel economy in Pakistan”, he added.

Dr Mohammad Iqbal, spokesperson Federal Board of Revenue (FBR), admitted that no formal research has been carried out to gauge the size, scale and trends in entities operating outside the reported economy.

“The businesses such as beauty parlours, eateries, consultancies, tuition centres, private clinics and hospitals often deal mostly in cash but the sales tax on services is a provincial subject and will thus be dealt at that level. I assume that Punjab and Sindh are more active on the subject”, he said over phone from Islamabad.

Another senior member of the tax authority said for a better part tax collection agency operates in firefighting mode. “What policy? Ad-hocism is the name of the game in Islamabad. The ultimate goal of all economic ministries and departments ought to be expansion in the economic activity but each of them is bogged down in trivial day-to-day issues and very often push policy that stunts growth”, he added.

Another officer criticised the futility of voluntary and self- assessment tax regime. “I fail to fathom what does that mean? Where in the world people pay taxes without tears? Name it to your taste the flow of taxes has direct relationship with the affectivity of tax laws and the efficiency of tax collectors”, he said.

Tashfeen Niaz, Chaiman, Sindh Revenue Board, said the agency lacks resources and free hiring rights to implement the programme of tracking the volume of business of enterprises in the service sector to extend the sales tax cover.

Salman Ali, Additional Commissioner, Punjab Revenue Authority, said the province was ahead of the rest as after the success of a pilot project the authority has rolled out an application to gauge transactions in 91 leading restaurants in Punjab.

“We have completed the homework and hope the technologically advanced system will extend the cover of formal economy to our province which will further improve the quality of governance in Punjab”, he said over phone from Lahore.

He considered Dr Zaman’s opinion bookish and FBR’s Dr Iqbal’s response evasive. “The FBR cannot absolve itself of the responsibility. Yes, sales tax fall in the purview of the province but income tax is their domain. Do they know how much private medical practitioners are earning? In absence of data how they hope to assess the income tax liability of proprietors of money spinning businesses?”, he questioned.

Published in Dawn, Business & Finance weekly, January 11th, 2016