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Pakistan -Smugglers paradise, taxman's nightmare

By       Message Rama Rao Malladi     Permalink    (# of views)   2 comments

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Trucks crossing into Kyber Pakhtunkhwa at Torkham
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Pakistan is a smugglers' paradise. From cigarettes to perfumes and cellular phones you can pick your choice from the "phoren" (foreign) goods stores that dot all cities and towns.
In fact, cigarette smuggling is a big business. Rough estimates put the number of sticks entering the land of the pure illegally at a whopping 19.5 billion every year. The treasury is poorer by over Pak Rupees 24 billion as a result.
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Just eleven items are making a $9 billion hole in Pak pocket every year. The government knows this. But is helpless; rather it has no clue, with politicians to bureaucrats and serving and retired army men -- every one busy in the smuggling racket under its very watchful eyes.
What are these smuggling-prone items?
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Tea, textiles, mobile phones, television sets/ electronic goods, tiles, tyres, diesel, petroleum products, and steel sheets are high on the list besides cigarettes. Petrol and diesel are smuggled from Iran and some of this finds its way into Afghanistan as well.
China contributes no less to the smuggled goods market; it has been flooding Gilgit, Peshawar and Lahore in particular with its less expensive goods that range from toys to batteries and medicines.
Adviser to PM on Revenues, Haroon Akhtar Khan, puts the value of total smuggling at around 3.88 percent of the GDP. The loss to the exchequer by way of taxes is $2.63 billion per year.
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"If smuggling of the cell phone is eradicated, we can create 2000 jobs by setting up a mobile phone plant", he told a round table on impact of smuggling on Pak economy held in Islamabad on the eve of Christmas Day. What about checking tea imports. "Well, we can have three plants to make the brew that cheers".
No less impressive are the illegal trade in ephedrine ($1.5 bn), human trafficking ($110 m), arms trafficking ($100 m) and the organised trade of kidnappings for ransom ($10 m) per annum. The government doesn't appear to have come to grips with the dimensions of the smuggling business in either its entirety or complexity. Otherwise, it would not have kept the anti-smuggling outfit of Customs Intelligence in an anaemic condition. With 460 people on its rolls across the country, the force cannot achieve any miracles.
Pakistanis are tax averse, and, therefore, give night mares to the tax-man.
"Less than a million tax returns were filed last year, a shameful statistic for a country boasting a population of 190 million", says Bilal Memon, Business Editor at the Express Tribune.
Official tax data justifies his critique. Only 21 per cent of registered businesses pay 75 per cent of the income tax receipts. Indirect taxes contribute 55 per cent of the tax revenue; the industry bears an estimated 73 per cent of this burden. The services sector is a relatively small player, and not a big contributor to the exchequer.
Yet the Sharif government has thought it fit, fair and proper to come up with a tax amnesty scheme. It is targeted at the trading community, whose incomes are very hard to discern. And has faced flak from the opposition.
No surprise, therefore, that Finance Minister Ishaq Dar is the most worried man in Pakistan today.
This honour should have gone to the Army Chief Gen Raheel Sharif or his sleuths in-chief, Lt Gen Rizwan Akhtar of ISI and Maj Gen Sahir Shamshad Mirza (DG-MI), what with terrorists striking at will across the country and the Operations against the Bad Taliban going nowhere. But it did not; in fact, they are sporting a big smile -- their 15-year-old foot soldier, Jaish-e-Muhammad (JeM) has just made India bleed at its Pathankot airbase.
The attack was no more than another manifestation of the Pakistani national security strategy to pursue its revisionist agenda against India, as long time Pak watcher, Christine Fair, puts it.
The 'other' civilian Sharif also has no reasons not to have his forty winks in the afternoon; he has left home turf, Punjab, which has become the hot bed of jihadi politics and Islamist adventurism, to the able hands of his brother, Shehbaz, who also does the lobbying with the GHQ Shura as and when the demand arises. And handed over finances to Ishaq Dar, the old loyalist -financial wizard, who finds himself in the cold.
For Dar, the New Year 2016 has not begun on a happy note. The excel sheets in front of him tell a story of not only missed opportunities but also highlight the mess in the economy: debt has piled up to unsustainable level.
The World Bank wants him to believe that tailwinds from China, Iran and Gulf Oil markets will gift a growth rate of 5.5 per cent over the near-to-medium term. Lenders optimism, it is; no more no less.
Neither of the Bretton Wood twins has any desire to overcome the ills created by long years of dressing-up the economy, notwithstanding the charge that the apex bank of Pakistan has fudged data to trick the IMF. How this was done?
According to business daily, Business Recorder, the central bank created excess liquidity in the interbank market last September. It first waived the capital reserve requirement (CRR) of five large banks, and then cut the limit by three percent in respect of other banks.
This magic trick pushed the net domestic assets (NDA) of the central bank to Rs. 2.8 trillion - roughly Rs.648 billion more than the IMF --fixed ceiling of Rs2.2 trillion for end September. This gave some reprieve to the economy mangers when they faced the IMF review a month later in October last. But it in no way hides the reality that Pakistan runs the risk of sovereign debt default.
Pakistan needs around $20 billion a year to meet its external financing requirements, according to Economist, Tehreem Husain, who is a former central banker. As of September 2015, the external debt stood at $66.5 billion. And at the present rate, it will peak to $90 billion in the next four years impacting not only growth rate but also making macro-economic stability a bumpy ride.
Next door nuclear neighbour, India's debt position is not rosy either. It has piled up a whopping $482.9 billion in foreign debt. But it is no consolation to Pakistan because unlike India, it has a very small export base, which is shrinking at rapid pace thanks to Yuan troubles.
One simple statistics is enough to explain this phenomenon. During 2014, ratio of external debt to exports touched 200 per cent mark. Compounding the misery is the steep rise in the debt servicing costs.
The IMF's projection is that Pakistan's external debt would touch $74.572 billion mark in 2017-18 fiscal- the year when the Sharif government will seek a fresh five year mandate. It means foreign debt would see a $6 billion increase during next two and a half years.
Dar's officials do not buy the IMF line but then there are no takers for their contention either. It is because the Sharif government has added $1.4 bn to the foreign debt since it came to power some 27 --months back. It also mopped up Rs. 2,796.1 bn as domestic loans.
Pakistan could have been out of the woods had it utilised the loans for productive purpose. Its troubles are largely due to the fact that almost sixty percent of the loans obtained during the decade 2005-2015 were spent to support the budget and balance of payments.
On average, Pakistan received close to $5 billion in fresh loans every year. It returned about $2.5 billion to its international creditors, Khaleeq Kiani reported in Dawn, a Karachi English daily.
This pathetic situation is because less than half a million of the estimated seven million Pakistanis pay income tax. Put simply, half a million people are overtaxed while the rest are smiling all the way to their local hundis (unofficial banks) to transfer their money to tax havens. And according to the anti-corruption watch dog, NAB, the country is losing a staggering Rs12 billion to corruption.
As I was writing this commentary came a new IMF report which said Pakistan is facing a Rupees 3.3 trillion revenue black hole. The current tax-to-GDP ratio is 11.5% but the tax capacity is anywhere upto 22.3 per cent of the GDP. "This implies a tax-revenue gap of more than 11 per cent of GDP or Rs 3.3 trillion, says the IMF. It is six times higher than the amount of Rs500 billion that was mentioned for the first time in 2009 by the then finance minister Shaukat Tarin.
Nearly a quarter of Pakistanis are living below the poverty line. To cut the poverty level, it must strive for a sustained growth of 5-7% a year, which is nowhere in sight. This is cause for concern not only to Pakistanis of all hues but also to their friends and well-wishers.

 

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Rama Rao Malladi is New Delhi based senior journalist and distinguished commentator on South Asian and Central Asian issues. He is a regular contributor to several publications in and outside India. His articles are featured in News Blaze.Rama is (more...)
 

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