Pakistan provides ample examples of paradoxes, one being the near bankruptcy of the public exchequer and the continuing rise in accumulation of wealth by the business class.
There is thankfully an explanation for this inconsistency. Private businesses have been able to accumulate wealth because the government has failed to tax them effectively despite earning huge profits. Since the emphasis is on indirect taxation, the government has been focusing on taxing the end consumers directly.
Calling it indirect taxation is another example of a paradox. General sales tax (GST) allows the treasury to collect taxes from general masses with a lot more ease than taxing corporate profits. It directly impacts the consumers and hence its effect on prices is more unambiguous as compared to the so-called direct taxes.
Despite the previous government bringing down the popular price indices (CPI, SPI and WPI) to almost half the level they were when it came into power in 2008, the media has successfully managed to create the image of rising prices. This has dampened consumer confidence. A marginal increase in the general price level will dent it further. An increase in GST will certainly have this effect.
Companies also attempt to avoid paying taxes through ingenious usage of legal loopholes or adopting corrupt tax evasion practices (like issuing fake receipts to customers or fiddling with sales ledgers). In the end, the consumer ends up paying higher prices and the exchequer loses out on desired revenue.
This certainty has been the case in Pakistan under the previous government. It will make the life of the new government very difficult if it fails to stop the leakages in the tax collection system.
The reaction of political parties and general public to just one percentage point increase in GST (as announced in the budget) is indicative of the fact that the general public, its parliamentary representatives in opposition and other members of civil society (especially media) have become completely irrational. While the majority rejected the previous PPP-led government for its mismanagement of the economy, failure to solve energy crisis and for being corrupt, one fails to understand how they expect the new government to solve all their problems with a magic wand.
The large businesses, especially those with consumer focus, have done extremely well and have shown to be resistant to the deteriorating law and order situation and the energy crisis. The textile sector is one glaring example of success with 2012 proving to be a particularly good year.
Irrespective of the negative portrayals of the textile sector by Aptma, it remains the fact that there has been an increase in the profitability of the sector even during the so-called dark five years under the previous government.
Similarly, the large landlords have enjoyed the best period of growth in the last 10-15 years. This would mean that beneath the accounting veils, companies are accumulating a large pool of profits but are failing to contribute to the general wellbeing of the country.
The culture of tax evasion in Pakistan is so deep-rooted that businessmen would always say, “Last year was much better than the current year; we are in deep trouble now.” The ground reality is that they have never been in trouble, and have always benefited from the large domestic market, which despite political adversities has always kept on expanding. The situation is admittedly not that good for SMEs, which remain vulnerable to a number of factors.
The current government, being a business-friendly government, has decided to favour the business class in an attempt to revive the depressed economy. This could be a successful policy if the businesses are willing to share their success with the government and eventually with the general public by paying the taxes and meeting their other social contributions honestly and with patriotic zeal. Failing to do so will increase income disparities, eventually leading to social disparities and a possible civil war.
The rise in popularity of social media in Pakistan means that it will be very easy for any pressure group or political party to bring millions of people out on the D-Square of Islamabad to embark on a revolution similar to what happened in Egypt.
Revolutions seem very romantic when seen from a distance but its outcome always leads to very bitter economic realities as can be seen in the emerging countries of the Arab Spring. If that happens in Pakistan, there is every chance that a new social contract will be written, which will be very disturbing for the large businesses and those who hold vast agriculture estates. This will then create the ultimate paradox.