Smuggling is one of the major curses retarding the growth of our economy. It is a decades-old problem that has never been tackled seriously. According to media reports, the Federal Board of Revenue (FBR) has developed a new, many-pronged strategy to curb it. Under the plan, effective from the beginning of September, special joint teams of the FBR would be visiting major shopping areas and large retailers to check import documents for imported goods available for sale to consumers.
It may be recalled here that a similar drive was launched under the Ayub martial law with raids conducted on retail outlets by taxmen to flush out smuggled goods. The results achieved were mixed, at best. It is estimated that there has been a massive increase of around 600pc in the smuggling of certain kinds of goods in the last one year, which were placed under the imposition of regulatory duties. Before the imposition of duties, these goods were largely imported through official channels. Experts had predicted that after the imposition of regulatory duties, the imported items, specially the food items, would disappear from the shelves of retail outlets, hurting the retail businesses. But this has not happened.
Ironically, the imposition of regulatory duties has not made the desired effect. While the FBR has not made big gains by imposing regulatory duties on imported items, the black money has found smuggling as a lucrative channel to have its way. It is a well-known fact that there are three parallel economies operating in Pakistan: the documented economy, the grey economy (legal business but undocumented) and black money (illegal business and undocumented).
The phenomenon is not unknown in other countries. But elsewhere, the percentage of grey and black economies is much smaller as compared to the documented economy. Further, in developed economies, the businesses under documented economy offer attractive returns, leaving little incentives for undocumented businesses to thrive.
By contrast, in Pakistan, the size of grey-black economy is much bigger than the documented economy and it also promises a greater margin of profit. One main reason for the large size of the undocumented economy in Pakistan is that above board businesses are overburdened with too many taxes, levies and corruption by the so-called regulatory bodies. That is the reason why in the ease of doing business index, Pakistan has a very low ranking, even among regional competitors.
No wonder, with the imposition of regulatory duties on imported items, smuggling became an extremely lucrative business. The Pakistan Tehreek-i-Insaf (PTI) government of Prime Minister Imran Khan has primarily focused on accountability and the documentation of the economy, but it has failed to provide an enabling environment and incentives for legitimate businesses to find their way into industry, exports and investments. It resulted in a slowdown and in some cases the suspension of transactions and businesses in the documented economy. Meanwhile, the grey economy has thrived.
The FBR’s drive to curb smuggling by raiding retail outlets is not likely to succeed. Rather, it will encourage corruption by the bad elements in FBR. Instead, we should go for better border management which requires massive human resource reforms, coordinated border management (CBM) strategies and investment in systems and processes. Here, one can recall a 2015 report of the FBR, which had revealed that Pakistan was losing a staggering $2.63 billion worth of revenue a year due to ATT-related smuggling of just 11 goods (high-speed diesel, vehicles, tyres, tea, auto parts, mobile phones, garments, cigarettes, plastics, television sets and steel sheets), which were making their way through porous borders, and more alarmingly, through high seas and containerized cargoes with full support of the state machinery. The 2019 figures could show over $ 4 billion in FBR revenue losses on account of smuggling.
The PTI government’s scheme of amnesty did widen the tax net base but it failed to increase the tax collection volume. Apparently, the middle class opted to move into the documented economy out of fear of losing moveable and immovable assets. But many others preferred to stay out of it. The profiling of the other segments indicates that many of them were earlier in regulated businesses, like textile, exports, etc. Discouraged by low or no returns on investments on account of escalation in cost, absence of ease of doing business and lack of government incentives, they opted to move into grey economy areas such as real estate and ‘dollarisation’ and in the process made good money which at the moment is parked or invested where exposure is limited. The challenge for the PTI government is to provide a way to mobilise this lot of big investors.
Yes, we need regulation and we need to curb smuggling. But our methodology is wrong. We should regulate but the taxes should not be too high. It encourages concealment and smuggling. Smuggling cannot be stopped by conducting raids on markets. It can be stopped by lowering taxes and making it easier for people to do business.