Note to Pakistan’s economic managers: reforming tax collection techniques

As the euphoria surrounding former cricket star Imran Khan’s election victory begins to fade in Pakistan, the country’s economic managers must deal with the hard tasks ahead. Immediately improving foreign currency reserves is simply a tactical necessity. The real challenges are strategic.

If Pakistan approaches the International Monetary Fund (IMF) for economic support – as is widely predicted by most analysts – then the IMF will remind Pakistan’s new Finance Minister of at least two priorities: increasing revenue and reducing expenses.

In order to achieve these two objectives there is a need to move away from the simple solution of imposing additional withholding taxes on an already excessively used taxation technique. To date, this method has only resulted in mixed success.

Presently, virtually any financial transaction in Pakistan’s organized sector, i.e. a documented transaction and not in cash, requires the collection of withholding tax. For example, registering a car or paying motor vehicle tax; registering a property; cash dividend payments made by listed corporations to individuals; and banking transactions such as preparing a bank draft all require collection / payment of a withholding tax. 

In theory, this tax payment is an advance tax and may be adjusted against future corporate or individual tax liabilities. In practice, few individual taxpayers make the effort to reduce their tax liability by the advance tax amount. For corporations, except maybe for top tier multinational and local institutions, increased bookkeeping coupled with a weak and often corrupt tax collection infrastructure reduce the incentive to claim advance tax. In other words, other than a few large corporations with sufficient resources to devote to copious bookkeeping, few businesses ever see the benefits of any ‘advance tax’ collected on their behalf.

Sure, it will be easy to continue and ‘widen’ Pakistan’s tax base by implementing additional presumptive tax on more transactions – or increasing percentages on existing advance tax payments - especially as these tax collections will likely be booked under the Direct Income Tax category and (falsely) boost the government’s claim of broadening the tax net.  Nevertheless, such taxes will only make Pakistan’s economy more inefficient by pushing up the cost of doing business, especially for Small and Medium Enterprises (SMEs), a backbone of the country’s economy.

Improving Pakistan’s tax collection infrastructure through reforming the operations of Federal Board of Revenue (FBR) is a prerequisite for success. It should be noted that reforming the FBR is a necessary though not sufficient condition for enhancing the country’s tax revenue.

One means of increasing FBR’s operational efficiencies is to reduce unnecessary human touch points. Corporate and individual tax payers should have as little interaction with humans as possible. Basic tax transactions must be simplified. More transactions should be shifted online. Online transactions reduce the possibility of corruption, improve speed and result in simplicity - an all round elegant solution.

To the naysayers who believe serious reform of the FBR is impossible only need look at the successes of NADRA and even the Election Commission. Both these government agencies have adopted new technologies and greatly simplified the lives of many Pakistanis as a result. Transactions which took weeks, months or even longer and were impossible without several unproductive visits to government departments are now routinely completed using a few clicks on a keyboard. Smart solutions are the way forward for the FBR.

Undoubtedly, increasing revenue and reducing expenses lie at the heart of any economic restructuring be it national, corporate or individual. Unfortunately, converting these two principles into effective policy decisions is a complicated process fraught with political minefields. Nonetheless, Imran Khan’s Justice Party (PTI) has a real opportunity to lay the foundation for genuine reform.

In my next post, I will discuss the necessity of approaching the ‘Filer’ and ‘Non-Filer’ distinction with greater finesse. ‘Non-Filers’ are not synonymous with tax evaders. Hence, throwing all ‘Non-Filers’ into a ‘penalize by paying more tax’ bucket is an unfair use of state powers. The policy must be improved to make it more equitable. Stay tuned.

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Imran is a Singapore based Tour Guide with a special interest in arts and history. Imran has lived and worked in several countries during his past career as an international banker. He enjoys traveling, especially by train, as a way to feed his curiosity about the world and nurture his interest in photography. He is available on twitter (@grandmoofti); Instagram (@imranahmedsg) and can be contacted at imran.ahmed.sg@gmail.com

Reflections from Pakistan XII: Malala’s Swat Valley

Until a few years ago, Pakistan's Swat Valley was a serene, beautiful region known only to a handful of foreign and Pakistani domestic tourists. All that changed with the gradual infiltration of the valley by Taliban extremists during the 2000s. In fact, by 2006 the Pakistani state had lost control of most of the valley. The Pakistani state was left protecting Buddhist relics in the Swat Museum and a few other isolated pockets of authority, mostly in the form of minor paramilitary bases.

However, with the gradual Taliban takeover of the valley, alarm bells rang in Islamabad. Islamabad, Pakistan's capital, is approximately 250 kilometres and a four hours drive from the Swat's largest town, Mingora. (As the crow flies, the distance between the two cities is approximately 135 kilometers.)

Additionally, Swat is part of Pakistan 'proper,' civil courts, Constitution and all. The Swat Valley is not part of Pakistan's Federally Administered Tribal Areas (FATA). There is no comparison between Swat and South Waziristan.

Pakistani soldiers raise the Pakistan flag at the Baine Baba Ziarat, the highest point in the Swat Valley located at a height of approximately 2,130 meters 

Initially uncertain about how to respond to the Taliban's encroachment on Pakistani territory, the state marshalled its forces and acted in 2009. Taking advantage of an unprecedented act of 'Islamic' justice – the whipping of a teenage girl by extremists in a public square – the government lined up public opinion behind a massive military offensive intended to eject Islamic militants from the Swat Valley.

Following bloody street battles and hand to hand combat, the military emerged victorious and declared victory a few months after Operation Rah-e-Rast began in May 2009. The operation came with a heavy price tag: millions of Swatis became temporarily homeless and street fighting had destroyed much physical infrastructure in the valley.

As Malala's optimism testifies, the war was worth the cost. The Swat Valley is open for tourism again. As a visitor to the Swat Valley myself late last year, I bear witness to the Valley's beauty and also its return to normalcy.

Surely, isolated (and unacceptable) acts of violence still occur across the Valley. However, the Taliban has been driven out. Girl schools are open. Women walk the streets alone – subject to 'pre-Taliban' social constraints imposed by the traditionally conservative Pashtun culture. Swat's residents radiate hope and happiness; more so than most other parts of Pakistan. Electricity shortages mean nothing to Swat's residents, they are happy simply to breathe freely again.

Most importantly, an unambiguous and defiant message has been delivered to the Pakistani Taliban by the Pakistani state and people: there is a line in the sand beyond which Islamist encroachment onto the country's 'mainland' will not be tolerated.

One may find many reasons to criticize the Pakistan army, beginning with General Zia's disastrous 'Islamization' process in the 1980s. However, any visitor (or resident) to the Swat Valley can do nothing but praise the Pakistani military. The army has brought order back to the valley – restoring hope and sanity in the process. If Pakistan has only one success story from its war against the Taliban, the Swat Valley has to be it.

View a small selection of my photos from the Swat Valley here.

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Imran is a business and management consultant. Through his work at Deodar Advisors and the Deodar Diagnostic, Imran improves profits of businesses operating in Singapore and the region. He can be reached at imran@deodaradvisors.com. 

Reflections from Pakistan XI: Islamabad is a foreign city

Islamabad is Pakistan's custom built capital. A city built on an empty piece of land during the 1960s. Until recently, Pakistanis were not 'from' Islamabad – they just happened to live in Islamabad. (Until recently, only bureaucrats and diplomats lived in Islamabad.) However, today a new generation of 'Islamabadis,' with their own culture and lifestyle has emerged.

Islamabad's location on the Potohar Plateau surrounded by the Margalla Hills was no accident. Despite sitting astride an earthquake fault line, President Ayub Khan selected the location due to its proximity with Rawalpindi, Lahore and Peshawar. As a bonus, nearby hill stations like Murree, standing at a comfortable 2,300 meters above sea level, are just about one hour drive north. From the capital, Lahore is several hours drive south while Peshawar is a road journey of a couple of hours northwest.

Daman-e-Koh park in the Margalla Hills which surround Islamabad

Islamabad is home to Pakistan's Parliament and civil bureaucratic leadership. The country's lawmakers and senior mandarins live in nice, leafy neighbourhoods dotted across the city's 900 square kilometer area. Despite being the country's capital, many Pakistanis feel Islamabad is a foreign city; not a part of the 'real' Pakistan. It is easy to understand why such a belief is so widespread.

Islamabad has a sense of order and logic absent from Pakistan's other cities. The 'grid' design of Islamabad city streets helps reinforce the perception of order. In stark contrast, Pakistan's other cities have developed with little or no urban planning. Cities like Karachi and Lahore are breaking under the weight of the country's ever expanding population.

Islamabad's order is far removed from the problems of 'real' Pakistan. Thus, by residing in Islamabad, Pakistani lawmakers and senior mandarins have little practical understanding of the life experienced by most Pakistanis.

Given Pakistan's multitude of serious problems, it is easy to understand why the Pakistani political elite might wish to insulate itself from the rest of the nation by sticking its head inside Islamabad's hallowed ground.

Unfortunately, Pakistan's problems are compounding to the extent that Islamabadis cannot hide from them any longer. Islamabad has electricity rationing like the rest of the country. Extremist mullahs make noise in Islamabad – even violently such as during the 2007 Lal Masjid incident, 2008 attack on Islamabad's Marriott Hotel, or most recently during protests in September 2012 against an allegedly blasphemous film – as in the rest of the country. Other ills plaguing Pakistan, including crime, inflation and unemployment, ultimately find themselves seeping through Islamabad's sterilized door.

Certainly, Islamabad is a nice showcase for Pakistan. But Islamabad is a foreign country. Pakistanis can only hope Prime Minister designate Nawaz Sharif's government will remember there is more to Pakistan than Islamabad (and Lahore).

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Imran is a business and management consultant. Through his work at Deodar Advisors and the Deodar Diagnostic, Imran improves profits of businesses operating in Singapore and the region. He can be reached at imran@deodaradvisors.com. 

Reflections from my stay in Pakistan VI: Pakistan Railways

It is easy recognize the importance of trains as a means of transport by looking at an European railways map. The European rail grid is interconnected and supersedes national boundaries. Even 'peripheral' European countries like Romania, Bulgaria and Turkey feed into the transnational rail grid. 

One assumes a geographically large and populous nation like Pakistan is ideal for the railways, especially as the country inherited a decent rail infrastructure at independence in 1947. Despite having the 27th largest railways network in the world, Pakistan Railways (PR) is a hopelessly underutilized institution. Still worse, PR is one more casualty in the list of mismanaged state institutions, particularly since the assumption of power by Zardari's Peoples Party government.

Pakistan Railways saw significant investment in new rolling stock and locomotives under Musharraf's regime. However, under the present government PR's financial and operational health has deteriorated to alarming proportions. Many trains have been cancelled; fuel is in short supply; functioning locomotives are scarce and staff demoralized.

Yet, there is a silver lining in these dark clouds.

The dire straits of PR has forced the authorities to involve the private sector in keeping the system alive. Presently, the Shalimar Express runs from Karachi to Lahore in the form of a public-private partnership. The train calls at various cities and towns en route. Additionally, the Business Express is a 'pure' private sector train also connecting Lahore and Karachi. Plans for another private sector train, the Jinnah Express, linking Karachi with Islamabad are being discussed.

I travelled the Shalimar Express from Karachi to Multan and the Business Express from Lahore to Karachi. Both experiences were a significant improvement over my journey on the Tezgam Express from Karachi to Multan in November 2011. Both trains also offered better service than the Karakoram Express on which I travelled from Lahore to Karachi in November 2011. In an environment where PR trains routinely arrive hours late, the Business Express kept to its schedule even reaching Karachi approximately fifteen minutes early.

To be sure, two train services cannot revive a flagging rail network. Nonetheless, the Shalimar and Business Express trains cast light on a brighter future for PR, i.e. a railway track network maintained by a central organization with many private sector companies operating trains 'leased' from PR. Just as there are several private airlines flying Pakistani skies, e.g. Shaheen Airlines, Air Blue, Pakistan International, etc., there may be many train companies offering competing passenger and goods services across the country. In due course, a complete privatization of PR may be the next step in revitalizing Pakistan's rail infrastructure.

Some say, "It is darkest before the dawn." I hope this is the case for PR. Not just because I enjoy train travel but also because a dynamic rail system acts as an enabler for economic growth. Pakistan Railways is an institution which should be a source of national pride for the country. I wish Pakistan Railways can reclaim its lost glory in the coming years. 

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Imran is a business and management consultant. Through his work at Deodar Advisors and the Deodar Diagnostic, Imran improves profits of businesses operating in Singapore and the region. He can be reached at imran@deodaradvisors.com.