Rent seekers

By Mansoor Ahmad
Perceptions about corruption in Pakistan are based on actual experiences with paying bribes by investing firms. It reveals that the firms making investments in Pakistan have to pay bribes even to get water, gas, and electricity connections. Corruption is largely associated with the business-government interface and reveals that the menace is more widespread here as compared to other countries. Many attempts to eliminate this interface through technology have failed.

Filing of refunds electronically detailing documented evidence of claim does not result in automatic refunds. Probably some loopholes are left in the software (at the behest of rent seekers) that reject genuine refunds. Applicants are asked to appear in person and justify the claim to the concerned bureaucrat. For those that agree to pay the rent, the claim is accepted. While those who refuse to pay and insist that the claim is genuine and fully supported by documents have to wait for a long time for refunds.

Entrepreneurship flourishes when all citizens are provided with a level playing field. A level playing field is denied in all corrupt societies.
Imports would be restricted to few when under-invoicing is allowed to those that grease the palms of concerned officials. When a new entrant explores foreign markets for import products popular in the local market, he/she dares not accept any offer from global suppliers that quote the actual prices. The new importer after assessing the impact of duties and taxes realises that importing at a quoted price would not be commercially possible.

After some probing, it dawns on him/her that the product is being imported at less than half its actual global rate. Only those new entrants would venture into imports, who are prepared to follow the entrenched importers. For the new entrant, this is not an easy job, for they have to look for a hundi operator, who could transfer the amount of under-invoicing to the foreign supplier (not all suppliers agree to under-invoice) and also look for a firm in that country to prepare the invoice. When the goods arrive in Pakistan, the new importer must pay the rent for clearance.

Thus, a vicious circle of rent-seeking boots entrepreneurs out of our system and promotes crooks who have mastered the art of bypassing the system at every step of their business. They evade import duties and sales tax as well as income tax. Similar corrupt practices at the import stage then creep into domestic trade as well. The government imposes a duty on imports to provide some advantages to domestic producers. The duty advantage is usually 5-10 percent.

The state charges a uniform sales tax of 17 percent at the import or local manufacturing stage. Local manufacturers pay a 17 percent sales tax on the retail price of their products. Importers in reality pay much less than 17 percent even after paying import duty and sales tax on the duty paid value of the invoice because of under-invoicing. This way the advantage of competition tilts towards imports.

As a countermeasure, local manufacturers must either under-report production to save most of the sales tax or close down. Those that refuse to join the crooks close down, while the remaining just survive and rarely flourish. For a prosperous Pakistan, the government must prefer to eliminate corruption in business dealings. Investors would come in large numbers if they were assured that they will get a level playing field. Controlling corruption in all avenues would take some time, but corruption at the business and taxation levels can be eliminated with immaculate software.

TN Media News