Business Growth Through Documentation & Prudential Regulations

Originally published in March 2001

Present Economic Disorder

Booming or busting, one has to live his times. We are passing through a difficult economic turmoil. It is some thing more than the conventional economic cycle. It has stayed longer than expected and may last our lifetime. But we have to work hard for our generation to come.

We are in a serious Debt trap. It is caused because of our wrong economic priorities of the last five decades. We are facing the shattered investors confidence, high unemployment, negative growth, high inflation, increased costs and erosion of profitability as well as brain drain at a faster rate. This is happening in the back drop of the New World Order where the protective tariff walls have fallen and lucrative sources of state revenue are no more available and we have to strive hard to mobilize our resources to meet our development needs, social uplift and other programs.

Pre Documentation

The documentation of the economy is the primary agenda of the present regime. The pace of the economic activity is set by the legislature. Unfortunately, we could not house our institutions with people of vision and conviction. Our laws are made to be frequently amended, reluctantly complied and selectively enforced. This has been true of the laws governing the economic activity.

We have been having the sales tax since 1952. It was charged at the source of entry point either at the import stage or at the manufacturers factory gates. This used to cause two problems (1) Low reporting of production and (2) Low reporting of values. Generally the goods were handled through the offices of a Commission Agent who handled the goods at retail prices without making any value addition and against a fixed percentage point of commission. High protective tariff wall helped generate lucrative revenue for the government and provided a free hand for the operators at the market through out the channel of distribution.

The gimmicks of gross profit rates and the ritual of disallowances of the expenses has been the guidelines at the income tax stage. The only incentive to pay tax was provided by the self assessment scheme. This was not enough to meet the growing needs of the state.

To fill in the gap, refuge was taken behind the presumptive tax regime where withholding tax at source was taken as a final discharge of tax liability. While it provided an easy cover for the sector of economy generating high profits, it almost killed the low margin bulk trading community. The withholding tax was added to the cost of the product which could not be realized from the sales and ultimately resulted in the erosion of the equity.

The Capital formation has never been the focus of attention of the taxation laws. This resulted in no dividend to the shareholders, no ploughing back in the business and no investments ultimately leading to a sick economy that we are facing today.

If at all any sector of the economy made profits, the profits were ploughed back into business as a camouflage investments in the business mostly as benamidar. The real estate was the top priority to store the profits made by the successful sectors of the economy.. The advancing of credit to the customers in the distribution of channel is another large junk of unreported investments consisting of accounts receivables and un-consumed inventories. Periodical amnesty schemes, foreign currency remittances, government bearers bonds and other channels of no question asked were mostly used to channelize the untaxed profits of the economy. At the same time it fueled the pace of un-reported and un-documented and non-collated consumption in the economy. The state used the tools of section 13 of the Income Tax Ordinance 1979 to plug in the...