Are we prepared?

LAHORE: The success of punitive measures incorporated in this year’s budget largely depends upon the government’s ability to improve its governance to a high level.

The sales tax on processed milk and its products, for instance, could reduce consumption. At the same time, it will force companies to reduce their margins and absorb as much tax as possible to keep their clients. All dairy processors are posting hefty profits and keeping their retail prices in almost the same range.

In depressed sales, some might consider keeping prices comparatively lower to attract more customers. If they succeed, it will trigger a chain reaction from all other producers to lower their margins.

This is only possible if the state manages to strictly monitor the production of all milk processors. Otherwise, a few of them might resort to concealing their production and take out their products without paying the sales tax. It will further increase the share of the undocumented economy in our system.

We already observe the same phenomenon in the beverage industry where trucks come out of factories without paying the sales tax and excise duty. It is erroneous to think that multinationals will comply, and only domestic manufacturers will indulge in malpractices.

The bottlers of many beverage manufacturers are local entrepreneurs and have been apprehended many times in this practice.The government has failed to plug these leakages in the beverage sector, and it could happen in the dairy sector as well. If that happens, it will be extreme cruelty towards consumers who will be paying excise and sales tax on their products, but the amount would go into the pockets of those that underfilled their production.

The trace and track system has to be implemented in letter and spirit to ensure the full compliance of manufacturers and suppliers. The prime minister a few months back removed several FBR officials for their failure to implement the track and trace system. But the system is still not ideally operational. We see cigarettes -- both smuggled and non-duty paid – being sold openly in the market. Sectors like sugar and cement are still not under full cover.

It has always been alleged that many cement units and almost all sugar mills underreport their production.In fact, sugar recovery from the sugarcane crop is grossly underreported. Some allege that because of better varieties, it ranges from 12-14 per cent but the best declared ranges up to 10 per cent.

Only by underreporting sugar recovery do the mills escape with large quantities of sugar without paying sales tax, and the alleged amount for each comes to millions of rupees. Now with an increase in sales tax rates, the mills would be minting even more if the track and trace system is not fully and strictly operational.

Obviously, the intention of the government is to generate more revenues through new taxes, knowing well that it would bring misery for ordinary people. But for those used to underreporting production, it will be an opportunity to further increase their incomes by collecting these taxes from consumers without depositing the amount in the national exchequer. In fact, tax collection last fiscal year would have increased to the target fixed for this year had only the underreports of production been fully apprehended.

Without plugging the leakages, there is no way that we could become financially self-reliant. Technology is there, which is successfully used in most countries, but it is unfortunate that vested interests in Pakistan find ways to defeat the technology with the connivance of enforcers.