Will rupee recovery ease price pressures?

LAHORE: It is highly unlikely that the rupee would trade at its April 28 value anytime soon despite the unprecedented recovery against the greenback witnessed during the last many weeks. Political infighting, however, may deny Pakistan of the full benefits of the appreciation of the local currency.

This is a rare time to correct our economic course and for that to materialise, the government will have to establish its writ to ensure the fruits of a stronger rupee are passed on to the consumers.

Price data of imported goods or items, made from imported raw materials, before the rupee downslide, could be compiled as reference price. Any increase or decline in duty structure must also be calculated.

The government functionaries must then ensure that the pre-devaluation rates are restored by the businesses. They must not be allowed to lower the rates to their liking and earn higher profits. The revenues from imports would be higher if the revenue collectors operated fairly and transparently.

The FBR (Federal Board of Revenue) has proved to be a weak institution. It brags that the tax revenues have increased in monetary terms. It is not bothered by the fact that the revenues as a percentage of GDP are either stationary or have declined. When it happens, it clearly means the undocumented economy has grown. We must strengthen the FBR and get rid of corrupt human resources in its ranks.

The FBR for instance allows clearance of goods at the invoiced price and charges duties accordingly. The imports usually are grossly under-invoiced.

The ICAP (Institute of Chartered Accountants of Pakistan) has regularly pointed out this flaw. The practice continues because it is done in connivance with the concerned officials that seek rent on these imports. The sad part is that the FBR does not monitor the disposal of these goods to record the money trail of each imported goods.

The importers are registered taxpayers, and they must provide solid evidence of the disposal of imported goods and the rates they charged for them. An item imported for example at an under-invoiced price of Rs100 (25 percent of actual value) would cost the importer between Rs145-160 (depending on the percentage of import duty, the sales tax is the same) after paying the prescribed duties on the invoiced price. The same item in the retail market should then be retailed in the market at Rs190-210 after accounting for 30 percent high profit distributed among importer, distributor, and retailer. However, in reality that item is retailed around Rs650-750 based on its original import value and deemed government levies.

Those that clear the goods at low-invoiced prices are not aliens, they live in this country. They also visit markets and know the actual value of the item. They clear them at low values for the rent they get. The check could either be made at import level and if it escapes the scrutiny of the retail price of item, raw material should determine the profit made by the importer after adjusting the 30 percent margin of the supply chain. The income tax must be charged on that profit and not on the profit declared by the importer under fake documents.

The concerned minister or the official of commerce ministry could check the rates of different imported items randomly and then check the import invoice of that item. The under-invoicing mafia would be exposed instantly.

The government has not done the economy a favour by letting traders off the hook under political pressure by withdrawing implementation of tax collection through power bills. It should also keep some cushion in adjusting fuel rates to ensure that the IMF condition on petroleum levy is not violated.