Hurdles being faced in documenting Pakistan’s economy – Part II

In this article, sector specific and international trade hurdles will be discussed in detail:

2- Sector specific hurdles

a) Agricultural taxation

Agricultural taxation is prone to outdated political system which is mainly dependent upon the feudal system. Every government is afraid of losing the massive vote bank of farmers by aggressive taxation reforms in the agriculture sector. Interestingly, subsistence level farmers are unable to comprehend that they will be exempt in any system of progressive taxation and are thus easily exploited by the feudalism.

The whole agricultural process is effectively informal i.e. from the supply of raw material to the sale of agricultural produce in the market. The important role of middlemen in the shape of ‘arthis’ for provision of informal agricultural lending, supply of seeds/fertilizers and commissioning the ultimate sale of agricultural produce, hinders the documentation of the agricultural sector.

b) Challenges within the Trading Sector

Trading sector consists of whole-sellers and retailers. As Pakistan is an import-oriented country, the trading sector (18.86 percent of GDP in 2018-19) has larger share in the national income than the manufacturing sector (13.04 percent of GDP in 2018-19). In spite of being the largest service sector of the country, majority of the traders, especially retailers, are not registered. According to FBR, among 4.0 million traders in Pakistan, only 10% actually pay the taxes.

The fundamental problem with the trading sector is that it consists of millions of small–scale retailers who have both local as well as national unions. Tax reforms by the incumbent governments always face significant resistance by such associations in the form of shutter-down strikes across the country. A recent attempt by the government to document the small-scale retailers by putting a CNIC requirement for their procurement from tier – 1 retailers/wholesale dealers also resulted in traders’ boycotts/strikes, pushing the government to its knees.

c) Timber – The Undocumented Natural Resource Trade

Timber is a gigantic undocumented natural resource sector of Pakistan. In contrast to the world average of one-fourth geographical coverage of forests per country, only 4.6 percent of Pakistan’s land consists of forests. This scarcity of forests and the UN demand of controls over deforestation resulted in prohibition of the logging of state-owned woods in Pakistan long ago. However, the inflating demand of timber in the rural areas for energy consumption, coupled with the outdated laws of forestry, established an illegal mafia for smuggling, cutting and selling the variety of timber over the last few decades.

Household consumption of firewood for cooking and heating is the only suitable option in the villages, especially in the hilly areas, because the alternate sources of energy i.e. electricity and gas are either not available or are very expensive in such areas.

Besides deforestation, the import of raw wood and associated wooden materials is the alternate option and Afghanistan has remained the key supplier in this respect. But due to import duties and tariffs, the documented import of wood becomes very expensive and is thus smuggled into Pakistan. According to United Nations Office on Drugs and Crime (UNODC) report, forgery of the papers and the collusion of the corrupt government officials allow such trade. The situation is aggravated by the involvement of the political forces in this high-profit industry. In Budget 2019-20 of Pakistan, import duties have been reduced from 3 percent to 0 percent on wood and from 11 percent to 3 percent on wooden veneering panels. However, due to the perception of the temporary nature of the relaxation in import duties, illegal timber trade seems to be undeterred by the reduction in import duty.

3- International Trade Impediments

a) Defective borders

Unfortunately, Pakistan has a poorly controlled border system which makes undocumented trade relatively easy and economical. Regarding documentation of Pakistan’s across the border trade, the following boundary markers appear to have major share in the ungoverned movement of goods:

  • Durand Line (Pak-Afghan border)
  • Pakistan-Iran border

b) Challenges of Transit Trade

Pakistan plays an intermediary role in transit trade for neighboring land-locked countries under certain terms and conditions. Transit trade has its own trade documentation challenges and contributes a significant share in the undocumented economy of Pakistan. Goods supplied into Afghanistan duty-free through seaports of Pakistan are also smuggled back into Pakistan. It has been observed that Afghanistan reports a fraction of its imports to the International Trade Center rather than the actual transfers. Pakistan is strained to bear the burden of undocumented leakages because the access of Pakistani goods into Turkmenistan, Uzbekistan and Tajikistan is dependent upon this trading route unless the infrastructure of alternate routes is created.

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