Steps Necessary to Fight Corruption

Introduction

Every person in the Country agrees we are in financial crisis. The Government not so strong based on coalition support. Stronger numbers in federal and provinces could have made it easier for the Government to encounter the basic issues more easily.

The Government will be supplementing its numbers by issuing Ordinance instead of passing legislation through parliament.

The Government is taking bold emergency steps to track down the capital, money laundered to overseas, it is highly commendable. But we have to realize the legislation and efforts require completing it. The Government will be dependent on other countries for Mutual Legal Assistance (MLA) and bilateral agreements for extradition, repatriation. It will take time to do all.

The short term initiatives for Domestic Financial Governance (DFG) should also be prioritized to get the going along with efforts for Money Laundered. This will show immediate impact, Government funding crisis will replace ventilator with simple oxygen mask.

The successful implementation of DFG will provide optics help to Government in portraying its political will, commitment to War Against Corruption (WAC).

Solution to Problem

In current scenario the immediate steps to counter financial crisis in Pakistan. The priorities include easing pressure on Dollar demand and bringing back the currency flight from economy.

Both currency flight and demand of Dollars are interlinked. The third component of this triangle is high denomination currency notes the most important and crucial element needs immediate attention.

The higher denomination currency notes lead to ease and support of corruption and terrorism funding. This not only eases corruption but facilitate parallel cash based economy, which is hard to trace.

The cash economy is the root cause of all economy ills. This never contribute to tax net resulting in poor tax collection to national exchequer. The short fall is unsuccessfully being tried to be covered with indirect taxes, giving undesired inflation.

This illegal money when never goes to bank accounts is kept out of mainstream economy. This money is used to purchase dollars from open market from foreign exchange companies.

The purchase of dollars puts unnecessary pressure on Rupee and foreign exchange reserves also disturbs exchange rate parity.

The dollars bought from open market are sent abroad in safe heavens of illegal money through illegal channels like hawala and hundi.

The Government urgently required taking steps on war footing to counter all the above mentioned issues.

First of all the high denomination currency notes should be immediately withdrawn specially 5000, 1000 and 500 rupees currency notes. The 100 rupee currency notes should be redesigned to re-monetize.

These demonetization and re-monetization should be done only through banking channels. Usually the demonetization and re-monetization sometimes create cash liquidity issues. Since Pakistan has micro-finance banking system strongly in place, with little fine tuning this will eliminate cash liquidity crunch scenario.

The re/demonetization policy will bring out the stored money once it is implemented with mandatory condition to exchange currency notes only through bank deposits. If the person does not have bank account he should be required to open account with schedule bank or micro finance bank/easy paisa account. This should be only way to exchange currency notes.

This step will bring the unaccounted economy and tax evaders in main stream economy.

The total of this cash economy, parallel economy or untaxed shadow economy is considered 30% to 50% of total GDP of Pakistan. Total impact can be fairly estimated by taking this step of demonetizing and re-monetizing.

To compliment demonetization is to curb the open market sale of foreign exchange, all the payments, remittances of school college fees, technical fees, royalties, boarding and lodging expenses of overseas students should only be allowed with banking / official channels. These payments and remittances should be adequately supported with documentary evidences.

The cash sales of OTC foreign exchange should be zero, for overseas travelers the cash be purchased on proof of valid confirmed ticket and visa or similar measures for control.

The bank deposit position will have positive impact and State Bank of Pakistan (SBP) should also consider revisiting banks deposit margin limits.

The key to success of these steps will be in implementing deregulate OTC sale of foreign currency and then proceed with demonetization.

The Government has to implement latest technology to counter these issues. The developed and developing countries are implementing Business Intelligence, data warehousing, ETL to keep track of necessary data in real time and with complete audit trail. This also minimizes the human involvement, their judgmental errors and possibility of manipulation.

The NADRA data is in place and achieved a satisfactory level of reliability. NADRA data should be utilized in centralized data connectivity with State Bank of Pakistan, Foreign Exchange Companies trading record, Banks data, sale/purchase transfer of properties data etc.

It is noteworthy that NADRA, SBP, FBR, SECP data is already available in database.

Initially these departments should integrate their data to start with. These departments are backbone of Revenue generation.

Now the process of creating Data Warehouse (DW) should be initiated. Once the DW is integrated ETL will be done.

The key will be Computerized National Identity Cards (CNIC) of individuals. In case of companies their registration numbers from SECP.

The business intelligence and business analytics will compensate efforts to identify the individuals out of tax net based on banking data and FBR data linked with their CNIC.

The best part of this solution, it will not require any legislation (to the best of my knowledge).

The astonishing fact is we have 50 million accounts (Page 26) as per SBP against the total population of 200 million of Pakistan. Out of these 50 million accounts only 1.2 million people are registered tax payers.

That shows out of 200 million the 25% have bank accounts (in 2017) and 2.4% of 25% people are contributing to national exchequer. To bring the remaining affording class in tax ambit the Government needs to refer Financial Emergency in Pakistan. Which can be dealt in second stage or simultaneous planning can be started.

The first priority of the Government should be to bring the remaining 22.6% of bank account holder in tax ambit. The financial year 2017-18 accounts for total direct tax collection Rs.1.536 Trillion. This is only 2.4% of 25% bank account holders, if for the sake of discussion this amount is grossed up to full 25% this figure will be Rs.36.864 Trillion, contributing 24 times more than what is accumulated at this point of time.

The direct taxes will also have trickle down impact on sales tax and other taxes. Currently sales tax contribution to Government treasury is Rs. 1.491 Trillion. The Government should also start General Sales Tax (GST) awareness campaign for general public to collect the GST receipt whatever purchase they make so the manufacturers/wholesalers & retailers not contributing or evading GST can be brought in the GST net.

The public should be made conscious of the fact if they ask for GST invoice from the seller will have to register in GST regime to provide the said invoice. This will result in registration in GST, where the benefit of registered seller the reduce rate of GST will be applied and result in reduction of purchase price.

The impact of consumer getting GST invoice from the seller will be colossal because of the buyer totaling to 200 million, out of 200 million will not come into tax payer class but they still be buyer.

 This data with the help of analytical tools the relevant Government departments should be able to see the trends, analysis, summaries of the data on their dashboards.

Technology implementation does not require long terms neither their results will take time to show the results expected.

The main concern will be choosing the right technology consultants, implementation teams. The timelines should be realistic and monitored with project management application to keep the projects within desired cost and timeline.

Very high levels of transparency can be achieved with new systems based on latest technology will enhance the public and international community trust level.