Lately, some of the cheats ripped off people and the
event was termed ‘Modaraba Scam’. Interestingly media flashed headlines, which
gave an impression as if the Modarabas listed at Pakistan Stock Exchange (PSX) were
involved in the scam. In fact a few clerics belonging to KPK were the master
minds, who cheated the innocent people. The amount involved is estimated from
Rs6 billion to Rs45 billion. The most regrettable point is that the regulators
failed in identifying the crisis, while it was brewing. According to a
financial analyst, “State Bank of Pakistan (SBP) considered it an issue which
pertained to Securities and Exchange Commission of Pakistan (SECP) and the high
ups at the Commission had an opposite view”. Another analyst said, “The quantum
of money involved is still not known because some of those having given the money
to the cheaters preferred to remain silent and also didn’t lodge any claim
because they couldn’t provide evidence of source of fund”.
As stated above there is little incentive for saving in
the country, not only that the opportunities are limited, the investors are
penalized by the government in one way or the other for making investment. To
begin with, people having other sources of income have to pay tax, often at a
fabulous rate, but the income of feudal lords is tax exempt because it is
termed income from agriculture. It has been highlighted by experts repeatedly
that that now business tycoons have also learnt the trick of clubbing income
from other sources into income from agriculture.
It would not be out of context to cite two example, rate
of tax applicable on the income of listed companies and tax charged on dividend
income. The number of listed companies at Pakistan Stock Exchange (formerly
Karachi Stock Exchange) is on constant decline because of merger and
acquisitions and voluntary delisting. At an average the listed companies pay
above 30% tax on their income and when they distribute dividend, on that income
tax/withholding tax is charged. The rationale put forward is that listed
company is a legal entity and shareholders are different, therefore both have
to pay tax on their income. The propagators of this philosophy tend to forget
that listed companies also pay taxes on import of machinery and raw material,
GST on finished goods and effectively act as tax collection agents for the
government. Therefore, not more than 5% tax should be charged on the income of
listed companies. On top of all these listed companies are the providers of
employment and also the earners of much needed foreign exchange for the
country.
Investment in listed companies is still considered risky
by the small investors, particularly after the global financial crisis of 2008.
Unlike developed countries, Pakistan didn’t suffer from ‘sub-prime loans issue’.
However, imposition of floor for a long time, did not allow the small
shareholders to take an exit. On top of all shares kept by investors in
subaccounts were sold by some of the brokerage houses that created the real
havoc. This disheartened many investors of stock market, who pulled out their
investment from capital market and invested it real estate, foreign exchange
and precious metals.
Around the world mutual funds are considered a safe haven
for the small investors. The logic is simple that asset management companies
have substantial investments in various types of funds and that any decline in
the income of on particular company does not affect the overall income of a
particular type of fund and in turn the income of the unit holders. Along with
this there is constant sale and redemption by the unit holders that save does
not causes spikes in value of the asset under management (AUM). However, in
various funds bulk of the investment is by corporates and large net worth
investors that results in sudden rise and fall in the value of AUM.
The big investors also invest in real estate, foreign
exchange, precious metals and energy products. One of the reasons for investing
in these products is the lack of documentation, which allows the investors to
evade tax payment. It is estimated that the documented economy constitutes only
one-third of county’s total economy and size of undocumented economy is always
increasing due to exemptions and evasions. There is always an incentive for the
evasion because the incumbent governments have been offering amnesty schemes
with regular intervals. It is also on record that billions of rupees are being
sent out of Pakistan in the form of US dollars every year. According to certain
estimates, funds kept by Pakistanis outside the country range from US$50
billion to US$500 billion. Bulk of this amount has been invested in real
estate, international trading and manufacturing facilities. Some of the
favorite destinations are India, UAE, Malaysia and Singapore. If the government
of Pakistan is serious in accelerating GDP growth rate, it has to ensure that
each penny saved is invested in Pakistan.
This article was originally published in Pakistan & Gulf economist
