Enough generated to pay for its infrastructure, facilities
Karachi is an economist juggernaut as clearly evidenced by the recently published taxation statistics released by the Federal Board of Revenue which further validate the immense scale at which the city operates.
As Pakistan’s economic hub as well as the primary port through which trade flows, the city collects an array of taxes—from import and custom duties, to corporate taxes from entities operating all over the country. Naysayers often argue that such taxes should not be counted as Karachi taxes, but I find this counter-intuitive as the presence of a base-level infrastructure is required to support throughput of trade and commerce of a country, and that infrastructure can only be maintained if taxes are collected and spent on its upkeep.
Just income tax data
To address such concerns, however, we can disaggregate taxation data to assess how much Karachi collects from its own markets and retailers. This is data on business within the city and excludes any other taxes (corporate, import etc.) that may be collected as a consequence of it being a port city.
Karachi paid more than Rs98 billion if we only focus on the income tax paid by its markets for fiscal year 2017-18. This figure does not include any sales tax, corporate taxes, salaried individual taxes, or federal duties that may have been charged. This is simply the income tax paid by various markets in the city on the income they generated during this timeframe. And so, this income tax from Karachi’s markets and retailers was 2.3 times what was paid in Lahore, and 2.4 times what was paid in Islamabad.
If we disaggregate further, Saddar in Karachi was the largest income tax paying market in the country, dishing out more than Rs77 billion in taxes. Just two major markets in Karachi, Saddar and Jodia Bazaar, paid more taxes than Lahore and Islamabad’s markets combined.
Just number of tax filers
Karachi also has the largest number of tax filers: in excess of 134,000, compared to 117,493 for Lahore, and only 8,084 for Islamabad. Average income tax paid by markets and retailers in Karachi was double what was paid by Lahore, and almost thrice the national average. This is just pure income tax generated by businesses in Karachi, who are potentially more tax compliant than the rest of the markets in the country.
If the average effective tax rate is considered a proxy, then markets in Karachi generated pre-tax income of more than Rs415 billion, which would have crossed more than half a trillion rupees by 2020. This is also at the lower end of the estimate, as massive tax evasion continues to exist—but is somehow still lower than that of the rest of the country if average tax paid, and number of filers is considered.
The market with the highest pre-tax income in the country is Saddar with a turnover of at least Rs309 billion, followed by Tariq Road at roughly Rs19 billion, and Jodia Bazaar at Rs11 billion. If we add sales tax contributed by these markets, the tally would be much higher.
Anecdotal evidence suggests that the numbers reported are considerably
lower than actual amounts. For certain markets it can be seen that average tax
paid is fairly low, and does not align with overall economic activity of those
markets. Notable in this case are Zainab Market, Bohri Bazaar, Lee Market,
Sarafa Bazaar, Liaqatabad, Jama Cloth, among others.
It could be higher
There exists a case for rationalizing income tax levels through proper reporting, but considering the dilapidated infrastructure and absolute apathy demonstrated by both the federal and provincial authorities in improving and investing in Karachi’s infrastructure, the incentive to declare higher income levels, and pay higher taxes is simply not there.
In the absence of base-level infrastructure, enabling reliable access to transportation, roads, electricity, water, healthcare, and other facilities, as well as security, individuals and businesses alike have to pay for them from their own wallet. The complete failure of both the federal and provincial authorities in assaying concerns of businesses and individuals in the city further discourages any additional tax compliance.
The markets in Karachi alone pay enough income tax annually to enable heavy investment in infrastructure and service delivery, thereby stimulating business activity, and ensuring enhanced tax compliance. An apathetic attitude towards the city’s problems, will further alienate individuals and businesses contributing to its economic vibrancy, while also hurting overall economic activity of the country at large.
Karachi Transformation Package
The Karachi Transformation Package which pegs investment at Rs1.1 trillion is a step in the right direction, but its implementation requires more than simply notifications, photo ops, and tweets. It requires political will and fiscal space with the latter possibly being arranged through reallocating all income taxes generated by markets and individuals operating in Karachi for the upkeep and investment in its infrastructure. Unless such a radical move is made, executing a trillion-rupee project would be like spotting a rainbow on a hot summer day in Karachi, i.e. impossible.
The writer is an economist @rogueonomist