Technically, they too belong to the private sector. However, their endeavors barely help them earn a living. It would be more appropriate to call them actors of the Subsistence Sector. [break]
Local governments should be able to list them and offer some protection against lean times through affordable insurance schemes.
Most of them can hardly afford to pay direct occupational taxes.
Less numerous are small enterprises that employ people other than family members, but the turnover and profit margins are just enough to cover the expenses of the people engaged in the business.
Most street corner groceries, tailors, and teashops would probably fall under what should be named the Sustenance Sector. They can bear the costs of insurance and pay some taxes.
Then there are outlets of professionals such as medical clinics, legal firms, accountancy and auditing agencies and engineering enterprises that may not employ a large number of people but have enough transaction to ensure a comfortable life for the promoters and partners of such enterprises.
They form the Substantial Sector of the service economy. Exceptions apart, most NGOs belong to this category. This group needs to be brought into the tax net and monitored properly for compliance.
What is normally understood by the term the Private Sector in everyday conversation—the uppercase being indicative of its influence upon the government—actually means the Profit Sector (PS) where maximization of return on investment is the main purpose of every enterprise. Jargons of liberalization, privatization and globalization (LPG) such as investment promotion, business-friendly environment, and public-private partnership refer to this sector.
Investors of PS claim to be creators of employment and generators of revenue. Based on these assertions, PS bosses demand and get privileges from the government even though their role in least developed countries (LDCs) is often limited.
The taxes that they say they pay are actually collected from consumers for the government.
Evasion and invasion
Tax avoidance is a legitimate activity in open economies. Hordes of lawyers and accountants make a living by suggesting managers of PS enterprises ways and means of dodging taxes. Many high-worth individuals gain that status by inventing creative ways bypassing tax rules.
Complicity of government officials makes tax evasion possible. These are all established ways doing business in any capitalist society.
However, when taxes collected through businesses are not deposited into the treasury, or fraudulent refunds are claimed for transactions never made, it becomes a serious white-collar crime. If corruption is cancer, trickery in the name of taxes is its most malignant form: It is an attack on the very existence of civic polity.
It has been rightly said that when someone picks the pocket of an individual, it is a minor crime as it affects a single person. But a person evading taxes is cheating the entire population of a country.
In economies based on consumption, Value Added Tax (VAT) is an important source of revenue that businesses are required to collect and submit to the government with due diligence.
However, VAT has become a source of maximizing earnings for the entrepreneurs and managers of prominent PS enterprises in Nepal over the last few years.
Many established names of the services and trade never give proper VAT-accounted receipts to their customers.
It would be a rarity to get a legitimate receipt from any of the high-priced restaurants in Jhamel or Thamel. Posh coffee shops at shopping malls write informal chits.
Enforcement agencies probably overlook such misdemeanors because much sophisticated swindles have been committed by bigger players of PS over VAT in recent past.
In the brouhaha over bribery, open loot of the treasury in the name of VAT refunds has been pushed off the media headlines.
During a private conversation, one of the highest taxpayers from the Profit Sector of the country claimed that if violations of VAT provisions were to be pursued vigorously, no business house worth its name would be able to remain untarnished.
When asked whether he dreaded such an eventuality, he gave a sly smile and admitted, “Yes, the cost of buying immunity would increase overheads.” He harbored no fear of being hauled into the courts let alone be punished for not just evading taxes but defrauding the exchequer through false invoices.
Roots of corruption
A certain degree of honesty is necessary to be counted as one of the highest taxpayers in the country. However, when such a person admits even in a tête-à-tête that if he maintained a clean record of all transactions he would not survive the cutthroat competition of the market in Nepal, it is time to start worrying.
He tried to defend himself by saying that he does everything that is necessary to do business. Perhaps that explains the reason behind Nepal having one of the lowest tax-to-GDP Ratios in Asia, according to an Asian Development Bank (ADB) study published in July this year.
The International Monetary Fund (IMF) confirmed these findings last month, which disclosed that Nepal’s tax revenue against Gross Domestic Product (GDP) was low among most of the low-income countries (LICs) and stood at 13.2%, against LICs’ average of 15.2%.
Part of the blame for lax tax collection has to be shared by the supposed meritocracy that has been running the Finance Ministry since the days of the Panchayat era.
But the public policy of creating “business-friendly environment” at all costs has been no less responsible for having a slack tax regime and weak implementation of laws. The ADB study has also pointed out that Vietnam had the highest tax-to-GDP ratio in the region, which was still about half that of most European countries.
There are no prizes for guessing the two worst performers: Nepal and Pakistan had the lowest tax-to-GDP ratios in Asia.
That has not helped these two countries attract much foreign investment, though. What it has done instead is foster a general climate of corruption, as measured by the Corruption Perception Index (CPI) published recently.
Afghanistan is still an occupied territory for all practical purposes. Hence, its low score on CPI is somewhat understandable. Afghan President Hamid Karzai is probably correct in his assessment that foreigners are fuelling corruption in the war-torn country.
Burma is similarly in a very awkward position where China and India are competing with each other for influence in this resource-rich but military-ruled country.
Both rank at the bottom of the list with a score of 1.5 out of 10 in a range that begins from the lowest for perceptibly of being most corrupt to the highest for the cleanest image. Nepal and Pakistan are at the near bottom with scores of 2.2 and 2.5 respectively.
The connection between tax evasion and general corruption is not as farfetched as it is made out to be. When swindlers prosper and bribery becomes an established method of doing business, the honest have little incentive to remain clean.
Like the interlocutor that claimed that he was merely doing what was necessary for running a business in Nepal, there is no dearth of individuals who have accepted cheating as a way of managing any PS enterprise.
Perhaps this is the reason why public support for anti-corruption drive is usually lukewarm at best: When sharks drive around in their SUVs free, why begrudge a potbellied bureaucrat that has consumed some small fishes from the pond? The initiators of the so-called “devil’s deal” between government officials and PS honchos are often parasites of the high society who shout shrill slogans against corruption in public even as they help perpetuate frauds through professional services.
Democratic solutions
Cutting the nose of corrupt politicians may hold some appeal for those with suppressed fascist instincts, but there is no better way of combating corruption than deepening democracy. Governance requires generation of revenue.
The dictum of no taxation without representation implies that the responsibility to vote and duty to pay taxes go together.
It would be interesting to see how many of those enraged youngsters with slogans against Constituent Assembly members would be able to persuade their parents, in-laws and employers to pay taxes in an honest manner.
It would be even more interesting to watch their activities during the coming elections.
If bribery were to be the only cancer, Hitler would have succeeded in establishing his pure Aryan heaven on earth.
By all accounts, the Fuehrer had the zeal of an upright demagogue similar to those professionals who were included in the “clean and competent” government of Chairman Gyanendra tasked with the responsibility of ridding the country of corrupt politicians.
It is not too late for the campaigners against corruption to make public their own property details. Government officials can then examine whether it has all been accounted for in their tax returns.
Some of them may have been donating a part of their income to laudable causes, but as scholars of civics have pointed it out repeatedly, the moral and/or religious responsibility to act charitably is not a substitute for the civic responsibility of citizens to pay taxes.
One of the founding fathers of the United States of America, Benjamin Franklin (1706-90), is credited with the immortal line about taxation: “In this world nothing can be said to be certain, except death and taxes.” Death is indeed certain, but taxes have become some of the most uncertain elements of capitalist governments.
Corruption is an issue of grave concern in states that have low tax base and have to rely on lenders and donors even for everyday expenditure.
However, even more daunting is the challenge of “civilizing” willful defaulters of bank loans who play with the trust of small investors and fraudsters who have no shame in deceiving the treasury of one of the poorest countries on Planet Earth.
Without bringing them within the net of governance, anti-corruption laws would remain ineffective.