Hinting at imposition of capital gains tax (CGT) on capital market transactions, increase in capital value tax (CVT) on real estate, and increase in income tax for higher income groups Finance Minister Ishaq Dar has warned currency speculators to stop playing with the exchange rates, otherwise the government would be forced to take strict action against speculators.
Addressing a pre-budget seminar, jointly organised by the Federal Board of Revenue (FBR) and the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) on Monday, he said that the country needs revenue, for which capital value tax (CVT) on real estate business "isunder consideration".
Talking about gain tax on capital market, he said that one business group wanted to impose CGT on stock exchanges, and the other group opposed the proposal. "However, one thing is clear that the country needs money." He also quoted the example of India where CGT was successfully levied last year.
He said that the speculators, playing with currency exchange rates would burn their fingers. "A handful of speculators are making an attempt to destabilise exchange market. They would face strict action. They should not forget that a similar situation arose in 1998-1999 when exchange rate was brought down from Rs 67 against $ to Rs 53 in A short span of time. The rupee-dollar parity is improving, which would further improve in days to come."
He said that the government has decided to mobilise over $3.0 billion during the remaining period of the current fiscal year. Pakistan's foreign exchange reserves are expected to reach over $13 billion by the end of June 2008.
He said that the State Bank of Pakistan (SBP) is watching the market players very closely and it is in the speculators' own interest that they should stop anti-state activities. "The SBP Governor has taken the step to check speculation and we will take more actions to check further de-valuation of Pak rupee."
He expressed serious concern over low tax-to-GDP ratio, which pointed towards immediate measures for revenue generation and broadening the tax base. "The tax-to-GDP ratio is stagnant for the last many years, which is not acceptable. Except Afghanistan, Pakistan has the lowest tax-to-GDP ratio in the region."
He said that overhauling of tax policy and tax administration was a key priority under the reforms. He also referred to the unacceptable phenomenon of under-reporting and non-reporting of income by some businessmen to conceal income. The under-taxed and un-taxed areas are being looked into for resource mobilisation and people having higher incomes would face higher income tax to enable the government to offer relief to the low income groups. The poor cannot wait long and the new government needs more resources, rich should expect increase in income tax.
He said that the next Finance Bill would include a pro-poor targeted package for low income group particularly poor. Rich taxpayers have a great responsibility to help the FBR is proving relief to the poor people.
He said that the government is considering nuclear energy to meet demands of the country. Focus is also on agricultural and manufacturing sectors. He said a new democratically elected government has taken the charge of the state of affairs only last month in a difficult domestic and external environment. Over one year of total inaction and political expediency of the previous government on addressing domestic and external challenges further accentuated macroeconomic imbalances.
As a result, economy is currently under pressure and facing four major challenges, that is deceleration in growth; rising inflation, particularly food inflation, growing fiscal deficit and widening of trade and current account deficits.
He said that the growth target for the year has been revised downward from 7.2 percent to 6.0 percent against last year's estimates of 7.0 percent. Poor performance of agriculture and weaker-than-expected growth in manufacturing and services are the key drivers for scaling down the growth target.
He said that inflation in general and food inflation in particular have emerged as major sources of concern for the policy makers in emerging and developing countries including Pakistan. Higher food prices, expansionary fiscal policy, extraordinary increase in government borrowing from the SBP, upward revision in local energy prices, and unanticipated increase in international commodity prices are responsible for the sharp prick up in prices in Pakistan. He said that the fiscal deficit for the year was targeted at 4.0 percent of GDP.
According to updated data, fiscal deficit has already crossed the targeted level for the year and stood at 5 percent of GDP during the first nine months (July- March) of the current fiscal year.
He said that various factors are responsible for such a large slippage in budget deficit adding said that the first and foremost is the slippage on tax side. Weaker-than-expected tax collection owing to slower-than-targeted real GDP growth and adverse law and order situation caused slippages in tax collection.
Secondly, failure to make adequate provision in the budget for increases in the prices of oil and food to consumers resulted in the over run of current expenditure. Thirdly, subsidised power tariff also caused slippages in current expenditure because of under provision in the budget for 2007-08. Fourthly, mismanagement on account of export of wheat based on inaccurate estimates and subsequent import of wheat at much higher prices also contributed to the widening of budget deficit for the current fiscal.
The government's reliance on heavy borrowing from the SBP caused excessive monetary expansion and has become one of the principal sources of inflationary build up in the country. The political expediency of the previous government contributed to fiscal slippages beyond sustainable level.
The new government finds itself in an unenviable position to have inherited such a large slippage, which neither can be corrected immediately nor can be allowed to persist as it would undermine growth momentum and macroeconomic stability. The slippages in fiscal account as well as the unprecedented increase in oil prices have contributed to the widening of trade and current account deficits.
As a result of higher oil prices Pakistan's oil import bill reached to a targeted level of $7.9 billion for the whole year in just nine months (July-March) of the fiscal year. The oil bill is expected to reach $11.3 billion by the end of the fiscal year--almost 42 percent more than the targeted level. As a result of increase in oil import bill and excessive imports of luxury goods, Pakistan's trade deficit has surged to $10.8 billion in the first nine months (July-March) and the year is likely to end at $13.8 billion - a deterioration of almost 46 percent over last year.
The Current Account deficit has widened to $9.86 billion in the first nine months (July-March) of the current fiscal year against the whole year target of $7.95 billion. The CA deficit is projected to be $11.6 billion for the year. The widening of CA deficit owes to a variety of factors including extra-ordinary surge in the imports of POL products and palm oil; and a one-off large import of wheat, raw cotton and fertilisers, Dar added.
FBR Chairman M. Abdullah Yusuf informed the audience that the overall objective of compliance could not be achieved without service to the taxpayer as well as proper enforcement.
In view of global challenges of price hike of POL products, gas, power and transport sectors, high tariff walls and subsidies could not work now in the global competitiveness. As far as budget proposals are concerned, we need some out of the box solution for improving revenue collection without causing any problem ton the law income group in coming budget.
He said: "We have to adjust ourselves with global changes taking place ie increasing oil prices, food prices and increased costs of doing business.' FPCCI Tanvir Ahmed President said that it was a misconception that the business community was avoiding payment of taxes. "We have helped the FBR in collecting over Rs 845 billion last year and now FBR is aiming at Rs 1 trillion by the end of 2007-08."
He hoped that the new government would take positive steps in the budget resulting in encouraging foreign and local investment, rapid industrialisation, lowering of cost of doing business and enhancing exports of the country without putting extra burden on existing tax base. He suggested exemption from all taxes and duties on export oriented industries for five years to 2012 for rapid industrialisation and sustaining the industrial sector.
He demanded of the government to provide subsidy to industrialists to enable them increase minimum wages from Rs 4500 to Rs 6000. Fixing the rate of EOBI and Workers Participation Fund, allowing duty free machinery, plants and all raw materials for export oriented industries and a general moratorium on payment of interest on loans obtained by the industrialists for 3 years. He strongly recommended imposition of capital gain tax on stock market and suggested that this tax should be on trading of shares not on long-term investment. He also supported increase in CVT on real estate sector.
President Saarc Chamber of Commerce and Industry Tariq Saeed demanded bringing GST rate to 10v percent, corruption free tax system, facilitation and bringing informal sector in formal sector for increase in tax to GDP ratio in the country. Representatives of business community, chambers, federations, trade bodies, chartered accountants, lawyers, and tax experts were also present.
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