Broad-basing the tax regime

It seems that Federal Board of Revenue (FBR) is still moving in circles and, instead of thinking about innovative ways to mobilise higher level of revenues through some prudent policy actions, is engaged in convincing the authorities to reimpose the same old measures which were discarded several years ago.
According to a recent study on "broadening the tax base" undertaken by the FBR, the wealth tax on expensive properties owned by the elite class of Pakistan should be restored to discourage concentration of wealth, and generation of huge revenues from the rich people of the society. Abolition of wealth tax by the military regime had proved "fatal" and worsened the income distribution in terms of "Gini Coefficient", while a gradual shift towards presumptive tax had put extra burden on low-income groups.
It was argued that wealth tax used to target only those rich people, who owned expensive properties and helped in generating handsome amount of revenues in the past. The study has also proposed corrective measures to improve compliance under the Income Tax Ordinance 2001, where a special provision exists to facilitate the money launderers to remit their illegal money through banking channels.
The tax net, at present, could be evaded by surrendering foreign exchange to the central bank and encashing it into Pak rupees. There are a number of other instruments like foreign exchange bearer bonds, US dollar bonds and certificates to serve the same purpose. The scheme, however, succeeded in bringing huge foreign remittances into the country but facilitated the tax evaders.
Those who can recall the wisdom of undertaking the above steps by military regime know that these measures were taken after proper analysis of the prevailing situation and assessing all the pros and cons of adopting such a policy strategy. The most convincing argument to abolish the wealth tax was that such a levy discouraged capital formation and did not yield enough revenues to justify its existence. Besides, it was an instrument of harassment and promoted corruption and flight of capital to safe havens abroad.
There are no reasons to believe that the position has now improved to an extent that these arguments are not valid any more. In fact, corruption has increased so persistently over time that the reverse may be true. Also, the need for providing incentives for capital formation is much more urgent at present, than previously, due to increasing reluctance of foreign investors to invest in Pakistan.
Some of the other arguments are equally frivolous. For instance, changes in income inequalities are a function of so many factors that abolition of wealth tax cannot be solely responsible for it. Also, we don't understand the reasons for fresh optimism of collecting a huge amount of taxes from this source when the FBR had failed to mobilise a substantial amount of revenues under this head during the period when it was in vogue.
We also need to understand that taxes are generally imposed on incomes and not on wealth and concentration of wealth is not necessarily a bad idea if it is accumulated through fair means. In fact, it could be easily argued that concentration of wealth could lead to higher investment and growth and generate more employment in the country. Also, suggested tax on immovable properties in posh localities of various cities needs to be explained further.
Such taxes are usually outside the domain of the central governments and largely levied by local councils/bodies to run the affairs of municipalities. As such, they are the ones to decide the changes to be effected in their rates. Besides, how could the FBR say that all such properties are owned by elite class of Pakistan. These may have been in the possession of widows etc due to inheritance or owned by retired people who are unable to pay huge amounts of taxes due to their low regular incomes.
To say that money launderers are facilitated by the Income Tax Ordinance 2001 could only be partly true. Home remittances are largely made by millions of overseas workers for day-to-day expenditures of their families in Pakistan. Withdrawal of the present facility would not only frighten these people from availing the banking channels, but would force them to use hawala/hundi system once again for sending payments back home.
Such a shift in preference would reduce the amount of home remittances which, at present, is keeping our current account in a reasonable shape. In our view, government, instead of contemplating such measures, should now be thinking about the incentives to raise the level of remittances due to the emerging pressures on the balance of payments.
Certain positive measures proposed by the study need to be underlined and highlighted for proper implementation, however. Due emphasis has been placed on bringing the undocumented sectors of the economy into the tax net, issues of black economy/informal sector and under-reporting of incomes by the registered taxpayers have been raised once again and very sensible changes have been suggested in the case of agricultural income tax. Hopefully, the federal and provincial governments would give due consideration to these proposals in order to improve fiscal management of the country.