Tax tussles

It took more than three months for the 80 plus members of the cabinet in Islamabad to make a decision on the flood tax. Finally, the meeting on Wednesday gave way to intensifying pressure from the IMF and the US for mobilisation of domestic resources for future funding to flow to Pakistan.
It takes some trickery to package a tax as a one-time surcharge when it is going to be charged in six monthly instalments. If all goes in accordance with Dr Hafeez Shaikhs plan, registered taxpayers and the business community will bear the burden of the 10 percent flood surcharge, come January 2011, that will expire at the end of the fiscal year.
Before anyone gets too worried, the 10 percent will be levied on the tax liability and not the income of the individual. So, if an individuals monthly tax liability is Rs1000, they will pay an additional Rs100 per month.
The initiative to increase the special excise duty on non-essential luxury products is a step in the right direction. The duty will be notched up to 2 percent, so cigarettes, cosmetics and fizzy drinks are likely to become marginally expensive in the coming days. But, that is as close as the government has treaded in taxing the affluent.
Reportedly, the finmin is in favour of taxing the elite (including real estate and agri) but brushes it away because it remains a provincial subject. This comes in contrast to his stance on GST on services, which also falls in the ambit of provincial legislation, but for which federal legislators have been pushing reforms for quite some time now.
This pick-and-chose methodology is perhaps because of the pressure from international donors on the GST at one end, and lack of political will to tax the elite on the other.
How does the government reconcile these two contrasting line of thinking is another question, but for now it faces the challenge of getting the new taxes approved by the parliament. Leaders of the PML-N have already registered their disapproval of new taxes. The MQM and ANP, key coalition partners, have also voiced concerns and are likely to vote against it.
Perhaps lawmakers are cognizant of elections in the not-so-distant future. After all, this government has completed nearly 3 years in office. Supporting a controversial tax at this point could harm their public support in the next contest.
The draft law for RGST will also be tabled for discussion in both houses. Withdrawal of exemptions for domestic consumption of key industries that have been tax-free for the past few years will be a challenge. Flying invoices may once again become a headache for the government, unless the implementation mechanism is strengthened.
Reforms in policy making are one thing and those in implementation of laws another. Until the corrupt elements of the FBR and Customs are rooted out, the envisaged benefits - Rs 65-70 billion - will not be realised.