Economists identify taxation measures for implementation over the next two years

Senior economists representing a reputed institution have identified a set of taxation measures for implementation over the next two years. These include an "Excess Profit Tax", "Higher Tax on Private Companies" and "Introduction of Capital Gains Tax".
These proposals, formulated by a team of Beaconhouse University's Institute of Public Policy, also include "More Progressive Personal Income Tax", "Higher Taxation on non-essential Luxury Goods", "A Broad-based Services Tax" and "Development of Provincial Taxes".
An identical set of measures has also been identified by Social Policy Development Centre (SPDC) in its pre-budget report. The proposals by the SPDC, however, are budget 2008-09 specific.
ACCORDING TO THE BNU'S IPP REPORT "STATE OF THE ECONOMY: Challenges and Opportunities", the big disappointment in the area of public finances is that four previous years of continuously high growth have not led to a rise in the tax-to-GDP ratio in the economy, which has remained stagnant at between 10 to 11 percent of GDP.
This is despite the buoyancy in major tax bases, like value added in large-scale manufacturing and imports. "We have identified a series of taxation proposals for implementation in the next two years, during the period of fiscal adjustment, by either the federal or provincial governments, with a potential yield of up to 2 percent of the GDP by 2009-10," the report says and adds what it says a summarised version of its proposals .
AN 'EXCESS' PROFITS TAX: Rates of corporate profitability remain high in Pakistan in the presence of demand-pull inflation. The average return on equity of non-financial public limited companies has gone up from 12 percent in 2000 to 29 percent in 2006.
Therefore, the ability of the corporate sector to add to government tax revenue has fortunately increased at a time when there is need for more revenues for macroeconomic stabilisation.
As such, it is recommended that an 'excess' profits tax provision be introduced for the next two years, during the period of fiscal adjustment, whereby profits upto a return on equity of 20 percent pay tax at the normal rate of 35 percent, while profits above this level could be taxed at a higher rate of, say, 45 percent.
HIGHER TAX ON PRIVATE COMPANIES: In order to encourage corporatisation, the tax rate differential between private and public limited companies should be restored with profits of the former being taxed at 40 percent.
INTRODUCTION OF CAPITAL GAINS TAX: as a first step, a capital gains tax on property can be introduced by the provincial governments in the next budget. In order to minimise assessment problems, the tax could initially be presumptive in nature.
The tax rate on the capital value at the time of sale should be linked to the period which has elapsed since the acquisition of the property. For example, beyond an exempt value, the tax rate on a property sold after 20 years should be 5 percent which could fall to 2 percent in the case of relatively new properties.
Tax payers would have the option of paying the tax at 10 percent on actual capital gains. Along with stamp duties, the imposition of a capital gains tax should discourage speculative investment in real estate and divert resources to more productive sectors of the economy. This should also help in making housing more affordable in the country.
Beyond this, depending on the buoyancy of the stock market and prevailing macroeconomic conditions, a capital gains tax on shares may be introduced at the appropriate time to avoid any outflow of portfolio investment which could exacerbate the balance of payments problem.
Perhaps, this tax be considered for the budget of 2009-1 0 when the economy has begun to stabilise following the commencement of the process of fiscal adjustment. At that time, the capital value tax on shares can be withdrawn.
MORE PROGRESSIVE PERSONAL INCOME TAX: This decline in marginal tax rates in 2006 has reduced the element of progressively in personal income tax, with tax breaks in excess of 30 percent to large tax payers. Action needs to be taken at both ends of the income scale.
At the lower end, the exemption limit may be enhanced to allow for high inflation and the rise in tax rates be made more progressive beyond the monthly income of Rs 50,000 such that the maximum tax rate in the case of salaried tax payers rises to 221/2 percent and for others to 27% percent.
HIGHER TAXATION ON NON-ESSENTIAL AND LUXURY GOODS: The rationalisation of import tariffs and the withdrawal of excise duties have reduced the effective taxation on luxury goods. One of the consequences has been phenomenal growth in import of such goods. In particular, the increased consumption of electronic goods has led to fast growth in power consumption.
As such, it is suggested that an additional regulatory import duty of 10 percent be introduced on luxury goods in the forthcoming budget. In addition, a similar duty of 5 percent be imposed on all other imports excluding essential imports of food, fertiliser, medicines and POL products.
A BROAD-BASED SERVICES TAX: The various service sectors of the economy have been growing fast and have accounted for more than half the incremental GDP. Many of these services cater primarily to the demand of upper income groups and to corporate entities. But their revenue contribution is very limited and they will increasingly have to be brought into the tax net.
Introduction of a broad-based sales tax could follow the lines of development of the service tax in India. The number of taxed services is 80 and the number of tax assessees has approached one million in India. The yield has crossed one percent of the GDP, with a tax rate of 12 percent.
The services tax could be extended in Pakistan within the provision of the Sales Tax Act, 1990, and the revenues fully reverted to the provinces. In order to effectively widen the tax net, the tax rate may initially be kept low at 5 percent and the tax may be also be paid by withholding tax agents in the economy, who receive the supply of taxable services.
DEVELOPMENT OF PROVINCIAL TAXES: The presumptive income tax rates of agricultural income tax need to be enhanced in order to yield significant revenue. As an interim measure, pending a comprehensive process of reassessment of annual rental values, the urban immoveable property tax could be doubled especially for properties above 500 square yards (or one canal).
Overall, the above proposals are oriented towards mobilisation of revenues from direct taxes or from indirect taxes on goods and services consumed by upper income groups. Implementation of these proposals will make the tax system more progressive while improving public perceptions about a fairer distribution of the tax burden.