Taxing the DHAs

In a far reaching move likely to generate billions of rupees in tax money, the Federal Board of Revenue (FBR) has brought in development authorities, housing societies and other organisations engaged in construction work, hitherto exempted from income tax under the guise of 'local authority', into the tax net.
This has been made possible through the Finance Act 2008 by defining 'local authority' as 'local government' by amending the relevant sub-section 4 of section 49 of the 2001 Ordinance. The effective date for this has been given as July 1.
There is little doubt in the minds of economists that the country needs to generate huge amounts of revenue in an effort to not only meet its budget deficit target of 4.7 percent but also to bring about some respectability in its otherwise abysmal tax to GDP ratio. It has been equally evident that the budget for the fiscal year 2008-09 lacked clarity with respect to its revenue generation sources. In this context, the source of revenue would prove critical to the government in meeting its obligations.
However it is a foregone conclusion that this move on the part of FBR will ruffle some very powerful feathers. For example, the Defence Housing Authorities in all major cities of this country would be affected. There is ample evidence that there have been serious legal and administrative violations of rules in the use of military land for the past sixty years.
However, it is pertinent to recall that the Caretaker Prime Minister Mohammadmian Soomro and his handpicked Cabinet on 13 March 2008 approved a summary moved by the Ministry of Defence to cover the misuse of military land over the last six decades by giving legal cover to all irregularities.
This approval was required because serious concerns had been raised at the time by the Departmental Accounts Committee of the Ministry of Defence and the Public Accounts Committee who alleged that land meant for shooting ranges and military exercises was being used for commercial purposes and some land in rural areas was included in urban areas where housing was allowed. The ISPR termed the decision taken by a Caretaker cabinet a few days prior to its natural demise as reflective of 'greater transparency'.
The military's involvement in real estate, production (both manufacturing and agro-based) and commercial/trading activities, including setting up schools/libraries and museums, has formed the basis of many an economic theses that argue that such activities by the army, whose raison d'etre is not to indulge in commercial or any other economic activity, has negatively impacted on market sentiment.
The reasons vary from the ability of the army to get unfair tax advantages in comparison to the private sector, which would allow for major differences in costs of production to lower productivity than is possible with the private sector that is exclusively focused on maximising profits to the real estate bubble that the country witnessed in the recent past. None of these outcomes is particularly desirable from the perspective of the economy and with today's weak macroeconomic fundamentals the decision of the present government to get the land development authorities including the DHAs to pay income tax must be lauded.