Talking to the media, after a detailed presentation on the budgetary outlays to the National Assembly Committee on Finance, the Federal Secretary Finance and Revenue Salman Siddique has revealed that the provinces have agreed on taxing four services (without disclosing the names) in the next budget. And, he expects to net Rs 15 to 30 billion.
Another positive development reported by him, was the agreement, reached with the provinces on levy of Capital Gains Tax on property. A meeting is scheduled to be held to have uniformity of rate and collection methodology, Salman revealed. With the economy growing at six percent plus - tax collection in absolute numbers did go up.
However, the tax to GDP ratio continued to stagnate and in fact declined this year. The economic slowdown in current financial year is now forcing the government to get its act together and obtain a national consensus to have more equitable sharing of burden of tax. Escalation of tax rates will militate against the objective of revival of growth.
In fact, the corporates are clamouring for a reduction. In 2008, a World Bank and FBR study estimated the measure of tax evasion in corporate income tax at four percent of the GDP. A reward based mechanism for tax men needs to be introduced to plug the leakages.
Country's Constitution allows the Federal Government to collect sales tax on goods only. Sales tax on services is a provincial tax. Federal government can collect the same on behalf of provincial government, against a nominal fee.
Our eastern neighbour collects sales tax in non-adjustable mode on 90 odd services. These include: Accountants; Shipping; Architects; Import cargo handling; Customs Agents; General Insurance; Banking and Financial Services etc.
FBR has selected four sectors out of 45 identified for imposition of sales tax in 2009-10. This provincial sales tax has to be a flat rate of five percent or less non-adjustable. 16 percent adjustable (ie in VAT mode) would not fetch substantial revenue. If imposed on four services the collection would be less than Rs 15 billion.
To collect Rs 30 billion, a dozen sectors, at least, would need to be roped in. Decision-makers are busy in planning steps or measures aimed at improvement in revenue collection. Once the budget exercise is over, attention needs to be diverted towards reduction in expenditure.
It appears that Prime Minister's target of 40 percent cut in establishment cost has been forgotten. In fact, 25 to 30 percent increase - excluding rise in subsidies and defence - over the budgeted figure is expected for 2008-09. PPP-led coalition government has been promised support, on national issues, by both PML (N) and PML (Q).
The time is appropriate to adopt a zero based budgetary approach for reducing 31 divisions, 422 attached departments and 105 autonomous bodies and corporations under Parliamentary supervision. This would result in reducing the federal government to 18 ministries and 24 divisions.
This appears to be politically unfeasible. Success on this score is the real test of leadership. Non-operational salary expenses within the government can be reduced and user charges for services levied with retention of proceeds. People can live with big government provided it is a government which can deliver. Unfortunately, this is not so.
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